UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26762
PEDIATRIX MEDICAL GROUP, INC.
| Florida (State or other jurisdiction of incorporation or organization) |
65-0271219 (I.R.S. Employer Identification No.) |
1301 Concord Terrace
Sunrise, Florida 33323
(Address of principal executive offices)
(Zip Code)
(954) 384-0175
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
Shares of Common Stock outstanding as of November 3, 2003: 23,520,130
PEDIATRIX MEDICAL GROUP, INC.
INDEX
| Page | ||||||
| PART I — FINANCIAL INFORMATION | ||||||
| ITEM 1. | Financial Statements | 3 | ||||
| Condensed Consolidated Balance Sheets as of September 30, 2003 (Unaudited) and December 31, 2002 | 3 | |||||
| Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002 (Unaudited) | 4 | |||||
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (Unaudited) | 5 | |||||
| Notes to Condensed Consolidated Financial Statements | 6 | |||||
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||||
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 | ||||
| ITEM 4. | Disclosure Controls and Procedures | 14 | ||||
| PART II — OTHER INFORMATION | ||||||
| ITEM 1. | Legal Proceedings | 15 | ||||
| ITEM 6. | Exhibits and Reports on Form 8-K | 16 | ||||
| SIGNATURES | 17 | |||||
| EXHIBIT INDEX | 18 | |||||
2
PART I — FINANCIAL INFORMATION
| September 30, | December 31, | |||||||||||||
| 2003 | 2002 | |||||||||||||
| (in thousands) | ||||||||||||||
ASSETS |
||||||||||||||
Current assets: |
||||||||||||||
Cash and cash equivalents |
$ | 10,410 | $ | 73,195 | ||||||||||
Accounts receivable, net |
89,869 | 75,356 | ||||||||||||
Prepaid expenses |
2,199 | 6,083 | ||||||||||||
Deferred income taxes |
15,024 | 5,515 | ||||||||||||
Other assets |
1,236 | 1,206 | ||||||||||||
Total current assets |
118,738 | 161,355 | ||||||||||||
Property and equipment, net |
26,823 | 16,820 | ||||||||||||
Goodwill |
516,144 | 463,032 | ||||||||||||
Other assets, net |
16,570 | 7,472 | ||||||||||||
Total assets |
$ | 678,275 | $ | 648,679 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||||
Current liabilities: |
||||||||||||||
Line of credit |
$ | 14,500 | $ | — | ||||||||||
Accounts payable and accrued expenses |
96,976 | 76,400 | ||||||||||||
Current portion of long-term debt and
capital lease obligations |
595 | 504 | ||||||||||||
Income taxes payable |
6,052 | 4,896 | ||||||||||||
Total current liabilities |
118,123 | 81,800 | ||||||||||||
Long-term debt and capital lease obligations |
2,042 | 1,985 | ||||||||||||
Deferred income taxes |
16,482 | 13,290 | ||||||||||||
Deferred compensation |
5,118 | 3,606 | ||||||||||||
Total liabilities |
141,765 | 100,681 | ||||||||||||
Commitments and contingencies |
||||||||||||||
Shareholders’ equity: |
||||||||||||||
Preferred stock; par value $.01 per share;
1,000 shares authorized; none issued |
— | — | ||||||||||||
Common stock; par value $.01 per share;
50,000 shares authorized; 28,067 and
27,005 shares issued, respectively |
281 | 270 | ||||||||||||
Additional paid-in capital |
420,467 | 392,321 | ||||||||||||
Treasury stock, at cost, 4,665 shares and
1,692 shares, respectively |
(150,000 | ) | (49,998 | ) | ||||||||||
Retained earnings |
265,762 | 205,405 | ||||||||||||
Total shareholders’ equity |
536,510 | 547,998 | ||||||||||||
Total liabilities and shareholders’ equity |
$ | 678,275 | $ | 648,679 | ||||||||||
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
