Pediatrix Medical Group Q3 2007 Earnings Call Transcript

Pediatrix Medical Group, Inc. (PDX)

Q3 2007 Earnings Call

November 2, 2007 10:00 am ET

Executives

Bob Kneeley - Director, Investor Relations

Roger Medel - Chief Executive Officer

Karl Wagner - Chief Financial Officer

Analysts

Bill Bonello - Wachovia

Dawn Brock - JP Morgan

Pradeep Singh - Deutsche Bank

Arthur Henderson - Jefferies and Company

Rob Mains - Morgan, Keegan and Company

Kevin Ellich - RBC Capital Markets

Nicholas Johnson - Raymond James

Brooke O'Neill - Daugherty and Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrix Medical Group Investor Conference Call.

At this time all participants on a listen only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions)

I would like to turn the conference over to your host, Mr. Bob Kneeley. Please go ahead.

Bob Kneeley

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 maybe 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 relate 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 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 made during this call are made as of the date hereof, 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 uncertainties.

Important factors that could cause results, developments and business decisions to differ materially from forward-looking statements are described in Pediatrix most recent annual report on form 10-K included in the section entitled risk factors.

Thank you. And with that, I would like to turn the call over to Roger Medel.

Roger Medel

Good morning, 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 months, 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 our 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 plans.

We've successfully completed some basic integration including compliance training and working with some human recourses related issues. As expected, we're just beginning to integrate billing and collections with our focus on anesthesia services for office-base practices.

As I mentioned in September, we're continuing to work with FAA 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 am giving you an itemization of activities. We are exactly where we thought we would be at this time, learning, understanding the new alliances 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 am 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 anesthesiologist in general.

They enjoy strong working relationships within hospital administrator and we are benefiting from that. We've been welcome by the hospital and we are 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 are 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 had a poor practices to our national group practice and as you know, we announced the completion of a neonatal transition in Palm Spring this morning.

There is something of a common thread among these practices and their reason for joining us at this time. These groups are facing increased demand for their services, some for the reason that are specific to their subspecialty like new early diagnostic testing and maternal-fetal medicine and some because they are 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 their 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 has been a lot of headline knows about SCHIP Reauthorization which was -- who 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 bars 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 we've seen as a way to expand coverage beyond the safety nets and towards an entitlement program.

Today, our strong crowd out language, which is an important part of the current compromised bill. I am 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 threshold 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 levels, before it is expanded to children in households at 300% of federal poverty levels.

But this is a very fluent 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 neonatology will start using a new neonate 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 non-critical hospital patients including adults. This new code goes hand in hand with the several weight based intensive neonate 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 it will have a positive impact on our services though not of the magnitude of 99300. Admit codes are used one time during a hospital stay while subsequent day codes such as 99300 maybe used throughout the whole stay. Late yesterday, CMS released its final rules 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 proposals 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 happened with the physician fee schedule for next year.

The sustainable growth rate formula mandates at 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 1 our reimbursement in Texas has increased reflecting the settlement of our class action lawsuit against the state that centered on the impact reimbursement have on access of 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 relation effort involving our regional management team, physician leaders and headquarter staff.

And I believe that our issues are being heard in Washington and State County. Obviously, these issues will affect our operations going forward and we will continue to use this form to provide the context for changes taking place.

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

Karl Wagner

Thanks, Roger. Good morning, everyone. Our results for 2007 third quarter continue to reflect, the company that are 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 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 2007 third quarter and acquisitions completed during the past 12 month 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% from the net impact of reimbursement related factors. Volume at our neonatal intensive care units was 4.9%, which is at the high end of our guidance range 3% to 5%. We see no reasons for the volume to shift away from our historical range on an annual basis and through nine months of 2007, same-unit Nikkei volume is up 4.3%.

Volume of other services including maternal fetal medicine physician service, pediatric cardiology and our metabolic and hearing screen programs contributed about one and three quarter percentage point of same unit growth during the 2007 third quarter when compared to 2006 period.

