Pediatrix Medical Group - 10-Q quarterly report FY

 

Commission File Number 001-12111

(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)

Large accelerated filer x                     Accelerated filer o                     Non-accelerated filer o

Shares of Common Stock outstanding as of July 20, 2007: 49,020,190.

 

     Immediately prior to the filing of this Form 10-Q, the Company filed its Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”). The 2006 Form 10-K contains restated financial information related to the completion of the Company’s stock option review as discussed in Note 3, “Restatement of Consolidated Financial Statements.” The filing of this Form 10-Q was delayed as a result of the stock option review.

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

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

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

     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 Form 10-Q. 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 Form 10-Q, 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.

     In July 2007, the Audit Committee of our Board of Directors completed an independent comprehensive review of our stock option granting practices and made certain findings with respect to these practices. Based on these findings, management concluded that incorrect measurement dates were used for certain stock option grants in prior periods. Our results of operations for the three months ended March 31, 2007 include professional fees incurred in order to complete the review. In addition, our results of operations reflect costs to cover Internal Revenue Code Section 409A (“409A”) tax obligations on behalf of employees and other payments to employees as a result of stock option measurement date revisions.

     During the three months ended March 31, 2007 and 2006, we completed the acquisition of two and three physician group practices, respectively. Our results of operations for the three months ended March 31, 2007 and 2006 include the results of operations for these physician group practices from their respective dates of acquisition and therefore are not comparable in some material respects.

     Our net patient service revenue increased $26.8 million, or 14.3%, to $214.5 million for the three months ended March 31, 2007, as compared to $187.7 million for the same period in 2006. Of this $26.8 million increase, $7.3 million, or 27.2%, was attributable to revenue generated from acquisitions completed after December 31, 2005. Same-unit net patient service revenue increased $19.5 million, or 10.7%, for the three months ended March 31, 2007. The change in same-unit net patient service revenue was primarily the result of a net increase in revenue of approximately $11.5 million related to pricing and reimbursement factors and increased revenue of $8.0 million from higher patient service volumes across our subspecialties. The net increase in revenue of $11.5 million related to pricing and reimbursement factors is due to improved reimbursement for our services as result of a new billing code introduced by the American Medical Association in the first quarter of 2006, improved managed care contracting and the flow through of revenue from modest price increases. Increased revenue of $8.0 million from higher patient service volumes includes $4.4 million from a 3.9% increase in neonatal intensive care unit patient days and $3.6 million from volume growth in maternal fetal, pediatric cardiology, metabolic screening and other services, including hearing screens and newborn nursery services. 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 $18.3 million, or 16.3%, to $130.9 million for the three months ended March 31, 2007, as compared to $112.6 million for the same period in 2006. The increase was primarily attributable to: (i) costs associated with new physicians and other staff of $10.1 million to support acquisition-related growth and volume growth at existing units; (ii) an increase in incentive compensation of $4.5 million as a result of same-unit growth and operational improvements at the physician practice level; (iii) costs of $3.0 million to cover 409A tax obligations on behalf of employees and other payments to employees as a result of stock option measurement date revisions; and (iv) increased insurance and other practice-related costs of approximately $700,000.

     Practice supplies and other operating expenses increased $1.1 million, or 14.1%, to $8.9 million for the three months ended March 31, 2007 as compared to $7.8 million for the same period in 2006. The increase was primarily attributable to supply and maintenance costs and other costs of approximately $600,000 to support growth in our metabolic and hearing screen services and supply and maintenance costs of approximately $450,000 to support acquisition-related growth.

     General and administrative expenses include all billing and collection functions and 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 $6.2 million, or 22.7%, to $33.6 million for the three months ended March 31, 2007, as compared to $27.4 million for the same period in 2006. This $6.2 million increase was due to: (i) costs of $3.4 million to cover 409A tax obligations on behalf of employees and other payments to employees as a result of stock option measurement date revisions; (ii) increased professional fees of $1.8 million primarily related to our stock option review; and (iii) a $1.0 million increase in other general and administrative expenses and salaries and benefits related to the continued growth of the Company.

