UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from ______ to ______
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of Incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
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(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol |
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Name of each exchange on which registered |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
On August 2, 2024, the registrant had outstanding
Pediatrix Medical Group, Inc.
INDEX
2
Pediatrix Medical Group, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)
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June 30, 2024 |
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December 31, 2023 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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Accounts receivable, net |
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Prepaid expenses |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Operating and finance lease right-of-use assets |
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Deferred income tax assets |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
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$ |
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Current portion of debt and finance lease liabilities, net |
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Current portion of operating lease liabilities |
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Income taxes payable |
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Total current liabilities |
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Long-term debt and finance lease liabilities, net |
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Long-term operating lease liabilities |
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Long-term professional liabilities |
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Deferred income tax liabilities |
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Other liabilities |
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Total liabilities |
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Shareholders’ equity: |
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Preferred stock; $ par value; |
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Common stock; $ par value; |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Retained deficit |
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Total shareholders’ equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
3
Pediatrix Medical Group, Inc.
Consolidated Statements of Income and Comprehensive Income
(in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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2024 |
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2023 |
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2024 |
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2023 |
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Net revenue |
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$ |
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$ |
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$ |
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$ |
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Operating expenses: |
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Practice salaries and benefits |
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Practice supplies and other operating expenses |
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General and administrative expenses |
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Depreciation and amortization |
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Transformational and restructuring related expenses |
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Goodwill impairment |
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Fixed assets impairments |
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Intangible assets impairments |
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Loss on disposal of businesses |
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Total operating expenses |
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(Loss) income from operations |
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( |
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( |
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Investment and other (loss) income |
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Interest expense |
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( |
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( |
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( |
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Equity in earnings of unconsolidated affiliate |
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Total non-operating expenses |
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( |
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( |
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( |
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( |
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(Loss) income before income taxes |
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( |
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( |
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Income tax benefit (provision) |
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( |
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( |
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Net (loss) income |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Other comprehensive (loss) income, net of tax |
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Unrealized holding gain (loss) on investments, net of tax of $ |
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( |
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Total comprehensive (loss) income |
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$ |
( |
) |
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$ |
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$ |
( |
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$ |
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Per common and common equivalent share data: |
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Net (loss) income: |
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Basic |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Diluted |
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$ |
( |
) |
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$ |
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$ |
( |
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$ |
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Weighted average common shares: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
4
Pediatrix Medical Group, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands)
(Unaudited)
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Common Stock |
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Number of |
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Additional |
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Accumulated |
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Retained |
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Total |
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Shares |
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Amount |
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Capital |
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Loss |
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Deficit |
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Equity |
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2024 |
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Balance at January 1, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Unrealized holding gain on investments, net of tax |
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— |
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— |
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— |
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— |
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Common stock issued under employee stock purchase plan |
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— |
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— |
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Forfeitures of restricted stock |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Repurchased common stock |
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( |
) |
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( |
) |
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( |
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— |
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— |
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( |
) |
Balance at March 31, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Unrealized holding gain on investments, net of tax |
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— |
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— |
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— |
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— |
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Common stock issued under employee stock purchase plan |
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— |
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— |
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Issuance of restricted stock |
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( |
) |
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— |
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— |
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— |
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Forfeitures of restricted stock |
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( |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Repurchased common stock |
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( |
) |
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— |
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( |
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— |
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— |
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( |
) |
Balance at June 30, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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2023 |
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Balance at January 1, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Unrealized holding gain on investments, net of tax |
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— |
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— |
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— |
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— |
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Common stock issued under employee stock purchase plan |
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— |
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— |
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— |
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Issuance of restricted stock |
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( |
) |
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— |
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— |
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— |
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Forfeitures of restricted stock |
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( |
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( |
) |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Repurchased common stock |
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( |
) |
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— |
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( |
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— |
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— |
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( |
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Unrealized holding loss on investments, net of tax |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Common stock issued under employee stock purchase plan |
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— |
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— |
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Issuance of restricted stock |
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( |
) |
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— |
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— |
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— |
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Forfeitures of restricted stock |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Repurchased common stock |
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( |
) |
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— |
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( |
) |
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— |
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— |
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( |
) |
Balance at June 30, 2023 |
|
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
5
Pediatrix Medical Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
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Six Months Ended June 30, |
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2024 |
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2023 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
( |
) |
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$ |
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Adjustments to reconcile net income to net cash from operating activities: |
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Depreciation and amortization |
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Amortization of premiums, discounts and issuance costs |
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Goodwill impairment |
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Fixed assets impairments |
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Intangible assets impairments |
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Loss on disposal of businesses |
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Stock-based compensation expense |
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Deferred income taxes |
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( |
) |
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Other |
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( |
) |
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( |
) |
Changes in assets and liabilities: |
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Accounts receivable |
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( |
) |
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Prepaid expenses and other current assets |
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Other long-term assets |
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Accounts payable and accrued expenses |
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( |
) |
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( |
) |
Income taxes payable |
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( |
) |
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Long-term professional liabilities |
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Other liabilities |
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( |
) |
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( |
) |
Net cash used in operating activities – continuing operations |
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( |
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( |
) |
Net cash used in operating activities - discontinued operations |
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( |
) |
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( |
) |
Net cash used in operating activities |
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( |
) |
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( |
) |
Cash flows from investing activities: |
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Acquisition payments, net of cash acquired |
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( |
) |
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( |
) |
Purchases of investments |
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( |
) |
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( |
) |
Proceeds from maturities or sales of investments |
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Purchases of property and equipment |
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( |
) |
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( |
) |
Net cash used in investing activities |
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( |
) |
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( |
) |
Cash flows from financing activities: |
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Borrowings on line of credit |
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Payments on line of credit |
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|
( |
) |
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( |
) |
Payments on term loan |
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( |
) |
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( |
) |
Payments on finance lease obligations |
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( |
) |
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( |
) |
Proceeds from issuance of common stock |
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Repurchases of common stock |
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( |
) |
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( |
) |
Other |
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( |
) |
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Net cash (used in) provided by financing activities |
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( |
) |
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Net decrease in cash and cash equivalents |
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( |
) |
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( |
) |
Cash and cash equivalents at beginning of period |
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|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
Pediatrix Medical Group, Inc.
Notes to Consolidated Financial Statements
June 30, 2024
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited Consolidated Financial Statements of the Company and the notes thereto presented in this Form 10-Q have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial statements, and do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) 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 statement 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 business corporations or professional associations, professional corporations, limited liability companies and partnerships (the “affiliated professional contractors”). Certain subsidiaries of PMG have contractual management arrangements with its affiliated professional contractors, which are separate legal entities that provide physician services in certain states. The terms “Pediatrix” and the “Company” refer collectively to Pediatrix Medical Group Inc., its subsidiaries and the affiliated professional contractors.
The Company is a party to a joint venture in which it owns a
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. In addition, the accompanying unaudited 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 (the “Form 10-K”).