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

We usually see a Government payor mix increase during this period. But this year was slightly higher than in the past few years. It is not a big number nothing that suggest there's any kind of shift from 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 to 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 payors.

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 payors agreeing to enter contracts with modest multi-year increases.

For the three months ended September 30, 2007 compared against the prior year period, practice salaries and benefits grew by 9% with slightly up in our revenue growth.

Practice supplies and expense growth exceeded overall revenue growth but is reflective of our growth in our office-space practices both from acquisitions and same-unit volume. Our hospital partners provide and reimbursed for most of the supplies used by hospital-based physicians.

Supplies used by office-based practices are on our income statement. Practice supplies expense remains roughly at 4% of revenue at 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 2007 third quarter to 40.3% which 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% roughly two-third the rate of revenue growth for the same period.

As a result 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 percentage of revenue for the fourth quarter would have been 81 basis points lower if you excluded the expenses that were 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 across this 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 for 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 has 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 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 when statutes of limitations run out on returns that have been reviewed and filed and one uncertain tax positions are resolved.

Pediatrix had net income of $39.6 million for the third quarter up 14% from $35.2 million for the prior year. 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 on 50.3 million shares outstanding during the third quarter.

This compares with debt EPS of $0.71 for 2006 third quarter based on 49.5 million shares, fully diluted shares outstanding. After excluding expenses associated with this stock option review of $1.9 million pretax for 2007 third quarter and $1.7 million pretax for the 2006 third quarter.

Non-GAAPs 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 mornings press release which is available at our website www pediatrix.com.

Our balance sheet remains strong. On September 30, we had $50.5 million in cash and cash equivalents, accounts receivable $132.8 million, our liability side accounts payable and accrued expenses were $210.6 million which consists largely of accrued bonuses with 1/10 matching contributions that we paid out early next year as well as malpractice and tax liabilities related to FIN 48.

We had virtually no debt as of September 30. Pediatrix generated $62.8 million in cash flow from operations during the third quarter. During the period, we completed five physician group practice acquisitions including back-to-back anesthesiology.

We also acquired a pediatric cardiology practice in San Antonio, a Seattle ultrasound radiology practice, Nashville neonatal practice and San Luis Obispo maternal fetal medicine practice during the quarter.

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

Our cash flow statement for 2007 third quarter 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 are finished with that authorization having acquired more than 1.5 million shares since the beginning of September. Capital expenditures remain minimal at $1.5 million for the 2007 third quarter.

For nine months ending September 30, 2007 compared with the same period in 2006, our net patient services 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 the stock option review for both periods, as well as, again in sale of an assets in 2006.

Net income was $101.5 million for three quarters of 2007 nearly earnings per share of $2.02 on weighted average of $50.1 million shares outstanding. This compared with net income of $92.1 million and earnings per share of $1.87 based on 49.3 million shares outstanding with 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 payors. 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 issued in this morning press release. As part of the discussion, it should be considered forward-looking. As we stated in our release, we expect earnings per share too 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%. 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 increased physician services that was adopted by the Texas legislature and became effective September 1. The increased revenue from that was approximately 25% across all of our physician’s 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 million to $85 million to complete acquisitions with 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, we completed the Fairfax Anesthesiology practice. We are going to proceed very cautiously understanding the new answers of anesthesia services.

Integration of FAA is moving forward as projected. It is a large practice with integration issues that are different from our traditional acquisitions. We are not seeing anything in the integration process that we hadn't expected.

We are 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 acquisitions. So while it is possible we will make one or two additional anesthesia group practice acquisitions during 2008.

We are not including that in our guidance for acquisitions and/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.

Roger Medel

Thanks Karl. At this time, let's just open the call for questions. Operator.

Question-and-Answer Session

Operator

(Operators Instruction) Our first question comes from Bill Bonello from Wachovia. Your line is open.

