UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended September 30, 2004 |
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 | 65-0271219 | |
| (State or other jurisdiction of incorporation or organization) |
(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 1, 2004: 22,352,094
PEDIATRIX MEDICAL GROUP, INC.
INDEX
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
PEDIATRIX MEDICAL GROUP, INC.
| September 30, | ||||||||
| 2004 | December 31, | |||||||
| (Unaudited) |
2003 |
|||||||
| (in thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 30,907 | $ | 27,896 | ||||
Accounts receivable, net |
108,400 | 94,213 | ||||||
Prepaid expenses |
4,161 | 3,152 | ||||||
Deferred income taxes |
14,294 | 19,354 | ||||||
Other assets |
1,940 | 942 | ||||||
Total current assets |
159,702 | 145,557 | ||||||
Property and equipment, net |
26,618 | 27,194 | ||||||
Goodwill |
566,679 | 527,422 | ||||||
Other assets, net |
19,759 | 17,421 | ||||||
Total assets |
$ | 772,758 | $ | 717,594 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 111,576 | $ | 111,974 | ||||
Current portion of long-term debt and
capital lease obligations |
614 | 686 | ||||||
Income taxes payable |
3,226 | 8,385 | ||||||
Total current liabilities |
115,416 | 121,045 | ||||||
Long-term debt and capital lease obligations |
755 | 1,178 | ||||||
Deferred income taxes |
19,536 | 17,429 | ||||||
Deferred compensation |
6,965 | 5,564 | ||||||
Total liabilities |
142,672 | 145,216 | ||||||
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; 29,519 and
28,425 shares issued, respectively |
295 | 284 | ||||||
Additional paid-in capital |
474,842 | 432,361 | ||||||
Treasury stock, at cost, 5,516 shares and
4,665 shares, respectively |
(207,278 | ) | (150,000 | ) | ||||
Retained earnings |
362,227 | 289,733 | ||||||
Total shareholders’ equity |
630,086 | 572,378 | ||||||
Total liabilities and shareholders’ equity |
$ | 772,758 | $ | 717,594 | ||||
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, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (in thousands, except for per share data) | ||||||||||||||||
Net patient service revenue |
$ | 158,333 | $ | 145,514 | $ | 458,636 | $ | 405,415 | ||||||||
Operating expenses: |
||||||||||||||||
Practice salaries and benefits |
88,592 | 80,196 | 258,947 | 230,460 | ||||||||||||
Practice supplies and other
operating expenses |
5,895 | 4,778 | 17,206 | 13,561 | ||||||||||||
General and administrative expenses |
20,002 | 19,843 | 59,455 | 57,150 | ||||||||||||
Depreciation and amortization . |
2,298 | 2,495 | 6,999 | 6,048 | ||||||||||||
Total operating expenses |
116,787 | 107,312 | 342,607 | 307,219 | ||||||||||||
Income from operations |
41,546 | 38,202 | 116,029 | 98,196 | ||||||||||||
Investment income |
96 | 76 | 354 | 296 | ||||||||||||
Interest expense |
(298 | ) | (417 | ) | (854 | ) | (1,142 | ) | ||||||||
Income before income taxes |
41,344 | 37,861 | 115,529 | 97,350 | ||||||||||||
Income tax provision |
15,401 | 14,388 | 43,035 | 36,993 | ||||||||||||
Net income |
$ | 25,943 | $ | 23,473 | $ | 72,494 | $ | 60,357 | ||||||||
Per share data: |
||||||||||||||||
Net income per common and
common equivalent share: |
||||||||||||||||
Basic |
$ | 1.08 | $ | 1.01 | $ | 3.00 | $ | 2.54 | ||||||||
Diluted |
$ | 1.04 | $ | .97 | $ | 2.88 | $ | 2.46 | ||||||||
Weighted average shares used in
computing net income per common
and common equivalent share: |
||||||||||||||||
Basic |
24,043 | 23,290 | 24,199 | 23,788 | ||||||||||||
Diluted |
24,980 | 24,196 | 25,176 | 24,521 | ||||||||||||
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
PEDIATRIX MEDICAL GROUP, INC.
