Pediatrix Medical Group Inc (MD) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Pediatrix Medical Group investor conference call.

At this time, all participants are on a listen-only mode.

Later, we will conduct a question and answer session.

Instructions will be give at that time.

If you should require assistance, during the call, please press star then zero.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr.

Bob Kneeley.

Please go ahead.

Thank you, Pam.

Good morning, everyone.

Well to Pediatrix third quarter investor conference call.

Before we open the call to Roger Medel, our CEO, and Karl Wagner, our CFO, I do want to read a forward-looking statement.

So, certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.

Forward-looking statements may include, but are not limited to, statements relating to 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, position, strategy, and similar expressions and are based on assumptions and assessments made by Pediatrix's management in light of their experience and their perception of historical trend, current condition, expected future developments, and other factors they believe to be appropriate.

Any forward-looking statements made during this call are made as of the date here of, and Pediatrix undertakes 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 Pediatrix's most recent annual report on Form 10-K included in the section entitled risk factors.

Thank you, and with that, I'd like to turn the call over to Roger Medel.

Thank you, Bob.

Good morning and thanks for joining our call today.

This morning, we reported another period of solid growth in our business with the continuation of the margin expansion that has become the hallmark of our results over the past few years.

We're growing our business completing acquisitions within our base business and taking the initial steps in moving into the much larger anesthesia specialty during the 2007 third quarter.

Our cash-generating capabilities have allowed us to simultaneously pursue these growth opportunities and repurchase our shares on the open market.

Over a period of less than two month as, we've now completed our $100 million authorized share repurchase program buying back 1.56 million shares in the open market.

And with the guidance that we issued this morning, we're expecting continuation of the growth trend into 2008.

I am going to discuss some of our recent growth and operating trends before turning the call over to our CFO, Karl Wagner, for a detailed review of our most recent financial results, as well as a discussion of the earnings guidance we issued in this morning's press release.

Obviously, the biggest operating event for our group was the acquisition of Fairfax Anesthesiology Associates in the beginning of September.

This is our first anesthesia group practice acquisition and we're on track in working through our integration plan.

We've successfully completed some basic integrations including compliance training and working with some human resources-related issues.

As expected, we're just beginning to integrate billing and collection with the focus on anesthesia services for office-based practices.

As I mentioned in September, we're continuing to work with FAA's outside billing company for the group's hospital and surgery center billing.

Since then, we've also identified several opportunities for improved manage care contracting and we've started that process.

I realize I'm giving you an itemization of activities.

We're exactly where we thought we would be at this time, learning, understanding the nuances of this business, identifying the opportunities for us to add value, and placing ourselves in a position to move forward with a significant presence in this specialty.

It's early in the process, and while I understand your appetite for information, I'm sharing with you what we know at this time.

This is a group of physicians that has earned a great reputation, not just at Fairfax Hospital but among anesthesiologists in general.

They enjoy a strong working relationship with their hospital administrators and we're benefiting from that.

We've been welcomed by the hospital and we're engaged with them to work on improving efficiency through information technology integration.

Having said all of that, the questions that you have about our ability to improve collected revenue through better contracting and collections will go unanswered for now.

Clearly, that's the value proposition for Pediatrix, and we remain confident that those opportunities exist and we're working to try to make them happen.

As you know, it's my preference and our style to share our accomplishments with you once we achieve them.

We continue to grow our base business as well.

During the third quarter, we added four practices to our national group practice, and as you know, we announced the completion of a neonatal transition in Palm Springs this morning.

There is something of a common thread among these practices and their reasons for joining us at this time.

These groups are facing increased demand for their services, some for the reasons that are specific to their subspecialty like new early diagnostic testing and maternal fetal medicine and some because they're anticipating volume growth like the neonatal practice we acquired in Nashville.

This is the environment facing many physicians and it's because of this environment that we remain encouraged about our ability to continue to grow, delivering value to physicians within our various specialties.

We serve as a clinical partner, as a business partner and as a financial partner to these practices that are struggling with how they maintain their focus on excellent patient care at the same time that the business side of medicine continues to become increasingly complex.

One example of that complexity is reimbursement for physician services.

In fact, this is an unusual year for us and for our specialties in that there are several reimbursement-related issues that affect our services.

While we've received resolution of some of these issues yesterday with the publication of the physician fee schedule, others remain open.