Bill Bonello - Wachovia

Hey. Thanks. Good morning, guys. Just a couple of questions if I can. Thank you for all the color on the changing reimbursement. I am just wondering if it is possible to give us some sense of the magnitude of the impact either specifically of the various components where in aggregate at least so we have some sense of how much they're driving your growth in '08?

Karl Wagner

Well. I mean, I will talk about some of them in general, a little more specific about Texas because 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 has no impact on next year.

We are really glad to hear that came out yesterday. We were hopeful but we weren't hearing any feedback as we were waiting for an answer on that. So that's very positive for us. We are happy to see that and we will continue to work with AMA and other organizations in pediatric cardiology to work through what the coding and changes are going to 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 is coming out as Roger said it is very minimal for us. It is a piece of our admit codes in neonatology so it is not a lot of money. We are happy to see it, I think we clearly think it recognizes the services the neonatology has provided as being different from the physicians not in house, coming in rounding patients and leaving. And a team could have care that provides those services. I think that's important and there's an increase in the use relate today that.

But it is not a huge code for us, it is not going to have a very large impact 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. That's because next year we will get eight months of impact.

We think the overall impact of Texas change after considering the physicians compensation part of that which is 50%. It is probably in the $0.08, little bit more than $0.08 range on annual basis.

We did get a little bit of impact this quarter. In the fourth quarter, we will get that and it will be positive in our fourth quarter which you know, we have haven't changed our range on that but because of Texas we might be at the high end of that range.

Bill Bonello - Wachovia

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

Karl Wagner

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

Bill Bonello - Wachovia

You just assumed it would, that you weren't going to lose it then.

Karl Wagner

We assumed we weren't going to lose it.

Bill Bonello - Wachovia

Well, okay.

Karl Wagner

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

Bill Bonello - Wachovia

Sure. Okay. And then, the second question that I had and I will get off, can you just give us some slots on your other uses of cash. If I look at it, you should probably generate $150 million of free cash flow over the next five quarters. You are going to spend about 80, 85, you have no more share repurchase authorized, no debt to repay. I mean, are you just going to build up sort of a big war chest because '09 could be a big year for anesthesiology or something or how are you thinking about that?

Karl Wagner

You know, we are constantly looking at your cash balances and we don 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 are well set up to complete acquisitions on. As I said, we will expect something will occur next year.

We don't know when, one to two deals is kind of what we are thinking. We don't know timing part of that it depend upon or we continues to see in Fairfax. But if things continue as they are going I think we'll expect to see some deals next year, which is in addition to the $80 million to $85 million dollar that I spoke about.

Bill Bonello - Wachovia

Okay.

Karl Wagner

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.

Bill Bonello - Wachovia

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

Karl Wagner

That is correct.

Bill Bonello - Wachovia

Okay. Thank you very much.

Karl Wagner

Thanks.

Operator

Our next question comes from Dawn Brock from JP Morgan. Your line is open.

Dawn Brock - JP Morgan

Good morning guys, I don’t want to stay with guidance as well, I just want to clarify that in the guidance you put out this morning it only includes the $0.02 for the originally guided to for Fairfax. So it’s still excluding any improvement, any synergy, any growth for Fairfax.

Karl Wagner

That's correct. The only thing in have in our guidance at this point is what we had expected from Fairfax when we closed the transaction, still it will be too early to say that there are any significant changes that will going to happen. As Roger mentioned there are things we are working on it, share contracts and the like but it's too early to make changes to those assumption.

Dawn Brock - JP Morgan

Excellent. Thank you for giving us the Texas Medicaid impact.

Karl Wagner

You're welcome.

Dawn Brock - JP Morgan

On the acquisitions the $80 million to $85 million, can you give us an idea of how the pipeline looks right now. I think that its obviously very encouraging to know that the core business is so strong that you guys are maintaining the high level that you have been investing, over the last couple of years.

Obviously 2007 was a bit of it and normally with that stock option review but, 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 queued toward neonatal or the neonatal sub specialties.