2. Cash Equivalents and Investments:
As of June 30, 2024 and December 31, 2023, the Company's cash equivalents consisted entirely of money market funds totaling $
Investments held are all classified as current and at June 30, 2024 and December 31, 2023 are summarized as follows (in thousands):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Corporate securities |
|
$ |
|
|
$ |
|
||
U.S. Treasury securities |
|
|
|
|
|
|
||
Municipal debt securities |
|
|
|
|
|
|
||
Federal home loan securities |
|
|
|
|
|
|
||
Certificates of deposit |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
3. Fair Value Measurements:
The accounting guidance establishes a fair value hierarchy that prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels:
Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following table presents information about the Company’s financial instruments that are accounted for at fair value on a recurring basis at June 30, 2024 and December 31, 2023 (in thousands):
7
|
|
|
|
Fair Value |
|
|||||
|
|
Fair Value |
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Assets: |
|
|
|
|
|
|
|
|
||
Money market funds |
|
Level 1 |
|
$ |
|
|
$ |
|
||
Short-term investments |
|
Level 2 |
|
|
|
|
|
|
||
Mutual Funds |
|
Level 1 |
|
|
|
|
|
|
||
The following table presents information about the Company’s financial instruments that are not carried at fair value at June 30, 2024 and December 31, 2023 (in thousands):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||||||||||
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
2030 Notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The carrying amounts of cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value due to the short maturities of the respective instruments. The carrying value of the line of credit approximates fair value. If the Company’s line of credit was measured at fair value, it would be categorized as Level 2 in the fair value hierarchy.
4. Accounts Receivable and Net Revenue:
Accounts receivable, net consists of the following (in thousands):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
|
|
|
|
|
|
|
||
Gross accounts receivable |
|
$ |
|
|
$ |
|
||
Allowance for contractual adjustments and uncollectibles |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Patient service revenue is recognized at the time services are provided by the Company’s affiliated physicians. The Company’s performance obligations related to the delivery of services to patients are satisfied at the time of service. Accordingly, there are no performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period with respect to patient service revenue. Almost all of the Company’s patient service revenue is reimbursed by government-sponsored healthcare programs (“GHC Programs”) and third-party insurance payors. Payments for services rendered to the Company’s patients are generally less than billed charges. The Company monitors its revenue and receivables from these sources and records an estimated contractual allowance to properly account for the anticipated differences between billed and reimbursed amounts.
Accordingly, patient service revenue is presented net of an estimated provision for contractual adjustments and uncollectibles. The Company estimates allowances for contractual adjustments and uncollectibles on accounts receivable based upon historical experience and other factors, including days sales outstanding (“DSO”) for accounts receivable, evaluation of expected adjustments and delinquency rates, past adjustments and collection experience in relation to amounts billed, an aging of accounts receivable, current contract and reimbursement terms, changes in payor mix and other relevant information. Contractual adjustments result from the difference between the physician rates for services performed and the reimbursements by GHC Programs and third-party insurance payors for such services.
Collection of patient service revenue the Company expects to receive is normally a function of providing complete and correct billing information to the GHC Programs and third-party insurance payors within the various filing deadlines and typically occurs within 30 to 60 days of billing.
Some of the Company’s hospital agreements require hospitals to pay the Company administrative fees. Some agreements provide for fees if the hospital does not generate sufficient patient volume in order to guarantee that the Company receives a specified minimum revenue level. The Company also receives fees from hospitals for administrative services performed by its affiliated physicians providing medical director or other services at the hospital.
8
The following table summarizes the Company’s net revenue by category (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net patient service revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Hospital contract administrative fees |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The approximate percentage of net patient service revenue by type of payor was as follows:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Contracted managed care |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Government |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other third-parties |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Private-pay patients |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
5. Business Combinations
During the six months ended June 30, 2024, the Company completed the acquisition of
6. Goodwill, Long-Lived Asset Impairments and Loss on Disposal of Businesses:
During the second quarter of 2024, the Company formalized its practice portfolio management plans, resulting in a decision to exit almost all of its affiliated office-based practices, other than maternal-fetal medicine. The practice exits are expected to be completed by December 31, 2024. Accordingly, a recoverability assessment for each individual physician practice was performed, and the estimated future cash flows related to the physician practices did not support the carrying value of the specifically identified individual long-lived assets. As a result, the Company recorded fixed asset impairments of $
During the second quarter of 2024, the Company made the decision to exit its primary and urgent care service line based on a review of the cost and time that would be required to build the platform to scale. The Company divested one of its two previously acquired primary and urgent care practices during the second quarter and divested of the second of its two acquired primary and urgent care practices subsequent to the end of the second quarter. The total loss on disposal of these two businesses was $
During the second quarter of 2024, the Company experienced a triggering event, due to a sustained decline in its stock price and a market capitalization below the Company's book equity value. As the Company consists of only one reporting unit, and is publicly traded, management estimates the fair value of its reporting unit utilizing the Company’s market capitalization, multiplying the number of actual shares outstanding on June 30, 2024 by its stock price on June 30, 2024 and applying an additional premium to give effect to the Company’s best estimate of a control premium. With respect to the estimated control premium used in its analysis, the Company believes that it is reasonable to expect that a market participant would pay a premium to obtain a controlling interest in the Company. The Company considered information from the public markets for premiums on acquisitions in its industry and also considered other factors, such as the value that may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity.
This assessment resulted in a non-cash impairment charge of $
Recognition of this non-cash charge against goodwill resulted in a tax benefit which generated an additional deferred tax asset of $
9
Company's book value to its previously determined fair value. Accordingly, the Company recorded the incremental non-cash charge of $
7. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following (in thousands):
|
|
June 30, 2024 |
|
December 31, 2023 |
Accounts payable |
|
$ |
|
$ |
Accrued salaries and incentive compensation |
|
|
||
Accrued payroll taxes and benefits |
|
|
||
Accrued professional liabilities |
|
|
||
Accrued interest |
|
|
||
Other accrued expenses |
|
|
||
|
|
$ |
|
$ |
The net decrease in accrued salaries and incentive compensation of $
8. Line of Credit and Long-Term Debt:
On February 11, 2022, the Company issued $
Interest on the 2030 Notes accrues at the rate of
Also in connection with the Redemption, the Company amended its credit agreement (the “Credit Agreement”, and such amendment, the "Credit Agreement Amendment"), concurrently with the issuance of the 2030 Notes. The Credit Agreement Amendment, among other things, (i) refinanced the prior unsecured revolving credit facility with a $
The Credit Agreement, as amended by the Credit Agreement Amendment (the “Amended Credit Agreement”) matures on February 11, 2027 and is guaranteed on an unsecured basis by substantially all of the Company's subsidiaries and affiliated professional contractors. At the Company's option, borrowings under the Amended Credit Agreement bear interest at
10
The Amended Credit Agreement contains customary covenants and restrictions, including covenants that require the Company to maintain a minimum interest coverage ratio, a maximum consolidated total consolidated net leverage ratio and to comply with laws, and restrictions on the ability to pay dividends, incur indebtedness or liens and make certain other distributions subject to baskets and exceptions, in each case, as specified therein. Failure to comply with these covenants would constitute an event of default under the Amended Credit Agreement, notwithstanding the ability of the Company to meet its debt service obligations. The Amended Credit Agreement includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Amended Credit Agreement. In addition, the Company may increase the principal amount of the Revolving Credit Line or incur additional term loans under the Amended Credit Agreement in an aggregate principal amount such that on a pro forma basis after giving effect to such increase or additional term loans, the Company would be in compliance with the financial covenants, subject to the satisfaction of specified conditions and additional caps in the event that the Amended Credit Agreement is secured.