I do want to provide you with our perspective on SCHIP reauthorization, some minor coding changes in neonatology for 2008, pediatric cardiology coding, reimbursement for anesthesia, and Texas Medicaid.

There's been a lot of headline notes about SCHIP reauthorization, which was to have taken place this past September.

This is a charge issue, and not surprisingly, politics are being played in Washington.

When you strip away the noise and look at the fundamentals, we feel comfortable with how SCHIP debate has unfolded throughout this year.

For instance, we're pleased with that -- with each new proposal.

With each draft bill, the bar is being raised to restrict individuals with access to commercial insurance from shifting to this public program, what's referred to as crowd out.

At the beginning of year, the notion of crowd out was not even being acknowledged by many of the policy makers and SCHIP was seen as a way to expand coverage beyond the safety nets and towards an entitlement program.

Today, strong crowd out language is an important part of the current compromise bill.

I'm spending time on this because it's an item that's in the headlines, and obviously, it impacts our primary patient population.

The reality is that SCHIP today is a very small piece of our business.

SCHIP covers children of all ages and even some adults and most of our patients are newborns.

In most states, Medicaid eligibility is higher for patients during the first year of life, so the gap between Medicaid eligibility thresholds and SCHIP thresholds are narrower for babies than they are for older children.

Our concerns with this issue have always been the extent to when -- the extent to which an expanded SCHIP program would cause any kind of a pair mixture.

Today, it appears very likely that SCHIP expansion will occur, first for children whose household is below 200% of the federal poverty level before it is expanded to children in households at 300% of federal poverty level.

But this is a very fluid situation, one which we will continue to watch.

I hope this discussion helps to frame the SCHIP impact potentially on our business.

On another issue, beginning in January, our neonatologists will start using a new neonatal admission code 99447 for newborns who are not critical but required intensive care services.

The new code is more closely tailored for services being provided in the NICU, and it will supplement several admit codes that are used for all noncritical hospital patients including adults.

This new code goes hand in hand with the several weight-based intensive care neonatal codes that have been introduced over the last decade with 99300 the most recent when it was started in 2006.

Like the other intensive care codes, this will have a positive impact on our services though not of the magnitude of 99300.

Admit codes are used one time during the hospital stay while subsequent day codes such as 99300 may be used throughout the whole stay.

Late yesterday, CMS released its final rule for physician fees for 2008, and they have delayed a proposal that would have impacted our pediatric cardiology practices.

During the past few months we expressed our concerns with this proposal and we're pleased with the outcome at this point.

We expect that CMS and the American Medical Association will work together to consider modifications to this code for 2009 and we expect to continue to contribute to the discussion throughout the year.

We did receive the expected increase in the conversion factor for anesthesia services for 2008.

The final anesthesia reimbursement will be determined by what happens with the physician fee schedule for next year.

The sustainable growth rate formula mandates a 10% reduction in physician fees, but there is legislation in process to eliminate that cut and even to present a two-year fix of this formula.

Of course, with one anesthesia practice, the impact of a 2008 increase will be minimal on our current business, though we are encouraged that there's an environment that's recognizing that anesthesia services have not been adequately reimbursed in the past.

Finally, effective September 1st, our reimbursement in Texas has increased reflecting the settlement of a class-action lawsuit against the state that centered on the impact reimbursement has on access to care.

This past summer, the state legislature approved a budget that increased rates for physician services by approximately 25% when blended across our subspecialties there.

As I said, that's been in place for about two months now.

As mentioned at the outset, there are a number of reimbursement-related issues on the table this year and most of them are not yet resolved.

Over the past several years, we've expanded our government relations efforts involving our regional management team, physicians leaders and headquarter staff, and I believe our issues are being heard in Washington and state capital.

Obviously, these issues will affect our results from operating -- from operations going forward and we'll continue to use this forum to provide the context of changes taking place.

This is a good time to turn the call over to Karl for a discussion of financial results and 2008 guidance.

Karl?

Thanks, Roger.

Good morning, everyone.

Our results for the 2007 third quarter continue to reflect the company that is expanding, operating more efficiently and one with a strong balance sheet and cash flow to continue to execute on a clearly defined growth strategy.

I'm going to spend a few minutes on our financial results for the period and then discuss the 2008 guidance that was issued in this morning's press release.

Revenue for the three months ending September 30, 2007 increased by 10% to $236.9 million from $215.8 million for comparable 2006 period.