     Depreciation and amortization expense increased by approximately $200,000, or 5.3%, to $2.5 million for the three months ended March 31, 2007, as compared to $2.3 million for the same period in 2006. This increase was primarily attributable to the amortization of intangible assets related to acquisitions completed after December 31, 2005.

     Income from operations increased $900,000, or 2.5%, to $38.5 million for the three months ended March 31, 2007, as compared with $37.6 million for the same period in 2006. Our operating margin decreased to 18.0% for the three months ended March 31, 2007, as compared to 20.0% for the same period in 2006. The decrease in our operating margin is primarily attributable to the recording of $6.4 million of costs to cover 409A tax obligations on behalf of employees and other payments to employees as a result of stock option measurement date revisions and $1.5 million in professional fees related to our stock option review.

     We recorded net investment income of $1.6 million for the three months ended March 31, 2007, as compared to net investment income of $41,000 for the same period in 2006. The increase in net investment income is due to an increase in funds available to invest and a higher return on outstanding investment balances for the three months ended March 31, 2007 as compared to the prior year period. Interest expense for the three months ended March 31, 2007 consisted of interest charges, commitment fees and amortized debt costs associated with our Line of Credit.

     Our effective income tax rate was 36.3% for the three months ended March 31, 2007, as compared to 37.7% for the same period in 2006. The decrease in our effective tax rate is primarily due to the recognition of tax benefits on uncertain tax positions as a result of the expiration of the statute of limitations on certain filed tax returns. This benefit was partially offset by an increase in our provision for uncertain tax positions as a result of the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) and increased taxes as a result of tax law changes in the State of Texas.

     Net income increased to $25.6 million for the three months ended March 31, 2007, as compared to $23.4 million for the same period in 2006. Net income for the three months ended March 31, 2007 reflects approximately $3.9 million for the after-tax impact of costs to cover 409A tax obligations on behalf of employees and other payments to employees as a result of stock option measurement date revisions and approximately $900,000 for professional fees related to our stock option review. These costs were partially offset by a reduction in our effective tax rate.

     Diluted net income per common and common equivalent share was $.51 on weighted average shares outstanding of 49.9 million for the three months ended March 31, 2007, as compared to $.48 on weighted average shares outstanding of 48.9 million for the same period in 2006. The increase in weighted average shares outstanding was primarily due to the exercise of employee stock options, the vesting of restricted stock and the issuance of shares under our Stock Purchase Plans.

     As of March 31, 2007, we had approximately $71.6 million of cash and cash equivalents on hand as compared to $69.6 million at December 31, 2006. In addition, we had working capital of approximately $125.0 million at March 31, 2007, an increase of $44.7 million from working capital of $80.3 million at December 31, 2006. This increase in working capital was primarily the result of quarterly earnings and proceeds from the exercise of employee stock options partially offset by funds used for the acquisition of physician group practices and the purchase of long-term investments during the three months ended March 31, 2007.

     Our net cash used in operating activities was $30.8 million for the three months ended March 31, 2007, as compared to net cash used in operating activities of $9.8 million for the same period in 2006. The net increase in our cash used in operating activities for the three months ended March 31, 2007 is primarily due to an increase in our annual payments due under our performance-based incentive compensation program partially offset by improved operating results.

     During the three months ended March 31, 2007, accounts receivable increased by $2.2 million, as compared to an increase of $4.0 million for the same period in 2006. Our days sales outstanding, or DSO, for accounts receivable at March 31, 2007 were 53.6 days, a decrease from 54.7 days at December 31, 2006. The net increase in accounts receivable during the three months ended March 31, 2007 is primarily due to an increase in patient service revenue related to acquisitions completed during the fourth quarter of 2006 and the first quarter of 2007 partially offset by the decline in our DSO.

     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.