At June 30, 2024, the Company had an outstanding principal balance on the Amended Credit Agreement of $
At June 30, 2024, the Company had an outstanding principal balance of $
9. Common and Common Equivalent Shares:
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income by the weighted average number of common and potential common shares outstanding during the period. Potential common shares consist of outstanding restricted stock and stock options and is calculated using the treasury stock method.
The calculation of shares used in the basic and diluted net income per common share calculation for the three and six months ended June 30, 2024 and 2023 is as follows (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of dilutive common share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of common and common |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Antidilutive securities (restricted stock and stock options) not included in the diluted net income per common share calculation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
(a)
10. Stock Incentive Plans and Stock Purchase Plans:
The Company’s Amended and Restated 2008 Incentive Compensation Plan (the “Amended and Restated 2008 Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted stock, deferred stock, and other stock-related awards and performance awards that may be settled in cash, stock or other property.
Under the Amended and Restated 2008 Incentive Plan, options to purchase shares of common stock may be granted at a price not less than the fair market value of the shares on the date of grant. The options must be exercised within
Under the Company’s Amended and Restated 1996 Non-Qualified Employee Stock Purchase Plan, as amended (the “ESPP”), employees are permitted to purchase the Company's common stock at
11
The Company recognizes stock-based compensation expense for the discount received by participating employees and non-employee service providers. During the six months ended June 30, 2024, approximately
During the three and six months ended June 30, 2024 and 2023, the Company recognized stock-based compensation expense of $
11. Common Stock Repurchase Programs:
In July 2013, the Company’s Board of Directors authorized the repurchase of shares of the Company’s common stock up to an amount sufficient to offset the dilutive impact from the issuance of shares under the Company’s equity compensation programs. The share repurchase program allows the Company to make open market purchases from time-to-time based on general economic and market conditions and trading restrictions. The repurchase program also allows for the repurchase of shares of the Company’s common stock to offset the dilutive impact from the issuance of shares, if any, related to the Company’s acquisition program.
In August 2018, the Company announced that its Board of Directors had authorized the repurchase of up to $
12. Commitments and Contingencies:
The Company expects that audits, inquiries and investigations from government authorities and agencies will occur in the ordinary course of business. Such audits, inquiries and investigations and their ultimate resolutions, individually or in the aggregate, could have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and the trading price of its securities. The Company has not included an accrual for these matters as of June 30, 2024 in its Consolidated Financial Statements, as the variables affecting any potential eventual liability depend on the currently unknown facts and circumstances that arise out of, and are specific to, any particular future audit, inquiry and investigation and cannot be reasonably estimated at this time.
In the ordinary course of business, the Company becomes involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by the Company's affiliated physicians. The Company's contracts with hospitals generally require the Company to indemnify them and their affiliates for losses resulting from the negligence of the Company's affiliated physicians. The Company may also become subject to other lawsuits which could involve large claims and significant costs. The Company believes, based upon a review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on its business, financial condition, results of operations, cash flows and the trading price of its securities. 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 the Company's business, financial condition, results of operations, cash flows and the trading price of its securities.
Although the Company currently maintains liability insurance coverage intended to cover professional liability and certain other claims, the Company cannot assure that its insurance coverage will be adequate to cover liabilities arising out of claims asserted against it in the future where the outcomes of such claims are unfavorable. With respect to professional liability risk, the Company generally self-insures a portion of this risk through its wholly owned captive insurance subsidiary. Liabilities in excess of the Company's insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and the trading price of its securities.
12
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 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission on February 20, 2024 (the “2023 Form 10-K”). As used in this Quarterly Report, the terms “Pediatrix”, the “Company”, “we”, “us” and “our” refer to the parent company, Pediatrix Medical Group, Inc., a Florida corporation, and the consolidated subsidiaries through which its businesses are actually conducted (collectively, “PMG”), together with PMG’s affiliated business corporations or professional associations, professional corporations, limited liability companies and partnerships (“affiliated professional contractors”). Certain subsidiaries of PMG have contracts with our affiliated professional contractors, which are separate legal entities that provide physician services in certain states. The following discussion contains forward-looking statements. Please see the Company’s 2023 Form 10-K, including Item 1A, 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.
Overview
Pediatrix is a leading provider of physician services including newborn, maternal-fetal, and other pediatric subspecialty care. Our national network is comprised of affiliated physicians who provide clinical care in 37 states. Our affiliated physicians provide neonatal clinical care, primarily within hospital-based neonatal intensive care units (“NICUs”), to babies born prematurely or with medical complications; and maternal-fetal and obstetrical medical care to expectant mothers experiencing complicated pregnancies, primarily in areas where our affiliated neonatal physicians practice. We also provide services across multiple other pediatric subspecialties.
General Economic Conditions and Other Factors
Our operations and performance depend significantly on economic conditions. During the three months ended June 30, 2024, the percentage of our patient service revenue being reimbursed under government-sponsored healthcare programs (“GHC Programs”) decreased as compared to the three months ended June 30, 2023. However, we could experience shifts toward GHC Programs if changes occur in economic behaviors or population demographics within geographic locations in which we provide services, including an increase in unemployment and underemployment as well as losses of commercial health insurance. Payments received from GHC Programs are substantially less for equivalent services than payments received from commercial insurance payors. In addition, costs of managed care premiums and patient responsibility amounts continue to rise, and accordingly, we may experience lower net revenue resulting from increased bad debt due to patients’ inability to pay for certain services.
Practice Portfolio Management Plan and Impairment of Long-Lived Assets
During the second quarter of 2024, we formalized our physician practice optimization plans, resulting in a decision to exit almost all of our affiliated office-based practices, other than maternal-fetal medicine. Over the course of many years, we expanded our pediatric service lines and footprint to provide specialized care to more patients, including through our office-based portfolio of practices. This added complexity to our operations over time and, accordingly, increased costs that resulted in operating challenges primarily for our office-based portfolio of practices. Recognizing this and our need to adapt to the current healthcare climate, during the second quarter, we made the decision to return to a hospital-based and maternal-fetal medicine-focused organization. The exits of our pediatric office-based practices are expected to be completed by December 31, 2024. Accordingly, a recoverability assessment for each impacted individual physician practice was performed, and the estimated future cash flows related to the physician practices did not support the carrying value of the specifically identified individual long-lived assets. As a result, during the second quarter of 2024, we recorded fixed asset impairments of $20.1 million, intangible asset impairments of $7.7 million and operating lease right-of-use asset impairments of $8.1 million. The operating lease right-of-use impairments are recorded within the transformational and restructuring related expenses line item.