PEDIATRIX MEDICAL GROUP, INC.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||||
| (in thousands, except for per share data) | ||||||||||||||||||||
Net patient service revenue |
$ | 145,514 | $ | 122,502 | $ | 405,415 | $ | 346,008 | ||||||||||||
Operating expenses: |
||||||||||||||||||||
Practice salaries and benefits |
80,196 | 68,232 | 230,460 | 195,950 | ||||||||||||||||
Practice supplies and other
operating expenses |
4,778 | 3,997 | 13,561 | 11,440 | ||||||||||||||||
General and administrative expenses |
19,843 | 17,483 | 57,150 | 52,796 | ||||||||||||||||
Depreciation and amortization |
2,495 | 1,520 | 6,048 | 4,447 | ||||||||||||||||
Total operating expenses |
107,312 | 91,232 | 307,219 | 264,633 | ||||||||||||||||
Income from operations |
38,202 | 31,270 | 98,196 | 81,375 | ||||||||||||||||
Investment income |
76 | 221 | 296 | 595 | ||||||||||||||||
Interest expense |
(417 | ) | (288 | ) | (1,142 | ) | (857 | ) | ||||||||||||
Income before income taxes |
37,861 | 31,203 | 97,350 | 81,113 | ||||||||||||||||
Income tax provision |
14,388 | 11,857 | 36,993 | 31,324 | ||||||||||||||||
Net income |
$ | 23,473 | $ | 19,346 | $ | 60,357 | $ | 49,789 | ||||||||||||
Per share data: |
||||||||||||||||||||
Net income per common and
common equivalent share: |
||||||||||||||||||||
Basic |
$ | 1.01 | $ | .75 | $ | 2.54 | $ | 1.93 | ||||||||||||
Diluted |
$ | .97 | $ | .73 | $ | 2.46 | $ | 1.86 | ||||||||||||
Weighted average shares used in
computing net income per common
and common equivalent share: |
||||||||||||||||||||
Basic |
23,290 | 25,677 | 23,788 | 25,760 | ||||||||||||||||
Diluted |
24,196 | 26,363 | 24,521 | 26,794 | ||||||||||||||||
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
PEDIATRIX MEDICAL GROUP, INC.
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
| (in thousands) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 60,357 | $ | 49,789 | ||||||||
Adjustments to reconcile net income to net cash provided from
operating activities: |
||||||||||||
Depreciation and amortization |
6,048 | 4,447 | ||||||||||
Deferred income taxes |
(6,317 | ) | 5,157 | |||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
(13,024 | ) | (11,793 | ) | ||||||||
Prepaid expenses and other assets |
4,177 | 718 | ||||||||||
Other assets |
(495 | ) | 1,335 | |||||||||
Accounts payable and accrued expenses |
20,167 | 6,830 | ||||||||||
Income taxes |
8,888 | 10,725 | ||||||||||
Net cash provided from operating activities |
79,801 | 67,208 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Acquisition payments, net of cash acquired |
(63,309 | ) | (25,809 | ) | ||||||||
Purchase of property and equipment |
(13,743 | ) | (5,187 | ) | ||||||||
Net cash used in investing activities |
(77,052 | ) | (30,996 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Borrowings on line of credit, net |
14,500 | — | ||||||||||
Payments on long-term debt and capital lease obligations |
(459 | ) | (599 | ) | ||||||||
Proceeds from issuance of common stock |
20,427 | 28,223 | ||||||||||
Purchase of treasury stock |
(100,002 | ) | (49,998 | ) | ||||||||
Net cash used in financing activities |
(65,534 | ) | (22,374 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents |
(62,785 | ) | 13,838 | |||||||||
Cash and cash equivalents at beginning of period |
73,195 | 27,557 | ||||||||||
Cash and cash equivalents at end of period |
$ | 10,410 | $ | 41,395 | ||||||||
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
PEDIATRIX MEDICAL GROUP, INC.