Karl Wagner

Good morning, Dawn. Our pipeline is actually pretty full. When you look at our neonatal deal that are in the pipeline, there are a number of deals that we are excited about, the timing of 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 couple of the small cardiology deal that is, you know, we have put on hold that we are trying to do [substrate] as we speak. So we've got some fair amount comments and will be able to get one or two of those deals done hopefully even before the end of year.

There are couple anesthesiology of deal we are excited about in our pipeline. So, you know, I would say that even though the timing this year, 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, neonatology maternal-fetal medicine and pediatric cardiology well into next year.

Dawn Brock - JP Morgan

Okay. That's great. Thank you very much.

Karl Wagner

Thanks. Dawn.

Operator

Our next question comes from Pradeep Singh from Deutsche Bank. Your line is open.

Pradeep Singh - Deutsche Bank

Hi. Good morning, guys.

Karl Wagner

Good morning.

Roger Medel

Good morning

Pradeep Singh - Deutsche Bank

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. Is that imply for the fourth quarter on EPS of a range of $0.77 to $0.81 and I think Karl mentions you may be 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?

Karl Wagner

Texas is leading me to say that it will be at the high end of that range. I am not at this point to change if range we have out there. I don't know that our intention was to look, to expect the fourth quarter we 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. The third quarter historically, depending on deals but from a true volume quarter-to-quarter on the cent 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. We will make some of that up with the deals in Texas Medicaid.

As far as the anesthesia deal that we did, yes we have some of that but as I said $0.22 on a year. So it only add about, quarter of a cent to our guidance for the quarter so it’s not a big impact.

Pradeep Singh - Deutsche Bank

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

Karl Wagner

We are continuing to add to the infrastructure. We have some people here in house and we are doing a lot of work but I don't think you are going to see anything which going to see anything which going cause a sizable change and you know our G&A clearly we wouldn't expect our G&A to grow as a percent of our revenue.

The reduction percentage might show down a little bit as it on when we deals happen in a way as we build that infrastructure but, 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 of a more than a year actually in that specialty. So I don't see major changes.

Pradeep Singh - Deutsche Bank

Great. Thanks very much.

Karl Wagner

Welcome.

Operator

Next question comes from Arthur Henderson Jefferies and Company. Your line is open.

Arthur Henderson - Jefferies and Company

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.

Karl Wagner

Our CapEx for this quarter was $1.5 million actually we have been running pretty low on capital expenditure this year, but I don't expect that we will get outside the range we have been historically. Which is some moreover in the $10 million, $7.5 million to $10 million a year going into '08. That I am seeing the major capital expenditure going to happen in next year that would change that.

Arthur Henderson - Jefferies and Company

That's helpful. You don't have any share repurchases in your guidance for next year, do you.

Karl Wagner

Nothing beyond what we have completed.

Arthur Henderson - Jefferies and Company

Okay. And then, back get a question on easology 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 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 comment that is maybe we should think more in terms of that being new acquisitions coming on it a little bit slower on the anesthesiologist side. Am I reading that correctly or am I not.

Roger Medel

It is Roger. It remains true that we are very excited about anesthesia and I think what I said was, we had originally talked about 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 before we would see our second one.

And you know, and I am still subscribed to that. I believe we will see our second one sometime during the first half of next year. So, we 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.

Arthur Henderson - Jefferies and Company

Okay. That's helpful. One last question I will jump back in the queue. Has there been anything with Fairfax that surprised you in terms of business, maybe anything that you didn't expect or something that you found that was encouraging?

Roger Medel

Yes. I wouldn't say surprises, you never know, you are going to run into it like until you get into and do it. So, we there have been surprises but we will 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, we are exactly what we expected we would be by this point in time.

We are surprised perhaps a little by just the interest that we see from other anesthesiologist groups calling us and asking us, to take a look at them on the positive side. You know and on the negative side, you know, it is surprising just how different the billing and the whole reimbursement atmosphere for anesthesiology is for neonatology. So but, I mean, we expect some of that and we knew there would be those kind of issues but nothing that I would say, oh my god, this thing is, there's something really bad or something really good here.