Loss on Disposal of Businesses
During the second quarter of 2024, we made the decision to exit our primary and urgent care service line based on a review of the cost and time that would be required to build the platform to scale. We divested one of our two previously acquired primary and urgent care practices during the second quarter and divested of the second of our two acquired primary and urgent care practices subsequent to the end of the second quarter. The total loss on disposal of these two businesses was $10.9 million, resulting from the loss on sale for one practice and marking the net assets to their fair value less costs to sell for the other practice.
Goodwill Impairment
Goodwill is tested for impairment on at least an annual basis, in accordance with the subsequent measurement provisions of the accounting guidance for goodwill. During the second quarter of 2024, we experienced a triggering event resulting from a sustained decline in our stock price that resulted in our market capitalization being lower than the book value of our equity. This impairment assessment resulted in a non-cash impairment charge of $130.0 million. Recognition of this non-cash charge against goodwill resulted in a tax benefit which generated an additional deferred tax asset of $24.2 million that increased the book value of our equity. An incremental non-cash charge was required to reduce the book value of our equity to our previously determined fair value. Accordingly, we recorded the incremental non-cash charge of $24.2 million for a total non-cash charge of $154.2 million.
13
“Surprise” Billing Legislation
In late 2020, Congress enacted the No Surprises Act (“NSA”) legislation intended to protect patients from “surprise” medical bills when certain services are furnished by providers who are not in-network with the patient’s insurer. Effective January 1, 2022, if the patient’s insurance plan or coverage is subject to the NSA, providers are not permitted to send patients an unexpected or “surprise” medical bill that arises from out-of-network emergency care provided at certain out-of-network facilities or at certain in-network facilities by out-of-network emergency providers, as well as nonemergency care provided at certain in-network facilities by out-of-network providers without the patient’s informed consent (as defined by the NSA). Many states have legislation on this topic and will continue to modify and review their laws pertaining to surprise billing.
For claims subject to the NSA, insurers are required to calculate the patient’s total cost-sharing amount pursuant to rules set forth in the NSA and its implementing regulations which, in some cases, can be calculated by reference to the applicable qualifying payment amount for the items or services received. The patient’s cost-sharing amount for out-of-network services covered by the NSA must be no more than the patient’s in-network cost-sharing amounts. Patient cost-sharing amounts for items and services subject to the NSA count toward the patient’s health plan deductible and out-of-pocket cost-sharing limits. For claims subject to the NSA, providers are generally not permitted to balance bill patients beyond this cost-sharing amount. An out-of-network provider is only permitted to bill a patient more than the cost-sharing amount allowed under the NSA for certain types of services if the provider satisfies all aspects of an informed consent process set forth in the NSA’s implementing regulations. Providers that violate these surprise billing prohibitions may be subject to state enforcement action or federal civil monetary penalties.
For claims subject to the NSA, including many emergency care services, out-of-network providers will be paid an amount determined by the patient’s insurer; if a provider is not satisfied with the initial amount paid for the services, the provider can pursue recourse through an independent dispute resolution process. The outcome of each IDR dispute is generally binding on both the provider and payor with respect to the particular claims at issue in that dispute but may not affect an insurer’s future offers of payment. Accordingly, we cannot predict how these IDR results will compare to the rates that our affiliated physicians customarily receive for their services. These measures could limit the amount we can charge and recover for services we furnish where we have not contracted with the patient’s insurer, and therefore could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.
Healthcare Reform
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively the “ACA”) has altered how health care is delivered and reimbursed in the U.S. and contain various provisions, including the establishment of health insurance exchanges to facilitate the purchase of qualified health plans, expanded Medicaid eligibility, subsidized insurance premiums and additional requirements and incentives for businesses to provide healthcare benefits. Other provisions have expanded the scope and reach of the FCA and other healthcare fraud and abuse laws. The status of the ACA may be subject to change as a result of political, legislative, regulatory, and administrative developments, as well as judicial proceedings. As a result, we could be affected by potential changes to various aspects of the ACA, including changes to subsidies, healthcare insurance marketplaces and Medicaid expansion. We cannot say for certain whether there will be additional future challenges to the ACA or what impact, if any, such challenges may have on our business. Changes resulting from various legal proceedings, and any legislative or administrative change to the current healthcare financing system, could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.
In addition to the ACA, there could be changes to other GHC Programs, such as a change to the Medicaid program design or Medicaid coverage and reimbursement rates set forth under federal or state law. These changes, if implemented, could eliminate the guarantee that everyone who is eligible and applies for Medicaid benefits would receive them and could potentially give states new authority to restrict eligibility, cut benefits and/or make it more difficult for people to enroll. Moreover, the expiration of the COVID-19 national emergency and public health emergency declarations in May 2023 may impact the coverage for and access to certain services for Medicaid patients. Expiration of the national emergency and public health emergency declarations will also end waivers for the provision of certain services, and returning our services to a pre-pandemic regulatory state similarly may increase our exposure to legal, regulatory, compliance and clinical risks.
Medicaid Expansion
The ACA also allows states to expand their Medicaid programs through federal payments that fund most of the cost of increasing the Medicaid eligibility income limit from a state’s historic eligibility levels to 133% of the federal poverty level. All of the states in which we operate, however, already cover children in the first year of life and pregnant women if their household income is at or below 133% of the federal poverty level. Recently, Democrats in Congress have sought to expand Medicaid or Medicaid-like coverage in states that have not yet expanded Medicaid. They also have sought to reduce payments to certain hospitals in some of these states. Should any of these changes take effect, we cannot predict with any assurance the ultimate effect on reimbursements for our services.
Non-GAAP Measures
In our analysis of our results of operations, we use various GAAP and certain non-GAAP financial measures. We have incurred certain expenses that we do not consider representative of our underlying operations, including transformational and restructuring related expenses. Accordingly, we report adjusted earnings before interest, taxes and depreciation and amortization (“Adjusted EBITDA”), defined as net income before interest, taxes, depreciation and amortization, and transformational and restructuring related expenses. Earnings per share has also been adjusted (“Adjusted EPS”) and consists of diluted net income per common and common equivalent share adjusted for amortization expense, stock-based compensation expense, transformational and restructuring related expenses and impacts from discrete tax events. For the
14
three and six months ended June 30, 2024, both Adjusted EBITDA and Adjusted EPS are being further adjusted to exclude loss on disposal of businesses and impairment losses.
We believe these measures, in addition to income from operations, net income and diluted net income per common and common equivalent share, provide investors with useful supplemental information to compare and understand our underlying business trends and performance across reporting periods on a consistent basis. These measures should be considered a supplement to, and not a substitute for, financial performance measures determined in accordance with GAAP. In addition, since these non-GAAP measures are not determined in accordance with GAAP, they are susceptible to varying calculations and may not be comparable to other similarly titled measures of other companies. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
For a reconciliation of each of Adjusted EBITDA and Adjusted EPS to the most directly comparable GAAP measures for the three and six months ended June 30, 2024 and 2023, refer to the tables below (in thousands, except per share data).