September 30, 2003
(Unaudited)
| 1. | Basis of Presentation: | |
| The accompanying unaudited condensed consolidated financial statements of Pediatrix Medical Group, Inc. and the notes thereto presented in this Quarterly Report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial statements, and do not include all disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of interim periods. The financial statements include all the accounts of Pediatrix Medical Group, Inc., and its subsidiaries combined with the accounts of the professional associations, corporations and partnerships (the “PA Contractors”) with which Pediatrix Medical Group, Inc. or one of its subsidiaries currently has specific management arrangements. The terms “Pediatrix” and the “Company” refer collectively to Pediatrix Medical Group, Inc., its subsidiaries and the PA Contractors. | ||
| The consolidated results of operations for the interim periods presented in this Quarterly Report are not necessarily indicative of the results to be experienced for the entire fiscal year. The accompanying unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission. | ||
| 2. | Summary of Significant Accounting Policies: | |
| Stock Options | ||
| The Company accounts for stock-based compensation to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense for stock options issued to employees is reflected in the condensed consolidated statements of income because the market value of the Company’s stock on the day options are granted equals the exercise price specified in the options. | ||
| If compensation expense had been determined based on the fair value accounting provisions of Statement of Financial Accounting Standards No. 123 (“FAS 123”), “Accounting for Stock-Based Compensation,” the Company’s net income and net income per share would have been reduced to the pro forma amounts below: |
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||
Net income, as reported |
$ | 23,473 | $ | 19,346 | $ | 60,357 | $ | 49,789 | |||||||||
Deduct: Total stock-based employee
compensation expense determined
under fair value accounting rules,
net of related tax effect |
(3,361 | ) | (3,191 | ) | (8,039 | ) | (6,062 | ) | |||||||||
Pro forma net income |
$ | 20,112 | $ | 16,155 | $ | 52,318 | $ | 43,727 | |||||||||
Net income per share: |
|||||||||||||||||
As reported: |
|||||||||||||||||
Basic |
$ | 1.01 | $ | .75 | $ | 2.54 | $ | 1.93 | |||||||||
Diluted |
$ | .97 | $ | .73 | $ | 2.46 | $ | 1.86 | |||||||||
Pro forma: |
|||||||||||||||||
Basic |
$ | .83 | $ | .61 | $ | 2.16 | $ | 1.63 | |||||||||
Diluted |
$ | .80 | $ | .60 | $ | 2.14 | $ | 1.60 | |||||||||
6
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| 2. | Summary of Significant Accounting Policies, Continued: | |
| The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for options granted in the three months ended September 30, 2003 and 2002: dividend yield of 0% for all years and expected volatility of 62% and 60%, respectively. A 3.4% risk-free interest rate assumption is used for options with expected lives of five years (officers and physicians of the Company) granted in the three months ended September 30, 2002. No options with expected lives of five years were granted in the three months ended September 30, 2003. Risk-free interest rates of 1.9% and 2.4% were used for options with expected lives of three years (all other employees of the Company) granted in the three months ended September 30, 2003 and 2002, respectively. Weighted average assumptions used for options granted in the nine months ended September 30, 2003 and 2002 are: dividend yield of 0% for all years; expected volatility of 62% and 60%, respectively, and risk-free interest rates of 2.9% and 3.6%, respectively, for options with expected lives of five years (officers and physicians of the Company) and 2.1% and 3.7%, respectively, for options with expected lives of three years (all other employees of the Company). | ||
| Accounting Pronouncements | ||
| In November 2002, FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,” was issued. This statement elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for interim and annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company’s financial position or results of operations for the three and nine months ended September 30, 2003. | ||
| In January 2003, FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51,” was issued. FIN 46 addresses consolidation by business enterprises of variable interest entities. The provisions of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, FASB Staff Position No. 46-6 was issued which deferred the effective date of the provisions of FIN 46 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 until the end of the first interim or annual period ending after December 15, 2003. The Company has a lease arrangement with an entity that may be considered a variable interest entity under FIN 46. The Company is currently evaluating whether this or any other entity will be subject to consolidation under the provisions of FIN 46. | ||
| 3. | Business Acquisitions: | |
| The Company completed the acquisition of an independent laboratory specializing in newborn metabolic screening and five physician group practices during the nine months ended September 30, 2003. Total consideration for the acquisitions, net of cash acquired, was approximately $63.0 million in cash. In connection with the acquisitions, the Company recorded goodwill of approximately $53.1 million, other assets of approximately $10.8 million and liabilities of approximately $927,000. The results of operations of the acquired practices have been included in the Company’s consolidated financial statements from the respective dates of acquisition. |
7
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| 3. | Business Acquisitions, Continued: | |
| The following unaudited pro forma information combines the consolidated results of operations of the Company and the Company’s 2002 and 2003 acquisitions, as if the transactions had occurred on January 1, 2002: |
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
| (in thousands, except for per share data) | (in thousands, except for per share data) | ||||||||||||||||
Net patient service revenue |
$ | 146,223 | $ | 128,164 | $ | 414,810 | $ | 366,399 | |||||||||
Net income |
23,493 | 19,882 | 61,350 | 51,380 | |||||||||||||