Our revenue growth was relatively balanced with same-unit growth which was 6.1% for the 2007 third quarter and acquisitions completed during the past 12 months contributing another 3.9% of growth for the current period versus the prior year.

Our same-unit growth breaks down to 5.1% growth from volume and 9/10 of 1% growth from the net impact of reimbursement-related factors.

Volume at our neonatal intensive care was had 4.9% which is at the high end of our guided range of 3 to 5%.

We see no reasons for the volume to shift away from historical range on an annual basis, and through nine months of 2007, same-unit NICU volume is up 4.3%.

Volume of other services including maternal fetal medicine, physician services, pediatric cardiology and our metabolic and hearing screen programs contributed about 1-3/4 percentage points of same-unit growth during the 2007 third quarter when compared to the 2006 period.

The 9/10 of 1% growth attributed to reimbursement includes a slight increase in the percentage of patient care reimbursed by government payers during the third quarter when compared with 2006 period.

Now, we usually see a government payer mix increase during this period, but this year was slightly higher than in the past few years.

It's not a big number, nothing that suggests there's any kind of shift from our recent patterns at this time, but obviously, we will watch this very closely.

In addition, throughout 2006 as Roger said, there was a new neonatal code that raised reimbursement for our physician services.

We did not fully recognize that code in the first half of last year until we started to see collections from that new code.

During last year's third quarter, we had a slight benefit from increased realization of that new code for the period which affects comparisons to the 2007 third quarter.

We can continue to see steady state in our contracting strategy and results with third-party commercial payers.

These contracts are negotiated throughout the year and we are seeing reasonable increases on those contracts that we negotiate.

In addition, we continue to see more payers agreeing to enter contracts with modest multi-year increases.

For the three months ending September 30, 2007 compared against the prior year period, practice salaries and benefits grew by 9%, which was slightly less than our revenue growth.

Practice supplies expense growth exceeded our overall revenue growth but is reflective of our growth in our office-based practices, both from acquisitions and same-unit volume.

Our hospital partners provide and are reimbursed for most of the supplies used by our hospital-based physicians.

Supplies used by our office-based practices are on our income statement.

Practice supplies expense remains at roughly 4% of revenue, its historical levels.

Profit after practice expense was $95.6 million, an increase of 10% for 2007 third quarter when compared with the same period in (2007), and profit after practice expense margin increased by 10 basis points for the 2007 third quarter to 40.3% when compared to the 2006 third quarter.

We continue to generate income statement leverage through effective general and administrative expense management.

For the third quarter, G&A expense grew by 6.7% or roughly 2/3 the rate of revenue growth for the same period.

As a percent of revenue, G&A expense declined by 37 basis points to 12.6% for the 2007 third quarter from 13% in the 2006 period.

G&A expense as a percent of revenue for the third quarter would have been 81 basis points lower if you excluded expenses associated with the stock option review.

We expect the G&A expense growth will continue at a rate less than that of our total revenue growth, as we constantly look at processes and identify ways to manage our business more efficiently.

Operating income was $63.1 million for the third quarter, up 12% from $56.5 million from the prior year period.

Operating margin of 26.7% for the 2007 period was 45 basis points higher than for the same period in 2006.

Since we had high cash balances throughout 2007 third quarter relative to last year and historical levels, we earned investment income of $2.1 million for this period.

Our cash balance as declined as a result of recent acquisitions and open market share repurchases.

Our tax rate for the third quarter is 39.25%.

As we said during our second quarter call, the tax rate increased largely as a result of the accounting for uncertainty as part of the adoption of FIN 48 as well as changes in the tax law in Texas.

We expect that our income tax provision will fluctuate with variability occurring since statutes of limitations run out on returns that are being -- have been reviewed and filed and when uncertain tax positions are resolved.

Pediatrix had net income of $39.6 million for the third quarter, up 13% from $35.2 million for the prior year.

While we were fairly aggressive in buying back shares during September and continued to be throughout October, the share repurchase had a minor impact on the weighted-average share calculation for the third quarter.

Earnings per share were $0.79 on a GAAP basis based on $50.3 million fully diluted shares outstanding during the third quarter.

This compares with GAAP EPS of $0.71 for 2006 third quarter based on $49.5 million shares -- fully diluted shares outstanding.

After excluding expenses associated with the stock option review of $1.9 million pretax for the 2007 third quarter and $1.7 million pretax for the 2006 third quarter, non-GAAP earnings per share were $0.81 for 2007, an increase of 11% from $0.73 for the same period in 2006.