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net (loss) income |
|
$ |
(153,025 |
) |
|
$ |
28,282 |
|
|
$ |
(148,990 |
) |
|
$ |
42,488 |
|
Interest expense |
|
|
10,308 |
|
|
|
11,230 |
|
|
|
20,907 |
|
|
|
21,620 |
|
Income tax (benefit) provision |
|
|
(14,703 |
) |
|
|
10,665 |
|
|
|
(10,914 |
) |
|
|
17,171 |
|
Depreciation and amortization expense |
|
|
8,791 |
|
|
|
8,945 |
|
|
|
19,099 |
|
|
|
17,898 |
|
Transformational and restructuring related expenses |
|
|
13,579 |
|
|
|
— |
|
|
|
22,059 |
|
|
|
— |
|
Goodwill impairment |
|
|
154,243 |
|
|
|
— |
|
|
|
154,243 |
|
|
|
— |
|
Fixed assets impairments |
|
|
20,112 |
|
|
|
— |
|
|
|
20,112 |
|
|
|
— |
|
Intangible assets impairments |
|
|
7,679 |
|
|
|
— |
|
|
|
7,679 |
|
|
|
— |
|
Loss on disposal of businesses |
|
|
10,873 |
|
|
|
— |
|
|
|
10,873 |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
57,857 |
|
|
$ |
59,122 |
|
|
$ |
95,068 |
|
|
$ |
99,177 |
|
|
|
Three Months Ended |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||
Weighted average diluted shares outstanding |
|
83,332 |
|
|
82,664 |
|
||||||||||
Net (loss) income and diluted net (loss) income per share |
|
$ |
(153,025 |
) |
|
$ |
(1.84 |
) |
|
$ |
28,282 |
|
|
$ |
0.34 |
|
Adjustments (1): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization (net of tax of $533 and $512) |
|
|
1,599 |
|
|
|
0.02 |
|
|
|
1,533 |
|
|
|
0.02 |
|
Stock-based compensation (net of tax of $500 and $782) |
|
|
1,501 |
|
|
|
0.02 |
|
|
|
2,344 |
|
|
|
0.03 |
|
Transformational and restructuring expenses (net of tax of $3,395) |
|
|
10,184 |
|
|
|
0.12 |
|
|
|
— |
|
|
|
— |
|
Goodwill impairment (net of tax of $15,490) |
|
|
138,753 |
|
|
|
1.67 |
|
|
|
— |
|
|
|
— |
|
Fixed assets impairments (net of tax of $5,028) |
|
|
15,084 |
|
|
|
0.18 |
|
|
|
— |
|
|
|
— |
|
Intangible assets impairments (net of tax of $1,920) |
|
|
5,759 |
|
|
|
0.07 |
|
|
|
— |
|
|
|
— |
|
Loss on disposal of businesses (net of tax of $2,718) |
|
|
8,155 |
|
|
|
0.10 |
|
|
|
— |
|
|
|
— |
|
Net impact from discrete tax events |
|
|
328 |
|
|
|
— |
|
|
|
150 |
|
|
|
— |
|
Adjusted income and diluted EPS |
|
$ |
28,338 |
|
|
$ |
0.34 |
|
|
$ |
32,309 |
|
|
$ |
0.39 |
|
|
|
Six Months Ended |
|
|||||||||||||
|
|
2024 |
|
|
2023 |
|
||||||||||
Weighted average diluted shares outstanding |
|
83,074 |
|
|
82,377 |
|
||||||||||
Net (loss) income and diluted net (loss) income per share |
|
$ |
(148,990 |
) |
|
$ |
(1.79 |
) |
|
$ |
42,488 |
|
|
$ |
0.52 |
|
Adjustments (1): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization (net of tax of $1,396 and $1,010) |
|
|
4,188 |
|
|
|
0.05 |
|
|
|
3,029 |
|
|
|
0.04 |
|
Stock-based compensation (net of tax of $1,215 and $1,534) |
|
|
3,647 |
|
|
|
0.04 |
|
|
|
4,601 |
|
|
|
0.06 |
|
Transformational and restructuring expenses (net of tax of $5,515) |
|
|
16,544 |
|
|
|
0.20 |
|
|
|
— |
|
|
|
— |
|
Goodwill impairment (net of tax of $15,490) |
|
|
138,753 |
|
|
|
1.67 |
|
|
|
— |
|
|
|
— |
|
Fixed assets impairments (net of tax of $5,028) |
|
|
15,084 |
|
|
|
0.18 |
|
|
|
— |
|
|
|
— |
|
Intangible assets impairments (net of tax of $1,920) |
|
|
5,759 |
|
|
|
0.07 |
|
|
|
— |
|
|
|
— |
|
Loss on disposal of businesses (net of tax of $2,718) |
|
|
8,155 |
|
|
|
0.10 |
|
|
|
— |
|
|
|
— |
|
Net impact from discrete tax events |
|
|
2,004 |
|
|
|
0.02 |
|
|
|
870 |
|
|
|
— |
|
Adjusted income and diluted EPS |
|
$ |
45,144 |
|
|
$ |
0.54 |
|
|
$ |
50,988 |
|
|
$ |
0.62 |
|
15
Results of Operations
Three Months Ended June 30, 2024 as Compared to Three Months Ended June 30, 2023
Our net revenue was $504.3 million for the three months ended June 30, 2024, as compared to $500.6 million for the same period in 2023. The increase in net revenue of $3.7 million, or 0.7%, was primarily attributable to an increase in same-unit revenue, partially offset by a decrease in revenue from non-same unit activity, primarily resulting from practice dispositions. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue increased by $13.5 million, or 2.8%. The increase in same-unit revenue was comprised of an increase of $11.6 million, or 2.4%, from net reimbursement-related factors and $1.9 million, or 0.4%, related to patient service volumes. The net increase in revenue related to net reimbursement-related factors was primarily due to an increase in revenue resulting from a favorable shift in payor mix and an increase in administrative fees from our hospital partners. The increase in revenue from patient service volumes was related to increases in maternal-fetal medicine and certain hospital-based pediatric subspecialty services, partially offset by modest declines in primary and urgent care and neonatology services.
Practice salaries and benefits increased $3.8 million, or 1.1%, to $357.8 million for the three months ended June 30, 2024, as compared to $354.0 million for the same period in 2023. The $3.8 million increase was primarily attributable to an increase in clinical compensation expense, including benefits and incentive compensation, and modest increases in medical malpractice insurance expense, all at our existing units, partially offset by decreases in non-same unit activity.
Practice supplies and other operating expenses increased $1.3 million, or 4.1%, to $32.4 million for the three months ended June 30, 2024, as compared to $31.1 million for the same period in 2023. The increase was primarily attributable to practice supply, rent and other costs related to our existing units, primarily professional services and rent expense, partially offset by decreases in non-same unit activity.