| Nine Months Ended | ||||||||
| September 30, |
||||||||
| 2004 |
2003 |
|||||||
| (in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 72,494 | $ | 60,357 | ||||
Adjustments to reconcile net income to net cash provided from
operating activities: |
||||||||
Depreciation and amortization |
6,999 | 6,048 | ||||||
Deferred income taxes |
7,167 | (6,317 | ) | |||||
Gain on sale of assets |
(197 | ) | — | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(14,187 | ) | (13,024 | ) | ||||
Prepaid expenses and other assets |
(1,315 | ) | 4,177 | |||||
Other assets |
91 | (495 | ) | |||||
Accounts payable and accrued expenses |
(785 | ) | 20,167 | |||||
Income taxes payable/receivable |
10,069 | 8,888 | ||||||
Net cash provided from operating activities |
80,336 | 79,801 | ||||||
Cash flows from investing activities: |
||||||||
Acquisition payments, net of cash acquired |
(41,687 | ) | (63,309 | ) | ||||
Purchase of property and equipment |
(5,227 | ) | (13,743 | ) | ||||
Proceeds from sale of assets |
1,100 | — | ||||||
Net cash used in investing activities |
(45,814 | ) | (77,052 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments for syndication of line of credit |
(890 | ) | — | |||||
Borrowings on line of credit, net |
— | 14,500 | ||||||
Payments on long-term debt and capital lease obligations |
(607 | ) | (459 | ) | ||||
Proceeds from issuance of common stock |
27,264 | 20,427 | ||||||
Purchase of treasury stock |
(57,278 | ) | (100,002 | ) | ||||
Net cash used in financing
activities |
(31,511 | ) | (65,534 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
3,011 | (62,785 | ) | |||||
Cash and cash equivalents at beginning of period |
27,896 | 73,195 | ||||||
Cash and cash equivalents at end of period |
$ | 30,907 | $ | 10,410 | ||||
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
PEDIATRIX MEDICAL GROUP, INC.
September 30, 2004
(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 consolidated subsidiaries (collectively, “PMG”) together with the accounts of PMG’s affiliated professional associations, corporations and partnerships (the “affiliated professional contractors”). PMG has contractual management arrangements with its affiliated professional contractors which are separate legal entities that provide physician services in certain states and Puerto Rico. The terms “Pediatrix” and the “Company” refer collectively to Pediatrix Medical Group, Inc., its subsidiaries, and the affiliated professional contractors. | ||||
| The consolidated results of operations for the interim periods presented 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 most recent Annual Report on Form 10-K. | ||||
| 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 equals the exercise price on the day options are granted. To the extent the Company realizes an income tax benefit from the exercise of certain stock options, this benefit results in a decrease in current income taxes payable and an increase in additional paid-in capital. | ||||
| Had compensation expense 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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
Net income, as reported |
$ | 25,943 | $ | 23,473 | $ | 72,494 | $ | 60,357 | ||||||||
Deduct: Total stock-based employee
compensation expense determined
under fair value accounting rules,
net of related tax effect |
(3,280 | ) | (3,361 | ) | (8,620 | ) | (8,039 | ) | ||||||||
Pro forma net income |
$ | 22,663 | $ | 20,112 | $ | 63,874 | $ | 52,318 | ||||||||
Net income per share: |
||||||||||||||||
As reported: |
||||||||||||||||
Basic |
$ | 1.08 | $ | 1.01 | $ | 3.00 | $ | 2.54 | ||||||||
Diluted |
$ | 1.04 | $ | .97 | $ | 2.88 | $ | 2.46 | ||||||||
Pro forma: |
||||||||||||||||
Basic |
$ | .91 | $ | .83 | $ | 2.54 | $ | 2.16 | ||||||||
Diluted |
$ | .89 | $ | .80 | $ | 2.48 | $ | 2.14 | ||||||||
6
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| 2. | Summary of Significant Accounting Policies, Continued: | |||
