UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
OR
Commission File Number 001-12111
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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ 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 April 28, 2005: 22,900,033.
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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(Unaudited)
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March 31, 2005
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PEDIATRIX MEDICAL GROUP, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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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 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 three months ended March 31, 2005 and 2004, we completed the acquisition of five and two physician group practices, respectively. Our results of operations for the three months ended March 31, 2005 include the results of operations for 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 months ended March 31, 2004.
Results of Operations
Three Months Ended March 31, 2005 as Compared to Three Months Ended March 31, 2004
Our net patient service revenue increased $16.1 million, or 10.8%, to $164.2 million for the three months ended March 31, 2005, as compared to $148.1 million for the same period in 2004. Of this $16.1 million increase, $10.1 million, or 62.7%, was primarily attributable to revenue generated from acquisitions completed during 2004 and 2005. Same-unit net patient service revenue increased $6.0 million, or 4.0%, for the three months ended March 31, 2005. The net increase in same-unit net patient service revenue was primarily the result of: (i) increased revenue of approximately $3.7 million from a 3.7% increase in neonatal intensive care unit patient days; (ii) increased revenue of approximately $3.1 million from volume growth in maternal-fetal services, metabolic screening services and other services, including hearing screens and newborn nursery services provided by existing practices; and (iii) decreased revenue of approximately $842,000 caused by a greater percentage of our patients being enrolled in government-sponsored programs partially offset by increased revenue from improved pricing for our patient services due to modest price increases and improved managed care contracting. Payments received from government-sponsored programs are substantially less than payments received from commercial insurance payors. This shift in our payor mix resulted in an increase in our estimated provision for contractual adjustments and uncollectibles for the three months ended March 31, 2005 as compared to the same period in 2004. 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 $11.3 million, or 13.1%, to $97.8 million for the three months ended March 31, 2005, as compared to $86.5 million for the same period in 2004. The increase was primarily attributable to: (i) costs associated with new physicians and other staff of $10.3 million to support acquisition-related growth and volume growth at existing units; and (ii) an increase in incentive compensation of $1.0 million as a result of same unit growth and operational improvements at the physician practice level.
Practice supplies and other operating expenses increased $899,000, or 16.8%, to $6.3 million for the three months ended March 31, 2005, as compared with $5.4 million for the same period in 2004. The increase was primarily attributable to rent, maintenance and other costs to support new and existing physician practices.
General and administrative expenses include all salaries, benefits, supplies and operating expenses not specifically related to the day-to-day operations of our physician group practices, including billing and collections functions. General and administrative expenses increased $8.3 million, or 41.7%, to $28.1 million for the three months ended March 31, 2005, as compared to $19.8 million for the same period in 2004. As a percentage of revenue, general and administrative expenses were 17.1% for the three months ended March 31, 2005, as compared to 13.4% for the same period in 2004. The increase in general and administrative expenses as a
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percentage of revenue is attributable to a $6.0 million increase in our estimated liability reserves as a result of a settlement offer we made in connection with our pending national Medicaid and TRICARE investigation.
Depreciation and amortization expense increased by $284,000, or 12.0%, to $2.6 million for the three months ended March 31, 2005, as compared to $2.4 million for the same period in 2004. This increase was primarily attributable to amortization of identifiable intangible assets related to our acquisitions.
Income from operations decreased $4.8 million, or 14.0%, to $29.3 million for the year ended March 31, 2005, as compared with $34.1 million for the same period in 2004. Our operating margin decreased to 17.9% for the three months ended March 31, 2005, as compared to 23.0% for the same period in 2004. The decrease in our operating margin is primarily attributable to the $6.0 million adjustment related to the settlement offer we made in connection with our pending national Medicaid and TRICARE investigation.