General and administrative expenses primarily 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 affiliated physician practices and services. General and administrative expenses were $56.6 million for the three months ended June 30, 2024, as compared to $58.0 million for the same period in 2023. The net decrease of $1.4 million was primarily related to decreases in overall staffing levels and timing of certain incentive compensation expenses, partially offset by increases in salary expense for enhancement of front-end revenue cycle management staffing. General and administrative expenses as a percentage of net revenue was 11.2% for the three months ended June 30, 2024, as compared to 11.6% for the same period in 2023.
Depreciation and amortization expense was $8.8 million for the three months ended June 30, 2024, as compared to $8.9 million for the same period in 2023.
Transformational and restructuring related expenses were $13.6 million for the three months ended June 30, 2024 and primarily related to impairment of various right-of-use lease assets resulting from our practice portfolio management activities, revenue cycle management transition activities and position eliminations across various shared services and operations departments.
Goodwill impairment was $154.2 million for the three months ended June 30, 2024, resulting from the triggering event during the second quarter based on a sustained stock price decline.
Fixed assets impairments were $20.1 million for the three months ended June 30, 2024, resulting from the practice portfolio management plan.
Intangible assets impairments were $7.7 million for the three months ended June 30, 2024, resulting from the practice portfolio management plan.
Loss on disposal from businesses was $10.9 million for the three months ended June 30, 2024, resulting from the disposals of our primary and urgent care practices.
Loss from operations was $157.7 million for the three months ended June 30, 2024, as compared to income from operations of $48.5 million for the same period in 2023. Our operating margin was (31.3)% for the three months ended June 30, 2024, as compared to 9.7% for the same period in 2023. The decrease in our operating margin was primarily due to the impairment activity recorded during the second quarter and transformational and restructuring related activity, as well as net unfavorable impacts in our same-unit results driven by higher operating expenses, partially offset by same-unit revenue increases and decreases in general and administrative expenses. Excluding impairment activity and transformational and restructuring related expenses for the three months ended June 30, 2024, our income from operations was $48.8 million and our operating margin was 9.7% for such period. We believe excluding the impacts from the impairment and transformational and restructuring related activity provides a more comparable view of our operating income and operating margin.
Total non-operating expenses were $10.0 million for the three months ended June 30, 2024, as compared to $9.6 million for the same period in 2023. The net increase in non-operating expenses was primarily related to an increase in other expense from the settlement of a litigation matter, partially offset by a decrease in interest expense.
Our effective income tax rate (“tax rate”) was 8.8% for the three months ended June 30, 2024 as compared to 27.4% for the three months ended June 30, 2023. The decrease in our tax rate from 27.4% to 8.8% for the three months ended June 30, 2024 primarily relates to the effects of the non-cash goodwill impairment charge and the pre-tax loss generated excluding the impairment charge. Discrete tax impacts during the three months ended June 30, 2024 and 2023 were nominal.
16
Net loss was $153.0 million for the three months ended June 30, 2024, as compared to net income of $28.3 million for the same period in 2023. Adjusted EBITDA was $57.9 million for the three months ended June 30, 2024, as compared to $59.1 million for the same period in 2023. The decrease in our Adjusted EBITDA was primarily due to net unfavorable impacts in our same-unit results, primarily from higher operating expenses.
Diluted net loss per common and common equivalent share was $1.84 on weighted average shares outstanding of 83.3 million for the three months ended June 30, 2024, as compared to diluted net income per common and common equivalent share of $0.34 on weighted average shares outstanding of 82.7 million for the same period in 2023. Adjusted EPS was $0.34 for the three months ended June 30, 2024, as compared to $0.39 for the same period in 2023.
Six Months Ended June 30, 2024 as Compared to Six Months Ended June 30, 2023
Our net revenue was $999.4 million for the six months ended June 30, 2024, as compared to $991.6 million for the same period in 2023. The increase in revenue of $7.8 million, or 0.8%, was primarily attributable to increases in same-unit revenue, partially offset by a decrease in revenue from non-same unit activity, primarily resulting from practice dispositions. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue increased by $27.9 million, or 2.9%. The increase in same-unit net revenue was comprised of an increase of $15.8 million, or 1.6%, from net reimbursement-related factors and an increase of $12.1 million, or 1.3%, related to patient service volumes. The net increase in revenue related to net reimbursement-related factors was primarily due to an increase in revenue resulting from a favorable shift in payor mix and an increase in administrative fees from our hospital partners. The increase in revenue from patient service volumes was related to increases in our neonatology, newborn nursery, maternal-fetal medicine, and certaince hospital-based pediatric subspecialty services, partially offset by declines in primary and urgent care and pediatric cardiology services.
Practice salaries and benefits increased $10.7 million, or 1.5%, to $726.9 million for the six months ended June 30, 2024, as compared to $716.3 million for the same period in 2023. The $10.7 million increase was primarily attributable to an increase in clinical compensation expense and a modest increase in medical malpractice expense at our existing units, partially offset by decreases in benefits and incentive compensation at our existing units as well as decreases in non-same unit activity.
Practice supplies and other operating expenses increased $1.7 million, or 2.7%, to $63.5 million for the six months ended June 30, 2024, as compared to $61.8 million for the same period in 2023. The increase was primarily attributable to practice supply, rent and other costs at our existing units, including increases in rent expense, collection fees and professional services expenses, partially offset by decreases in medical supplies and other office expenses.
General and administrative expenses primarily include all billing and collection functions and all other salaries, benefits, supplies and operating expenses not specifically identifiable to the day-to-day operations of our physician practices and services. General and administrative expenses were $116.8 million for the six months ended June 30, 2024, as compared to $117.1 million for the same period in 2023. The net decrease of $0.3 million is primarily related to lower information technology expenses, professional services fees, travel expenses, and decreases in expenses from net staffing reductions, partially offset by increases in salary expense for enhancement of revenue cycle management staffing. General and administrative expenses as a percentage of net revenue were 11.7% for the six months ended June 30, 2024, as compared to 11.8% for the same period in 2023.
Depreciation and amortization expense was $19.1 million for the six months ended June 30, 2024, as compared to $17.9 million for the same period in 2023. The increase of $1.2 million was primarily related to an increase in depreciation expense for non-same unit activity.
Transformational and restructuring related expenses were $22.1 million for the six months ended June 30, 2024 and primarily related to the impairment of various right-of-use lease assets resulting from our practice portfolio management activities, position eliminations across various shared services and operations departments and revenue cycle management transition activities.
Goodwill impairment was $154.2 million for the six months ended June 30, 2024, resulting from the triggering event during the second quarter based on a sustained stock price decline.
Fixed assets impairments were $20.1 million for the six months ended June 30, 2024, resulting from the practice portfolio management plan.
Intangible assets impairments were $7.7 million for the six months ended June 30, 2024, resulting from the practice portfolio management plan.