| In calculating the pro-forma results above, the fair value of each option or share to be issued is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for grants in the three months ended September 30, 2004 are: dividend yield of 0%, expected volatility of 46%, and risk-free interest rates of 3.7% for options with expected lives of three and one-half years (all employees of the Company except officers and physicians). No options with expected lives of three years (officers of the Company) and four years (physicians of the Company) were granted in the three months ended September 30, 2004. The weighted average assumptions used for grants in the three months ended September 30, 2003 are: dividend yield of 0%, expected volatility of 62%, and a risk-free interest rate of 1.9% for options with expected lives of three years (all employees of the Company except physicians). No options with an expected life of five years (officers and physicians of the Company) were granted in the three months ended September 30, 2003. The weighted average assumptions for grants in the nine months ended September 30, 2004 are: dividend yield of 0%, expected volatility of 46%, and risk-free interest rates of 2.9% for options with expected lives of three years (officers of the Company), 2.6% for options with expected lives of four years (physicians of the Company), and 2.4% for options with expected lives of three and one-half years (all other employees of the Company). The weighted average assumptions for grants in the nine months ended September 30, 2003 are: dividend yield of 0%, expected volatility of 62%, and risk-free interest rates of 2.9% for options with expected lives of five years (officers of the Company), 3.0% for options with expected lives of five years (physicians of the Company), and 2.1% for options with expected lives of three years (all other employees of the Company). | ||||
| 3. | Business Acquisitions: | |||
| The Company completed the acquisition of eight physician group practices during the nine months ended September 30, 2004. Total consideration and related costs for these acquisitions were approximately $41.7 million. In connection with these transactions, the Company recorded goodwill of approximately $39.3 million and other identifiable intangible assets consisting of physician and hospital agreements of approximately $2.4 million. The goodwill of approximately $39.3 million related to these acquisitions represents the only change in the carrying amount of goodwill for the nine month period ended September 30, 2004. | ||||
| The following unaudited pro-forma information combines the consolidated results of operations of the Company and the Company’s 2003 and 2004 acquisitions, as if the transactions had occurred on January 1, 2003: | ||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (in thousands, except for per share data) | (in thousands, except for per share data) | |||||||||||||||
Net patient service revenue |
$ | 158,643 | $ | 153,372 | $ | 466,106 | $ | 435,517 | ||||||||
Net income |
$ | 25,987 | $ | 24,485 | $ | 73,946 | $ | 64,112 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 1.08 | $ | 1.05 | $ | 3.06 | $ | 2.70 | ||||||||
Diluted |
$ | 1.04 | $ | 1.01 | $ | 2.94 | $ | 2.61 | ||||||||
| The pro-forma results do not necessarily represent results which would have occurred if the acquisitions had taken place at the beginning of the period, nor are they indicative of the results of future combined operations. |
7
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| 4. | Accounts Payable and Accrued Expenses: | |||
| Accounts payable and accrued expenses consist of the following: | ||||
| September 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (in thousands) | ||||||||
Accounts payable |
$ | 12,831 | $ | 10,528 | ||||
Accrued salaries and bonuses |
43,744 | 55,336 | ||||||
Accrued payroll taxes and benefits |
11,648 | 11,452 | ||||||
Accrued professional liability
coverage |
31,249 | 24,040 | ||||||
Other accrued expenses |
12,104 | 10,618 | ||||||
| $ | 111,576 | $ | 111,974 | |||||
| 5. | Line of Credit: | |||