A detailed GAAP reconciliation table is included in this morning's press release which is available at website at www.pediatrix.com.

Our balance sheet remains strong.

By September 30th, we had $50.5 million in cash and cash equivalents.

Accounts receivable were $142.8 million.

On the liability side, accounts payable and accrued expenses were $210.6 million which consists largely of accrued bonuses, 401(k) matching contributions that will be paid out early next year as well as malpractice and tax liabilities related to FIN 48.

We had virtually no debt as of September 30th.

Pediatrix generated $62.8 million in cash flow from operations for the third quarter.

During the period, we completed five physician group practice acquisitions including Fairtax Anesthesiology We also acquired a pediatric cardiology practice in San Antonio, a Seattle ultrasound radiology practice, Nashville neonatology practice, and San Luis Obispo maternal fetal medicine practice during this quarter.

Our cash expenditures for acquisitions during the quarter were $89.4 million, and since the Nashville and San Luis Obispo acquisitions were not funded until October 1st, there's an additional $7.2 million in acquisition spending for deals closed during the quarter.

Our cash flow statement for the 2007 third quarter will also reflect about $67.4 million in open market purchases of our common stock as part of the $100 million share repurchase authorization.

As of today, we're finished with that authorization, having acquired more than $1.5 million shares since the beginning of September.

Capital expenditures remain minimal and were $1.5 million for the 2007 third quarter.

For the nine months ending September 30, 2007 compared with the same period in 2006, our net patient service revenue increased by 12% to $678.1 million, operating income was 159.9 million through nine months of 2007 and grew by 8% even after considering expenses associated with stock option review for both periods as well as a gain in the sale of assets in 2006.

Net income was $101.5 million for three quarters of 2007, yielding earnings per share of $2.02 on a weighted-average $50.1 million shares outstanding.

This compares with net income of $92.1 million and earnings per share of $1.87 based on $49.3 million shares outstanding through the nine months of 2006.

Cash flows from operations for the nine months of '07 was $99.1 million, down from $108 million for the prior period, largely as a result of the timing of tax payments.

Through this point in 2007, we have paid approximately $24 million more in federal income taxes than we paid in 2006.

Finally, I want to spend a few minutes going over the guidance that was issued in this morning's press release.

As part of the discussion, it should be considered forward-looking.

As we said in the release, we expect earnings per share to be in the range of $3.35 to $3.45 for 2008.

Our assumptions include an expectation that patient volume will continue to grow by 3 to 5% and we expect to generate 2 to 4% same-unit growth through improved reimbursement.

Our reimbursement guidance includes higher payments from Texas Medicaid as a result of increase for physician services that was adopted by the Texas legislature and became effective September 1st.

The increased revenue from that was approximately 25% across all of our physician subspecialties in Texas.

As a reminder, it is important to recognize that most of our physicians in Texas are on a 50/50 bonus program.

The impact of this change is shared equally between the physicians and Pediatrix.

Finally, we expect that over the next 14 months, between now and the end of 2008, we will invest approximately $80 to 85 million to complete acquisitions within our neonatal, maternal fetal and pediatric cardiology subspecialties.

We expect additional acquisitions this year.

The time of these acquisitions has been difficult to predict.

As we said, when we completed the Fairfax anesthesiology practice, we're going to proceed very cautiously in understanding the nuances of anesthesia services.

The integration of FAA is moving forward as projected.

It's a large practice with integration issues that are different from our traditional acquisitions.

But we're not seeing anything in the integration process that we hadn't expected.

We're excited about the opportunity to add value within this specialty.

Having said that, we don't have a specific timetable for completing our next anesthesia practice acquisition.

So while it's possible that we will make one or two additional anesthesia group practice acquisitions during 2008, we're not including that in our guidance for acquisitions spend or for earnings per share impact.

I want to thank you for your time and patience this morning.

Let me turn the call back to Roger.

Thanks, Karl.

At this time, let's just open up the call for questions.

Operator?

(OPERATOR INSTRUCTIONS) One moment for question.

Our first question comes from Bill Bonello from Wachovia.

Your line is open.

Hey.

Thanks.

Good morning, guys.

Just a couple of questions if I can.

Thank you for all of the color on the changing reimbursement.