Loss on disposal from businesses was $10.9 million for the six months ended June 30, 2024, resulting from the disposals of the primary and urgent care practices.
Loss from operations was $141.8 million for the six months ended June 30, 2024, as compared to income from operations of $78.5 million for the same period in 2023. Our operating margin was (14.2)% for the six months ended June 30, 2024, as compared to 7.9% for the same period in 2023. The decrease in our operating margin was primarily due to the impairment activity recorded during the second quarter and transformational and restructuring related activity, as well as net unfavorable impacts in our same-unit results driven by higher operating expenses, partially offset by same-unit revenue increases and decreases in general and administrative expenses. Excluding impairment activity and transformational and restructuring related expenses for the six months ended June 30, 2024, our income from operations was $73.2 million
17
and our operating margin was 7.3% for such period. We believe excluding the impacts from the impairment and transformational and restructuring related activity provides a more comparable view of our operating income and operating margin.
Total non-operating expenses were $18.1 million for the six months ended June 30, 2024, as compared to $18.9 million for the same period in 2023.
Our tax rate was 6.8% for the six months ended June 30, 2024 compared to 28.8% for the six months ended June 30, 2023. The tax rates for the six months ended June 30, 2024 and 2023 include net discrete tax benefits of $2.0 million and $0.9 million, respectively. After excluding discrete tax impacts, during the six months ended June 30, 2024 and 2023, our tax rate was 8.1% and 27.3%, respectively. We believe excluding discrete tax impacts on our tax rate provides a more comparable view of our effective income tax rate. The decrease in our tax rate from 27.3% to 8.1% for the six months ended June 30, 2024 primarily relates to the effects of the non-cash goodwill impairment charge and the pre-tax loss generated excluding the impairment charge.
Net loss was $149.0 million for the six months ended June 30, 2024, as compared to net income of $42.5 million for the six months ended June 30, 2023. Adjusted EBITDA was $95.1 million for the six months ended June 30, 2024, as compared to $99.2 million for the same period in 2023. The decrease in our Adjusted EBITDA was primarily due to net unfavorable impacts in our same-unit results, primarily from higher operating expenses.
Diluted net loss per common and common equivalent share was $1.79 on weighted average shares outstanding of 83.1 million for the six months ended June 30, 2024, as compared to diluted net income per common and common equivalent share of $0.52 on weighted average shares outstanding of 82.4 million for the same period in 2023. Adjusted EPS was $0.54 for the six months ended June 30, 2024, as compared to $0.62 for the same period in 2023.
Liquidity and Capital Resources
As of June 30, 2024, we had $19.4 million of cash and cash equivalents as compared to $73.3 million at December 31, 2023. Additionally, we had working capital of $119.1 million at June 30, 2024, an increase of $24.5 million from working capital of $94.5 million at December 31, 2023.
Cash Flows from Continuing Operations
Cash (used in) provided from operating, investing and financing activities is summarized as follows (in thousands):
|
|
Six Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Operating activities |
|
$ |
(13,280 |
) |
|
$ |
(8,038 |
) |
Investing activities |
|
|
(29,130 |
) |
|
|
(21,748 |
) |
Financing activities |
|
|
(6,451 |
) |
|
|
29,636 |
|
Operating Activities
During the six months ended June 30, 2024, our net cash used in operating activities for continuing operations was $13.3 million, compared to $8.0 million for the same period in 2023. The net increase in cash used of $5.3 million was primarily due to decreases in cash flow from accounts receivable, partially offset by increases in cash flow from income tax-related activity as well as accounts payable and accrued expenses.
During the six months ended June 30, 2024, cash outflow from accounts receivable was $0.9 million, as compared to a cash inflow of $28.9 million for the same period in 2023. The decrease in cash flow from accounts receivable for the six months ended June 30, 2024 as compared to the prior year period was primarily due to the prior year period reflecting a significant improvement in collections.
DSO is one of the key factors that we use to evaluate the condition of our accounts receivable and the related allowances for contractual adjustments and uncollectibles. DSO reflects the timeliness of cash collections on billed revenue and the level of reserves on outstanding accounts receivable. Our DSO for continuing operations was 49.5 days at June 30, 2024 as compared to 50.5 days at December 31, 2023 and 49.2 days at June 30, 2023. The change in our DSO was primarily related to an increase in cash collections at our existing units.
Investing Activities
During the six months ended June 30, 2024, our net cash used in investing activities of $29.1 million consisted primarily of capital expenditures of $12.3 million, net purchases of investments of $8.7 million and acquisition payments of $8.2 million.
Financing Activities
During the six months ended June 30, 2024, our net cash used in financing activities of $6.5 million primarily consisted of net payments on our Term A Loan (as defined below).
Liquidity
18
On February 11, 2022, we issued $400.0 million of 5.375% unsecured senior notes due 2030 (the “2030 Notes”). We used the net proceeds from the issuance of the 2030 Notes, together with $100.0 million drawn under our Revolving Credit Line (as defined below), $250.0 million of Term A Loan and approximately $308.0 million of cash on hand, to redeem (the “Redemption”) the 2027 Notes, which had an outstanding principal balance of $1.0 billion, and to pay costs, fees and expenses associated with the Redemption and the Credit Agreement Amendment (as defined below).
Also in connection with the Redemption, we amended and restated the Credit Agreement (the "Credit Agreement"), and such amendment and restatement (the “Credit Agreement Amendment”), concurrently with the issuance of the 2030 Notes. The Credit Agreement, as amended by the Credit Agreement Amendment (the “Amended Credit Agreement”), among other things, (i) refinanced the prior unsecured revolving credit facility with a $450.0 million unsecured revolving credit facility, including a $37.5 million sub-facility for the issuance of letters of credit (the “Revolving Credit Line”), and a new $250.0 million term A loan facility (“Term A Loan”) and (ii) removed JPMorgan Chase Bank, N.A., as the administrative agent under the Credit Agreement and appointed Bank of America, N.A. as the administrative agent for the lenders under the Amended Credit Agreement.
The Amended Credit Agreement matures on February 11, 2027 and is guaranteed on an unsecured basis by substantially all of our subsidiaries and affiliated professional contractors. At our option, borrowings under the Amended Credit Agreement bear interest at (i) the Alternate Base Rate (defined as the highest of (a) the prime rate as announced by Bank of America, N.A., (b) the Federal Funds Rate plus 0.50% and (c) Term Secured Overnight Financing Rate ("SOFR") for an interest period of one month plus 1.00% with a 1.00% floor) plus an applicable margin rate of 0.50% for the first two fiscal quarters after the date of the Credit Agreement Amendment, and thereafter at an applicable margin rate ranging from 0.125% to 0.750% based on our consolidated net leverage ratio or (ii) Term SOFR rate (calculated as the Secured Overnight Financing Rate published on the applicable Reuters screen page plus a spread adjustment of 0.10%, 0.15% or 0.25% depending on if we select a one-month, three-month or six-month interest period, respectively, for the applicable loan with a 0% floor), plus an applicable margin rate of 1.50% for the first two full fiscal quarters after the date of the Credit Agreement Amendment, and thereafter at an applicable margin rate ranging from 1.125% to 1.750% based on our consolidated net leverage ratio. The Amended Credit Agreement also provides for other customary fees and charges, including an unused commitment fee with respect to the Revolving Credit Line ranging from 0.150% to 0.200% of the unused lending commitments under the Revolving Credit Line, based on our consolidated net leverage ratio.