We recorded net interest expense of $663,000 for the three months ended March 31, 2005, as compared with net interest expense of $110,000 for the same period in 2004. The increase in net interest expense is primarily due to increased borrowings under our $225 million revolving line of credit (“Line of Credit”) to fund acquisitions during the fourth quarter of 2004 and the first quarter of 2005 and repurchase shares of our common stock during the fourth quarter of 2004. Interest expense for the three months ended March 31, 2005 consisted primarily of interest charges, commitment fees and amortized debt costs associated with our Line of Credit.
Our effective income tax rate was 37.25% for the three months ended March 31, 2005 and 2004.
Net income decreased to $18.0 million for the three months ended March 31, 2005, as compared to $21.3 million for the same period in 2004. This $3.3 million decline in net income includes the $3.8 million after-tax impact of the adjustment related to the settlement offer we made in connection with our pending national Medicaid and TRICARE investigation.
Diluted net income per common and common equivalent share was $.77 on weighted average shares of 23.5 million for the three months ended March 31, 2005, as compared to $.85 on weighted average shares of 25.1 million for the same period in 2004. Diluted net income per common and common equivalent share of $.77 for the three months ended March 31, 2005 includes the impact of the adjustment related to the settlement of our pending national Medicaid and TRICARE investigation. The net decrease in weighted average shares outstanding was primarily due to the impact of shares repurchased during 2004 offset in part by the exercise of employee stock options and the issuance of shares under our employee stock purchase plan.
Liquidity and Capital Resources
As of March 31, 2005, we had approximately $4.1 million of cash and cash equivalents on hand as compared to $7.0 million at December 31, 2004. In addition, we had working capital of approximately $44.1 million at March 31, 2005, an increase of $22.9 million from working capital of $21.2 million at December 31, 2004.
Our net cash provided from operating activities was $656,000 for the three months ended March 31, 2005, as compared to net cash used in operating activities of $7.9 million for the same period in 2004. We typically experience nominal or negative cash flow from operations during the first quarter of each year due to our performance-based incentive compensation program for affiliated physicians and our 401(k) matching contributions for participating employees. Our annual 401(k) matching contributions and a majority of the annual payments due under our performance-based incentive compensation program are made during the first quarter of each year. As a result, we are typically required to fund our operations during this period with cash on hand or funds borrowed under our Line of Credit.
The improvement in our cash flow from operations for the three months ended March 31, 2005 is primarily due to changes in our working capital components. For the three months ended March 31, 2005, our significant working capital component changes are related to accounts receivable, accounts payable and accrued expenses, and income taxes payable.
During the three months ended March 31, 2005, accounts receivable decreased by $2.5 million due to increased first quarter cash collections. Our days sales outstanding, or DSO, for accounts receivable at March 31, 2005 was 57.8 days, a decrease from 61.6 days at December 31, 2004. During the same period, we experienced a decrease in cash flow from operating activities of $35.0 million primarily due to a decrease in accounts payable and accrued expenses related to our annual physician incentive compensation payments and our annual 401(k) matching contributions. In addition, we realized an increase in income taxes payable which increased our cash flow from operating activities by $10.5 million. This increase in cash flow is associated with the timing of our tax payments.
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Our accounts receivable are principally due from managed care payors, government payors, and other third party insurance payors. We track our collections from these sources, monitor the age of our accounts receivable, and make all reasonable efforts to collect outstanding accounts receivable through our systems, processes and personnel at our corporate and regional billing and collection offices. We use customary collection practices, including the use of outside collection agencies for accounts receivable due from private pay patients when appropriate. Almost all of our accounts receivable adjustments consist of contractual adjustments due to the difference between gross amounts billed and the amounts allowed by our payors. Any amounts written off related to private pay patients are based on the specific facts and circumstances related to each individual patient account.
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, 2005, we obtained professional liability coverage that expires on May 1, 2006 with substantially similar terms as our previous policy which includes a provision which may result in additional premiums or a return of premiums based on our actual losses.
During the three months ended March 31, 2005, our cash flows from financing activities consisted primarily of borrowings under our Line of Credit and proceeds from the exercise of employee stock options.