I'm just wondering if it's possible to give us some sense of the magnitude of the impact either specifically of the various components or in aggregate at least, so we have some sense of how much they're driving your growth in '08.

Well, I mean let's -- I'll talk about some of them in general.

I'll talk a little bit more specific about Texas 'cause I think that's the big one a lot of people are interested in.

So, when you look at the different reimbursement factors, clearly, the cardiology factor is no impact on next year.

We're really glad to hear that came out yesterday.

We were hopeful because we weren't hearing any feedback, as we were waiting for an answer on that, so that's very positive for us and we're happy to see that.

And we'll continue to work with AMA and the other organizations in pediatric cardiology to work through what the coding and changes (inaudible) may be needed if a change goes forward in 2009 and beyond.

So there's no impact from that.

As far as the new CPT code that's coming out, as Roger had said, it's very minimal for us.

It's, you know, a piece of our admit codes in neonatology, so it's not a lot of money.

You know, we're happy to see it.

I think -- we clearly think it recognizes the services the neonatologist provide as being different from the physicians that aren't in-house, that --- they're coming in and rounding their patients and leaving and a team of care that provides those services we think that's important, and there is a little bit -- there is an increase in the (inaudible) related to that, but because it's not a huge code for us, it's not going to have a very large impact going into next year.

The bigger item relates to Texas, and we expect Texas will probably add in the range for next year of about $0.05, and I think that's lower than people think, and that's because next year we'll only get eight months of impact for that.

We think the overall impact of the Texas change after considering the physician compensation part of that, which I said is 50%, it's probably in the $0.08, maybe a little bit more than $0.08 range on an annual basis.

We did get a little bit of impact this quarter related to that.

In fourth quarter, we'll get that and it will be positive in our fourth quarter which, you know, we haven't changed our range on that, but because of Texas, we might be at the high end of that range.

Okay.

And just -- did your guidance -- it would seem that your guidance couldn't have contemplated the fact that CMS reinstated the Doppler code or was that within the range of your guidance?

Our guidance didn't have any impact of what was happening.

We didn't assume --

You just assumed it would -- that you weren't going to lose it then?

Yeah, we assumed we weren't going to lose it.

Oh.

Well, okay.

Only because we didn't have an answer and we -- you know, until we had an answer, we didn't want to, you know, start putting out guesses of what that number was.

Sure.

Okay.

And then, the second question that I had and I'll get off, can you just give us some thoughts on, you know, your other uses of cash?

I mean if I look at it, you should probably generate $150 million of free cash flow over the next five quarters.

You're going to spend about $80 to $85 on acquisitions.

You have no more share repurchase to authorize, No debt to repay.

I mean are you just going to build up sort of a big war chest cause '09 could be a big year for anesthesiology or something?

Or how are you thinking about that?

You know, we're constantly looking at our cash balances and we don't want to maintain significant cash balances for a long period of time.

You know, clearly, anesthesia is something that we want to be sure that we're well set up to complete acquisitions on.

As I said, you know, we will expect that something will occur next year.

We don't know when.

One to two deals is kind of what we were thinking, but we don't know timing and part of that is going to depend upon what we continue to see in Fairfax, but if things continue as they're going, I think we'll expect to see some deals next year, which is in addition to the $80 to $85 million that I spoke about.

Okay.

So, when you add all of that, you know, I think we have uses of the cash but we will continue to evaluate that as we go forward.

Okay.

And then just what I think about, if you did do deals in addition to the $80 to $85 million then that would also be in theory not contemplated in the current guidance either?

That is correct.

Okay.

Tank you very much.

Thanks.

Our next question comes from Dawn Brock from J.

P.

Morgan.

Your line is open.

Good morning, guys.

I kind of wanted to stay with guidance as well.

I just want to clarify that in the guidance that you put out this morning, it only includes the $0.02 that you originally guided to for Fairfax, so it's still excluding any improvements, any synergy, any growth for Fairfax.

That's correct.

The only thing in our guidance at this point is what we had expected from Fairfax when we closed the transaction.

It's still a little too early to say that there are any significant changes that are going to happen.

And as Roger mentioned, there are things we're working on, as share contracts and the like, but it's too early to make changes to those assumption.

Okay.

Excellent.

I just want to as an aside thank you for giving us the Texas Medicaid impact.

You're welcome.

On the acquisitions, the $80 to $85 million, can you give us an idea of how the pipeline looks right now?