The Amended Credit Agreement contains customary covenants and restrictions, including covenants that require us to maintain a minimum interest coverage ratio, a maximum consolidated total consolidated net leverage ratio and to comply with laws, and restrictions on the ability to pay dividends, incur indebtedness or liens and make certain other distributions subject to baskets and exceptions, in each case, as specified therein. Failure to comply with these covenants would constitute an event of default under the Amended Credit Agreement, notwithstanding the ability of the company to meet its debt service obligations. The Amended Credit Agreement includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Amended Credit Agreement. In addition, we may increase the principal amount of the Revolving Credit Line or incur additional term loans under the Amended Credit Agreement in an aggregate principal amount such that on a pro forma basis after giving effect to such increase or additional term loans, we are in compliance with the financial covenants, subject to the satisfaction of specified conditions and additional caps in the event that the Amended Credit Agreement is secured.
At June 30, 2024, we had an outstanding principal balance on the Amended Credit Agreement of $221.9 million, composed of the Term A Loan. There was no balance outstanding under the Revolving Credit Line. We had $450.0 million available on our Amended Credit Agreement at June 30, 2024.
At June 30, 2024, we had an outstanding principal balance of $400.0 million on the 2030 Notes. Our obligations under the 2030 Notes are guaranteed on an unsecured senior basis by the same subsidiaries and affiliated professional contractors that guarantee our Amended Credit Agreement. Interest on the 2030 Notes accrues at the rate of 5.375% per annum, or $21.5 million, and is payable semi-annually in arrears on February 15 and August 15, beginning on August 15, 2022.
The indenture under which the 2030 Notes are issued, among other things, limits our ability to (1) incur liens and (2) enter into sale and lease-back transactions, and also limits our ability to merge or dispose of all or substantially all of our assets, in all cases, subject to a number of customary exceptions. Although we are not required to make mandatory redemption or sinking fund payments with respect to the 2030 Notes, upon the occurrence of a change in control, we may be required to repurchase the 2030 Notes at a purchase price equal to 101% of the aggregate principal amount of the 2030 Notes repurchased plus accrued and unpaid interest.
At June 30, 2024, we believe we were in compliance, in all material respects, with the financial covenants and other restrictions applicable to us under the Amended Credit Agreement and the 2030 Notes. We believe we will be in compliance with these covenants throughout 2024.
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 claims incurred but not reported based on an actuarial valuation using historical loss information, claim emergence patterns and various actuarial assumptions. Our total liability related to professional liability risks at June 30, 2024 was $283.7 million, of which $29.0 million is classified as a current liability within accounts payable and accrued expenses in the Consolidated Balance Sheet. In addition, there is a corresponding insurance receivable of $29.4 million recorded as a component of other assets for certain professional liability claims that are covered by insurance policies.
19
We anticipate that funds generated from operations, together with our current cash on hand and funds available under our Amended Credit Agreement, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and capital expenditures, fund expenses related to our transformational and restructuring activities, fund our share repurchase programs and meet our contractual obligations for at least the next 12 months from the date of issuance of this Quarterly Report on Form 10-Q.
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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 2023 Form 10-K, including the section entitled “Risk Factors.”
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to market risk primarily from exposure to changes in interest rates based on our financing, investing and cash management activities. We intend to manage interest rate risk through the use of a combination of fixed rate and variable rate debt. We borrow under our Amended Credit Agreement at various interest rate options based on the Alternate Base Rate or SOFR rate depending on certain financial ratios. At June 30, 2024, we had an outstanding principal balance of $221.9 million on our Amended Credit Agreement under our Term A Loan. Considering the total outstanding balance, a 1% change in interest rates would result in an impact to income before taxes of approximately $2.2 million per year.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2024.
Changes in Internal Controls Over Financial Reporting
No changes in our internal control over financial reporting occurred during the three months ended June 30, 2024 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
Item 1. Legal Proceedings
We expect that audits, inquiries and investigations from government authorities and agencies will occur in the ordinary course of 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, results of operations, cash flows and the trading price of our securities.
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 and other clinicians. We may also become subject to other lawsuits, including with payors or other counterparties that could involve large claims and significant defense costs. We believe, based upon a 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, cash flows or the trading price of our securities. 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, cash flows and the trading price of our securities.
Although we currently maintain liability insurance coverage intended to cover professional liability and certain other claims, we cannot ensure 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 to us. With respect to professional liability risk, we self-insure a significant portion of this risk through our wholly owned captive insurance subsidiary. Liabilities in excess of our insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our 2023 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2024, we withheld 1,564 shares of our common stock to satisfy minimum statutory withholding obligations in connection with the vesting of restricted stock.
Period |
|
Total Number |
|
|
Average Price |
|
|
Total Number of |
|
|
Approximate Dollar |
|||
April 1 – April 30, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
(a) |
May 1 – May 31, 2024 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
(a) |
June 1 – June 30, 2024 |
|
1,564 (b) |
|
|
|
7.31 |
|
|
|
— |
|
|
(a) |
|
Total |
|
|
1,564 |
|
|
$ |
7.31 |
|
|
|
— |
|
|
(a) |
The amount and timing of any future repurchases will depend upon several factors, including general economic and market conditions and trading restrictions.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended June 30, 2024, none of the Company’s directors or officers
22
Item 6. Exhibits
Exhibit No. Description
|
|
10.1+†
|
|
31.1+ |
|
31.2+ |
|
32.1++ |
|
101.1+ |
Interactive Data File
|
101.INS+ |
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
|
101.SCH+ |
XBRL Schema Document.
|
101.CAL+ |
XBRL Calculation Linkbase Document.
|
101.DEF+ |
XBRL Definition Linkbase Document.
|
101.LAB+ |
XBRL Label Linkbase Document.
|
101.PRE+ |
XBRL Presentation Linkbase Document.
|
104+ |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
|
+ Filed herewith.
++ Furnished herewith.
† Portions of this exhibit have been redacted in accordance with Regulation S-K Item 601(b)(10). The omitted information is not material and would likely cause competitive harm to the Company if publicly disclosed. Certain of the exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5).
23
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.
|
Pediatrix Medical Group, Inc. |
|
|
|
|
Date: August 6, 2024 |
By: /s/ James D. Swift, M.D. |
|
James D. Swift, M.D. |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
|
|
Date: August 6, 2024 |
By: /s/ C. Marc Richards |
|
C. Marc Richards |
|
Chief Financial Officer |
|
(Principal Financial Officer and Principal Accounting Officer) |
|
|
|
|
|
|
|
|
|
|
24