Arthur Henderson - Jefferies and Company

Okay. Great. That's helpful. Thanks very much, Roger.

Roger Medel

You are welcome. But I just wanted to add to that is, one of the thing that, we are not disappointed in this practice to hear about physicians and how they're working with us. They're, you know, providing great care but working well with us and try to look at the opportunities and understanding some of the issues that are inevitable to come up when you take on a transaction of this size integrated and do that. So that's not, we are not hearing issues on the physician side at this point because they're not thinking they shouldn't have done this, I think, we are all in sink moving forward and working together.

Karl Wagner

Now, if anything I have to tell you I am thrilled with this group of guys. They're absolutely, you know, excellent.

Operator

Our next question comes from Rob Mains from Morgan Keegan. Your line is open.

Rob Mains - Morgan, Keegan and Company

Thanks. Good morning.

Karl Wagner

Good morning. Rob

Roger Medel

Good morning, Rob

Rob Mains - Morgan, Keegan and Company

Karl, the share repurchase if I am doing the math right with the fully diluted share count likely decline in Q4?

Karl Wagner

I am sorry. Would the fully diluted share account climb?

Rob Mains - Morgan, Keegan and Company

No. Decline.

Karl Wagner

Yes.

Rob Mains - Morgan, Keegan and Company

Okay. And do you have the equity base compensation number for the quarter?

Karl Wagner

You know, I don't have that at any fingertips. That will be in the Q we will file next week.

Rob Mains - Morgan, Keegan and Company

Okay. And then, if I look at NICU volumes you've had to-date, they're kind of in line with some of other years but there are good deals stronger than what you had last year. You know, not like percentage points but enough I think it is kind of noticeable. Is there anything going on in your markets that you would attribute that to or just sort of normal variation?

Karl Wagner

Normal variation and we see this run up and down we have actually seen quarters in past we have exceeded that 5% volume, when you look in history and then we had quarters that we have been actually some of them we have been negative from the same unit standpoint for less than 1%. So it does fluctuate but that 3% to 5% range has been very constant on an annual basis.

Rob Mains - Morgan, Keegan and Company

Fair enough everything else I had has been answered. Thanks.

Karl Wagner

Thanks.

Operator

Our next question comes from Kevin Ellich from RBC Capital Markets. Your line is open.

Kevin Ellich - RBC Capital Markets

Good morning, guys.

Roger Medel

Good morning, Kevin.

Karl Wagner

Good morning.

Kevin Ellich - RBC Capital Markets

Just a handful of questions as last been discussed. Just wondering if you could breakout the revenue contribution from Fairfax in the for third quarter revenues?

Karl Wagner

Yeah. At this point we have decided we are not going split out anesthesia from our revenues at this point in time. We will continue to evaluate that but, it’s only one month it is not a huge number but it is not something we want to breakout. You know, as you expect we are seeing more competition in this area than we see neonatal side, we want too be real careful on what we put out there.

Kevin Ellich - RBC Capital Markets

Sure. 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?

Karl Wagner

That is correct. It does not. The $89 million is just the cash that we paid out during the quarter.

Kevin Ellich - RBC Capital Markets

Okay.

Karl Wagner

Two deals on the last day of the quarter the cash didn't get funded until the 1st October.

Kevin Ellich - RBC Capital Markets

Right. So then if we go back and look at, yes, I believe it is 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?

Karl Wagner

Yes. I think that's roughly right, yes.

Kevin Ellich - RBC Capital Markets

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?

Karl Wagner

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

Kevin Ellich - RBC Capital Markets

Okay. Then last question do you have any update on the SEC or US attorney investigation?

Karl Wagner

No. There's no update, you know, there's nothing really new to report.

Kevin Ellich - RBC Capital Markets

Okay. That's it. Thanks.

Karl Wagner

Thanks, Kevin.