I think that it's obviously really encouraging to know that, you know, the core business is so strong that you guys are maintaining that high level you've been investing, you know, over the last couple of years.

Obviously, 2007 was a bit of an anomaly with the stock option review, but, you know, it's nice to see that number so high.

Can you give us an idea of where the pipeline is right now and whether it's geared toward neonatal or the neonatal subspecialties?

Good morning, Dawn.

You know, our pipeline is actually pretty full.

When you look at our neonatology deals that are in the pipeline, there are a number of deals that we're excited about.

The timing this year has been an issue for us and the other thing that happened was with the cardiology uncertainty that came up during the summer, we just stopped doing cardiology deals.

There are, you know, a couple of the small cardiology deals that, you know, we have put on hold that we're trying to resuscitate as we speak.

And so, you know, we've got some fair amount of confidence that we'll be able to get, you know, one or two of those deals done hopefully even before the end of the year.

There are a couple of perinatology deals that we're excited about in our pipeline.

So, you know, I would say that even though the timing this year, you know, has not been what we would have hoped for it to be, we continue to be very optimistic that we will continue to do deals across all specialties, neonatalogy, maternal fetal medicine and pediatric cardiology well into next year.

Okay.

That's great.

Thank you very much.

Thanks, Dawn.

Our next question comes from Sudeep Singh from Deutsche Bank.

Your line is open.

Hi.

Good morning, guys.

Good morning.

I guess just based on what you guys did for the first nine months relative to your second half guidance of 158 to 162, I guess that implied for the fourth quarter an EPS of a range of $0.77 to $0.

81, and I think Karl mentions you may be on the high end of that range, but that range also excludes Fairfax and the Texas rate increase, so is it possible that you could even be above that range when you include Texas?

Well, you know, Texas is leading me to say that we'll be at the high end of that range.

I mean I'm not prepared at this point to change the range that we have out there.

I don't know that our intention was to look to expect the fourth quarter will drop as low as $0.77.

But, when you look at the fourth quarter as well, typically, the fourth quarter is a lower quarter than what we have seen than the third quarter on a historical basis, depending on how deals fall out, but from a true volume quarter to quarter on a same-unit basis, volume in the fourth quarter is lower than volume in the third quarter.

So that will impact the fourth quarter from that standpoint, and we will make some of that after the deals in Texas Medicaid.

And that's where I'm at.

As far as the anesthesia deal that we did, yes, we'll have some of that, but as I said, it's $0.02 in a year, so it'll only add about a $0.25 to our guidance for the quarter so it's not a big impact.

And maybe if you could just talk a little bit about as you further integrate, you know, Fairfax, what kind of G&A costs or what kind of ramp up do you expect to see there or do you feel that a lot of the infrastructure has already been built out?

You know, we're continuing to add to the infrastructure.

We have some people here in-house and we're doing a lot of work, but I don't think you're going to see anything that's going to cause a sizable change in our G&A.

Clearly, we wouldn't expect our G&A to grow as a percent of our revenue.

The reduction percentage might slow down a little bit depending upon when deals happen as we build that infrastructure, but, you know, at this point, I don't see a big change in what's going on with G&A because of anesthesia.

We have been doing investments over the year, more than a year actually, in that subspecialty, so I don't see major changes.

Great.

Thanks very much.

You're welcome.

Question comes from Art Henderson from Jefferies & Company.

Your line is open.

Hi.

Good morning.

Karl, could you tell us what your CapEx was this quarter and could you give us some sense of what we should expect for '08?.

Our CapEx for this quarter was about $1.5 million.

Actually, we've been running pretty low on capital expenditures this year, but, you know, I don't expect that we'll get outside the range that we've been historically which is somewhere in the $10 million, $7.5 to $10 million a year going into '08.

I don't see any mayor capital expenditures that need to happen in next year that will change that.

Okay.

That's helpful.

And then you don't have any sort of share repurchases in your guidance for next year, do you?

No, nothing beyond what we've completed.

Okay.

And then, back -- you know, the question on anesthesiology and sort of the pipeline for that, I know that when you guys announced Fairfax, you talked about that the length of time that it had taken you to do Fairfax, you had gotten very comfortable and familiar with what was out there in terms of businesses and that you had been pretty close or at least somewhat close with a couple of other acquisitions and you had indicated, I think, the possibility that we might see more done in a shorter period of time.

And I am just wondering, is there -- it sounds to me like from your comments that maybe we should think more in terms of that being, you know, new acquisitions coming on a little bit slower on the anesthesiology side.