     During the three months ended March 31, 2007, we experienced a net decrease in cash flow from operating activities related to accounts payable and accrued expenses of $60.8 million. This net decrease is primarily due to payments for 2006 performance-based compensation and Thrift and Profit Sharing Plan matching contributions of approximately $101.5 million partially offset by accruals for 2007 performance-based compensation and Thrift and Profit Sharing Plan matching contributions of approximately $28.7 million, as well as accrued costs to cover 409A tax obligations on behalf of employees and other payments to employees as a result of stock option measurement date revisions of $6.4 million recorded during the three months ended March 31, 2007. Our annual payments due under our performance-based incentive compensation program and our annual Thrift and Profit Sharing Plan matching contributions are made during the first quarter of each year. We typically experience negative cash flow from operations during the first quarter of each year due to these payments.

     During the three months ended March 31, 2007, cash flow used in operations related to income taxes payable and deferred taxes was $9.2 million, compared to $7.1 million of cash provided for the same period in 2006. This change is related to significant tax payments made in conjunction with the filing of tax return extensions in the first quarter of 2007.

     During the three months ended March 31, 2007, cash generated from our operating activities along with cash on hand was used to fund the acquisition of two physician group practices for $12.0 million and fund capital expenditures in the amount of $1.5 million. Our capital expenditures were for medical equipment, computer and office equipment, software, furniture and other improvements at our office-based practices and our corporate and regional offices.

     During the three months ended March 31, 2007, our net cash flows provided from financing activities consisted primarily of proceeds from the exercise of employee stock options and the excess tax benefit of stock option exercises.

     Our $225 million 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.

     As a result of our stock option review, we executed certain Consent to Extension Agreements with the latest Consent to Extension Agreement permitting us to extend the delivery of financial statements and related debt covenant calculations and certifications for the quarters ended June 30, 2006, September 30, 2006 and March 31, 2007, and the year ended December 31, 2006, until August 14, 2007. The consent to Extension Agreement also waives any default or event of default relating to our failure to deliver an annual budget within the required time period provided the budget is delivered by August 14, 2007. We plan to deliver the budget and all required financial statements and related debt covenant calculations and certifications on or before this date.

     At March 31, 2007, we believe we were in compliance with the financial covenants and other restrictions applicable to us under the Line of Credit. At March 31, 2007, we had no outstanding principal balance on our Line of Credit; however, we had outstanding letters of credit of $25.0 million, which reduced the amount available on our Line of Credit.

     We maintain professional liability insurance policies with third-party insurers, subject to self-insured retention, exclusions and other restrictions. We self-insure our liabilities to pay self-insured retention amounts under our professional liability insurance coverage through a wholly owned captive insurance subsidiary. We record liabilities for self-insured amounts and an estimate of liabilities for claims incurred but not reported based on an actuarial valuation using historical loss patterns.

     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.

     Effective January 1, 2007, we adopted the provisions of FIN 48. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As part of the implementation of FIN 48, we evaluated our open tax positions using the recognition and measurement criteria established by FIN 48 and, as a result, recorded an increase in our liability for unrecognized tax benefits of $7.7 million as of January 1, 2007. The $7.7 million cumulative effect of adopting FIN 48 was reported as an adjustment to the opening balance of retained earnings.

     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 the Company’s most recent Annual Report on Form 10-K, including the section entitled “Risk Factors.”

     As part of the Federal Settlement Agreement, we entered into a five-year Corporate Integrity Agreement with the Office of Inspector General of the Department of Health and Human Services (the “OIG”). The Corporate Integrity Agreement acknowledges the existence of our comprehensive Compliance Plan, which provides for policies and procedures aimed at promoting our adherence with FHC Program requirements and requires us to maintain the Compliance Plan in full operation for the term of the Corporate Integrity Agreement. In addition, the Corporate Integrity Agreement requires, among other things, that we must comply with the following integrity obligations during the term of the Corporate Integrity Agreement:

     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.