Operator

(Operator Instructions) Our next question comes from Nicholas [Johnson] from Raymond James. Your line is open.

Nicholas Johnson - Raymond James

Hi, guys. Good morning. A quick question on the manage care side. We have heard some manage care companies say specifically that on the NICU side they are seeing some going after that in terms of trying to rating the cost on there. So if you can give me a color on that it would be great? Thanks.

Roger Medel

I guess we have heard that from Manage Medicaid programs in the past, which I don't know what their expectations are from how to rain that in, we are just providing service to the patient in the unit. Our compensation is usually medicaid maybe touch above medicaid, 505% of medicaid depending upon the market.

So, you know, I don't know what, what that impact would come from. We have not seen any impact in the changes from manage medicaid. If you are hearing that from somewhere else I would like to know we have not seen anyone else doing it, we just thought we are working with.

Nicholas Johnson - Raymond James

We just heard it from on the WellPoint call. They were talking about NICU specifically. But that helps.

Roger Medel

Okay.

Nicholas Johnson - Raymond James

Thanks.

Operator

Our next question comes from Dawn Brock from JP Morgan. Your line is open.

Dawn Brock - JP Morgan

Hi there. I just have two quick follow-ups and they're basically maintenance. The first is, can you give us the number of [docs] anesthesiology in the quarter?

Karl Wagner

I don't have that number on my fingertips. We will get that to you number of docs in anesthesia.

Dawn Brock - JP Morgan

Okay. That's great. And then Karl, just a number that you are using for shares outstanding for 2008?

Karl Wagner

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

Dawn Brock - JP Morgan

Okay. Excellent. Thank you very much.

Operator

Our next question comes from [Brooke O'Neill] from Daugherty and Company. Your line is open.

Brooke O'Neill - Daugherty and Company

Yes, Roger. I thought your comment regarding the things you have 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 are seeing and how do you think they're going to affect your approach to the business going forward?

Roger Medel

Well, you know, that's what I get for trying to answer the question. Somebody earlier shaking their finger at me. You know, it is just a different, you know, it is just a completely different system.

You know, we got in to look at the billing companies that they use and we are intrigued by some of the software that they have in place etcetera. So, it is just that kind of stuff, I mean, their billing as we know is based on time and how they go about, breaking down those time period and 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 is being reimbursed on a cash basis or whether they're billing, the insurance. And that's typically, some -- it's just that it is very complicated and it's just been surprising how much work there is to be done there for us.

Brooke O'Neill - Daugherty and Company

Wag, you means that all of that -- 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 are thinking.

Roger Medel

Yes. We believe that, we think that's exactly right, the more and again it isn't anything we are not going to be able to handle.

Brooke O'Neill - Daugherty and Company

Right.

Roger Medel

It's going to take time to look at and to comprehend and to work through.

Karl Wagner

I mean, Roger hit on lot of point to me in those complexities are added -- there's not necessarily a standard with every payer users. So some payers are around time to the minutes, some around it to the closer 15 minutes.

You know, so there are a lot of complexities and as we're building the infrastructure for the building system it's just very complicated and intricate. I think, as you hit appropriately looks to me once we were in this it's going to be -- very strong for us.

We have very set and strict processes we are putting in place as we do this to make sure we understand it appropriately and can apply that as we go forward. So you know, it is just working through all of these intricacies that has us a little behind, I guess, on that piece of it.

Brooke O'Neill - Daugherty and Company

Sure. It will just take time but in the end the reward will be worth it. Thanks a lot.

Roger Medel

Okay.

Operator

(Operator Instructions) One moment for questions.

Roger Medel

Okay. If there are no further questions, then we thank you for listening this morning. Thank you operator.

Operator

Ladies and gentlemen, this conference will be available for replay after November 2, 2007 at 1:30 pm Eastern Time today through November 16th, 2007 at 11:59 pm.

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That does conclude our conference for today. Thank you for participating and for using AT&T Executive Teleconference you may now disconnect.

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