Am I reading that correctly or am I not?

You know -- it's Roger.

Hey.

Roger.

It remains true that we are very excited about anesthesia, and I think what I said was we had originally talked about, you know, maybe waiting a year from our first acquisitions before we would see our second one, and that I felt that maybe that was a little conservative and that it probably wouldn't be a year, you know, before we would see our second one.

And, you know -- and I'm still subscribed to that.

I believe that we'll see our second one, you know, sometime during the first half of next year.

So, you know, we -- you know, everything that we see in anesthesia up to date continues to make us feel like this is the right place for us to be at.

Okay.

That's helpful.

One last question.

I'll jump back in the queue.

Has there been anything with Fairfax that surprised you in terms of the business?

Maybe anything that you didn't expect or something that you found that was encouraging?

You know, I wouldn't say surprises.

I mean, you know, you never know what you're going to run into until, you know, you actually get in there and do it, you know.

You -- and so, we -- there have been surprises, but we were not surprised by them because we knew there were going to be surprises, both on the good side and the bad side, so I would say, you know, we are exactly where we expected we would be by this point in time.

You know, we're surprised perhaps a little by just the interest that we see from other anesthesiology groups, you know, calling us and asking us, you know, to take a look at them on the positive side, you know.

And on the negative side, you know, it's surprising just how different the billing and the whole reimbursement atmosphere for anesthesiology is for neonatology, so -- but I mean, you know, we expect some of that and we knew that there would be those kind of issues so -- but nothing that I would say oh my gosh, you know, this thing is -- you know, there's something really bad or something really good here.

Okay.

Great.

That's helpful.

Thanks very much, Roger.

You're welcome, Art.

I just wanted to add to that.

I mean one of the things that -- we're not disappointed at this practice, the group of physicians and how they're working with us.

They're, you know, providing great care but they're working well with us in trying to look at the opportunities and understanding some of the issue that are inevitable to come up when you're taking on a transaction of this size, to integrate it and do that.

So, you know, that's not -- we're not hearing issues on the physician's side at this point that says, you know, they're not thinking they shouldn't have done this.

I think we're all in sync and moving forward and working together.

No, if anything, I'm going to tell you I'm thrilled with this group of guys.

They're absolutely, you know, excellent.

Our next question comes from Bob Mains from Morgan Keegan.

Your line is open.

Thanks.

Good morning.

Good morning, Bob.

Karl, the share repurchase, if I'm doing the math right, would the fully diluted share count likely decline in Q4?

I am sorry.

Would the fully diluted share count climb in Q4?

No.

Decline.

Yes.

Okay.

And then, do you have the equity-based compensation number for the quarter?

You know I don't have that at my fingertips.

That will be in the Q that we'll file next week.

Okay.

And then, if I look at the NICU volumes that you've had to date, they're kind of in line with some of your other years but they're a good deal stronger than what you had last year.

You know, not like percentage points but enough that I think it's kind of noticeable.

Is there anything going on in your markets that you would attribute that to or is it just sort of normal variation?

It's normal variation and we've seen these run up and down.

We've actually seen quarters in the past where we exceeded that 5% volume, you know, when you look at history and then we've had quarters that we've been -- actually some of that we've been negative from the same-unit standpoint or, you know, less than 1%.

So, it does fluctuate, but that 3 to 5% range has been very, very constant on an annual basis.

Fair enough.

Everything else I had has been answered.

Thanks.

Our next question comes from Kevin Ellich from RBC Capital Markets.

Your line is open.

Good morning, guys.

Good morning.

Just a handful of questions that has been discussed.

Just wondering if you could break out the revenue contribution from Fairfax in the -- for third quarter revenues?

Yeah.

At this point, we've decided we're not going split out anesthesia from our revenues at this point in time.

We will continue to evaluate that but, you know, it was only one month.

It's not a huge number, but it's not something we want to break out.

And as you can expect we're seeing more competition in this area than we've seen in neonatal side, and we want to be real careful on what we're putting out there.

Sure.

I understand.

Okay.

Next question would be, of the -- just wanted to clarify, of the $89 million of acquisitions spent in the quarter, that does not include the $7 million?

That is correct.

It does not.

The $89 million is just the cash that we paid out during the quarter.

Okay.

There were two deals on the last day of the quarter.

The cash didn't get funded until the 1st of October.