On March 11, 2005, we exercised an option under our Line of Credit to increase the aggregate commitments thereunder from $150 million to $225 million. Our Line of Credit matures in July 2009 and includes a $25 million subfacility for the issuance of letters of credit. At our option, the Line of Credit bears interest at (i) the base rate (defined as the higher of the Federal Funds Rate plus .5% or the Bank of America prime rate) or (ii) the Eurodollar rate plus an applicable margin rate ranging from .75% to 1.75% based on our consolidated leverage ratio. Our Line of Credit is collateralized by substantially all of our assets. We are subject to certain covenants and restrictions specified in the 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. Failure to comply with these covenants and restrictions would constitute an event of default under the Line of Credit, notwithstanding our ability to meet our debt service obligations. Our Line of Credit includes various customary remedies for our lenders following an event of default. At March 31, 2005, we were in compliance with the financial covenants and other restrictions applicable to us under the Line of Credit. At March 31, 2005, we had an outstanding principal balance of $82.0 million under the Line of Credit and outstanding letters of credit that reduced the amount available under the Line of Credit by $7.0 million.
The exercise of employee stock options generated cash proceeds of $8.5 million during the three months ended March 31, 2005, as compared to $15.5 million for the same period in 2004. Since stock option exercises are dependent on several factors, including the market price of our common stock, we cannot predict the timing and amount of any proceeds from future exercises.
During the three months ended March 31, 2005, cash generated from our operating and financing activities along with cash on hand and amounts borrowed under our Line of Credit were primarily used to fund the acquisition of five neonatal physician group practices for $36.9 million and to fund capital expenditures in the amount of $1.5 million. Our capital expenditures were for computer and office equipment, software, furniture and other improvements at our corporate and regional offices.
We anticipate that funds generated from operations, together with our current cash on hand, short-term investments and funds available under the Line of Credit, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and 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 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
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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 the Company’s most recent Annual Report on Form 10-K, including the section entitled “Risk Factors.”
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 line of credit bears interest at our option at (i) the base rate (defined as the higher of the Federal Funds Rate plus .5% or the Bank of America prime rate) or (ii) the Eurodollar rate plus an applicable margin rate ranging from .75% to 1.75% based on our consolidated leverage ratio. The aircraft operating lease bears interest at a LIBOR-based variable rate. The outstanding principal balance under our Line of Credit was $82.0 million at March 31, 2005. The outstanding balance related to the aircraft operating lease totaled approximately $4.8 million at March 31, 2005. Considering the total outstanding balances under these instruments at March 31, 2005 of approximately $86.8 million, a 1% change in interest rates would result in an impact to income before income taxes of approximately $868,000 per year.
Item 4. 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 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 March 31, 2005.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In June 2002, we received a written request from the Federal Trade Commission (the “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 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 being coordinated together and are active and ongoing. In April 2005, we made a settlement offer to federal and state authorities in connection with these matters. In accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” as a result of this offer, we increased our reserves relating to these matters by $6.0 million during the three months ended March 31, 2005. Although we continue to cooperate fully with federal and state authorities, there can be no assurance that our present offer will result in a settlement of these matters and the eventual resulting losses will not exceed our established reserves.
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 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, results of operations or 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
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resolutions, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations or the trading price of our common stock.
In the ordinary course of our business, we become involved 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 generally require us to indemnify them and their affiliates for losses resulting from the negligence of our affiliated physicians. We may also become subject to other lawsuits which could 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, results of operations or 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, results of operations or the trading price of our common stock.
Although we currently maintain liability insurance coverage intended to cover professional liability 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, we cannot assure that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us in the future where the outcomes of such claims are unfavorable. With respect to professional liability insurance, we self-insure our liabilities to pay deductibles through a wholly-owned captive insurance subsidiary. Liabilities in excess of our insurance coverage, including coverage for professional liability and other claims, could have a material adverse effect on our business, financial condition and results of operations.
Item 6. Exhibits.
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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