| In July 2004, the Company obtained a new revolving line of credit and simultaneously terminated the 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 the Company’s 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 the Company’s consolidated leverage ratio. Swing line loans bear interest at the base rate. The new line of credit is collateralized by substantially all of the Company’s assets. The Company is subject to certain covenants and restrictions specified in the new line of credit, including covenants that require the Company to maintain a minimum level of net worth and that restrict the Company from paying dividends and making certain other distributions as specified therein. At September 30, 2004, the Company believes that it was in compliance with such financial covenants and restrictions. The Company had no outstanding principal balances under the line of credit at September 30, 2004. The Company has outstanding letters of credit which reduced the amount available under the new line of credit by $7.0 million at September 30, 2004. | ||||
| 6. | Shareholders’ Equity: | |||
| The Company’s changes in shareholders’ equity for the nine months ended September 30, 2004 are as follows (in thousands): | ||||
| Common Stock |
Additional | Total | ||||||||||||||||||||||
| Number of | Paid in | Treasury | Retained | Shareholders’ | ||||||||||||||||||||
| Shares |
Amount |
Capital |
Stock |
Earnings |
Equity |
|||||||||||||||||||
Balance at December 31, 2003 |
28,425 | $ | 284 | $ | 432,361 | $ | (150,000 | ) | $ | 289,733 | $ | 572,378 | ||||||||||||
Net income |
— | — | — | — | 72,494 | 72,494 | ||||||||||||||||||
Common stock issued under
employee stock option and
stock purchase plans |
1,094 | 11 | 27,253 | — | — | 27,264 | ||||||||||||||||||
Treasury stock |
— | — | — | (57,278 | ) | — | (57,278 | ) | ||||||||||||||||
Tax benefit related to
employee stock options and
stock purchase plans |
— | — | 15,228 | — | — | 15,228 | ||||||||||||||||||
Balance at September 30, 2004 |
29,519 | $ | 295 | $ | 474,842 | $ | (207,278 | ) | $ | 362,227 | $ | 630,086 | ||||||||||||
8
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| 7. | Net Income Per Share: | |||
| Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the applicable period. Diluted net income per share is calculated by dividing net income by the weighted average number of common and potential common shares outstanding during the applicable period. Potential common shares consist of the dilutive effect of convertible subordinated notes calculated using the if-converted method and outstanding options calculated using the treasury stock method. The calculation of diluted net income per share excludes the after-tax impact of interest expense related to convertible subordinated notes. | ||||
| During the three months ended December 31, 2003, all issued and outstanding subordinated convertible notes were converted into approximately 33,000 shares of common stock. | ||||
| The calculations of basic and diluted net income per share for the three and nine months ended September 30, 2004 and 2003 are as follows: | ||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (in thousands, except for per share data) | ||||||||||||||||
Basic: |
||||||||||||||||
Net income applicable to common stock |
$ | 25,943 | $ | 23,473 | $ | 72,494 | $ | 60,357 | ||||||||
Weighted average number of
common shares outstanding |
24,043 | 23,290 | 24,199 | 23,788 | ||||||||||||
Basic net income per share |
$ | 1.08 | $ | 1.01 | $ | 3.00 | $ | 2.54 | ||||||||
Diluted: |
||||||||||||||||
Net income |
$ | 25,943 | $ | 23,473 | $ | 72,494 | $ | 60,357 | ||||||||
Interest expense on convertible
subordinated debt, net of tax |
— | 7 | — | 20 | ||||||||||||
Net income applicable to common stock |
$ | 25,943 | $ | 23,480 | $ | 72,494 | $ | 60,377 | ||||||||
Weighted average number of
common shares outstanding |
24,043 | 23,290 | 24,199 | 23,788 | ||||||||||||
Weighted average number of
dilutive common stock equivalents |
937 | 876 | 977 | 703 | ||||||||||||
Dilutive effect of convertible
subordinated debt |
— | 30 | — | 30 | ||||||||||||
Weighted average number of
common and common equivalent
shares outstanding |
24,980 | 24,196 | 25,176 | 24,521 | ||||||||||||
Diluted net income per share |
$ | 1.04 | $ | .97 | $ | 2.88 | &nbs | |||||||||