Right.

So then if we go back and look at the, I believe, it was stated in your last Q, the San Antonio pediatric cardiology practice was about $3 million, that would leave $86 million to be spread out over Fairfax and one other deal you did during the quarter?

Yeah.

I think that's roughly right, yes.

Okay.

And then, on the Texas Medicaid, how much of the 2 to 4% same-unit pricing growth in '08 is attributed to Texas Medicaid?

You know, I don't have that number off the top of my head as far as the percent.

Okay.

And then last question, do you have any update on the SEC or U.S.

Attorney investigation?

No, there's no update.

You know, there's nothing really new to report.

Okay.

That's it.

Thanks.

Thanks, Kevin.

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Our next question comes from Nicholas Jansen (ph) from Raymond James.

Your line is open.

Hey guys.

Good morning.

A quick question on the managed care side.

We've heard some managed care company say specifically that on the NICU side, they're seeing some, you know, going after that have in terms of trying to reign in the cost on there.

So, if you can give any color on that it would be great.

Thanks.

I guess we've heard that from managed Medicaid programs in the past which I don't know what their expectations are from how to reign that in, we're just providing the service to the patient in the units.

Our compensation is usually Medicaid to maybe a touch above Medicaid, 105% of Medicaid rates, dependent upon the market.

So, you know, I don't know what that impact would come from.

We have not seen any impact in the changes from managed Medicaid.

If you're hearing that from somewhere else, I'd like to know.

We haven't seen anyone else (inaudible).

We just heard it from -- on the WellPoint call.

They're talking about NICU specifically, but that helps.

Okay.

Thanks.

Our next question comes from Dawn Brock from J.

P.

Morgan.

Your line is open.

Hi there.

I just have two quick follow-ups and they're basically maintenance.

The first is can you give us a number of docs X anesthesiology in the quarter.

I don't have that number off my fingertips.

We'll get back to you, number of docs not anesthesia.

Okay.

That's great.

And then, Karl, just the number that you're using for shares outstanding for 2008?

I think we're estimating that number to be about $50 million shares outstanding next year.

Okay.

Excellent.

Thank you very much.

Our next question comes from Brooks O'Neil from Dougherty & Company.

Your line is open.

Yes, Roger, I thought your comment regarding the things you've been finding about differences between the billing and reimbursement atmosphere in anesthesia were interesting.

Would you be willing to amplify on that in any way?

I mean what are some of those differences you're seeing and how do you think they're going to affect your approach to the business going forward?

Well, you know, that's what I get for trying to answer the question.

Somebody is over here shaking their finger at me.

You know, it's just a different -- you know, it's just a completely different system.

You know, we got in to look at the billing companies that they use and we're intrigued by some of the software that they have in place, et cetera.

So, you know, just that kind of stuff.

I mean, you know, their billing as we know is based on time and, you know, how they go about, you know, breaking down those time periods and, you know, the complications related to who's covering where, where there's back-up needed, you know, who is going outside of the hospital to provide care in a physician's office, whether that's being reimbursed on a cash basis or whether they're billing, you know, the insurance, you know, and that specifics.

I mean it's just that it's very complicated and, you know, it's just been surprising how much work, you know, there is to be done there for us.

Great.

It means that all of that, you know ultimately will play to your strength as a company because you guys have demonstrated over a long period of time an ability to get into those details and bring a whole lot of discipline and rigor to that process.

Is that what you're thinking?

Yeah, we believe that.

You know, we think that that's exactly right, you know, the more -- and again, it isn't anything we're not going to be able to handle.

Right.

It is just going to take time to, you know, to look at and to comprehend and to work through.

I mean there -- Roger hit on a lot of points.

I mean those complexities are added to.

There's not necessarily a standard that every payer uses, so some payers round time for the minutes, some round it to the closest 15 minutes, some, you know -- So, there are a lot of complexities, and as we're building that infrastructure for the building system, it's just very complicated and intricate.

I think as you hit appropriately, Brooks, I mean once we learn this, it's going to be something that's going to be very strong for us.

We have very set and strict processes that we're putting in place as we do this to make sure that we understand it appropriately and can apply that as we go forward.

So, you know, it's just working through all of these intricacies that has us, you know, a little bit behind I guess on that piece of it, but --

Sure.

It'll just take time, but in the end, the reward will be worth it.

Thanks a lot.

Okay.

Thanks, Brooks.

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