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| ADPI > SEC Filings for ADPI > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Introduction
The following information should be read in conjunction with the financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2007.
Cautionary Statement Regarding Forward-Looking Statements
Some of the information in this Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "anticipate," "project," and similar expressions, among others, identify forward-looking statements. Forward-looking statements speak only as of the date the statement was made. Such forward-looking statements are subject to risks and uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied. Certain factors that might cause such a difference include, among others, our risks associated with overall or regional economic conditions, our affiliated practices contracts with third party payors and the impact of any terminations or potential terminations of such contracts, the cost of and access to capital, fluctuations in labor markets, our expansion strategy, management of rapid growth, dependence upon affiliated practices, dependence upon service agreements, settlements or judgments of pending litigation and government regulation of the dental industry. Additional risks, uncertainties and other factors are set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations-"Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2007.
Overview
American Dental Partners is a leading provider of dental facilities, support staff, and business services to multi-disciplinary dental group practices in selected markets throughout the United States. We are committed to the growth and success of the affiliated practices, and we make substantial investments to support each affiliated practice's growth. We provide or assist with organizational planning and development; recruiting, retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems and practice technology; marketing and payor relations; and financial planning, reporting and analysis. At September 30, 2008, we were affiliated with 26 dental group practices, comprising 551 full-time equivalent dentists practicing in 244 dental facilities in 18 states.
Legal Proceedings
As previously disclosed, we entered into a definitive settlement agreement and related agreements, effective February 29, 2008, to resolve the outstanding litigation, filed in the Fourth Judicial District of Hennepin County, Minnesota, court file number 27-CV-06-2500, among us, our subsidiary PDHC, Ltd. ("PDHC") and PDG, P.A. ("PDG"). Under the terms of the definitive settlement agreement and in settlement and dismissal of the litigation among us, we transferred to PDG the leases and operating assets associated with 25 of 31 Park Dental facilities and tradenames, including "Park Dental," owned by us. As part of the settlement of litigation among us, we also entered into a transition services agreement with PDG effective February 29, 2008 in which we agreed to provide interim management services to PDG for a period of up to nine months commencing on January 1, 2008. PDG will pay us a transition service fee of $19,000,000 regardless of whether PDG utilizes the interim management services during the nine month period.
Affiliation and Acquisition Summary
When affiliating with a dental practice, we customarily acquire selected assets and enter into a long-term service agreement with the affiliated practice. Under our service agreements, we are responsible for providing all services necessary for the administration of the non-clinical aspects of the dental operations. The affiliated practice is responsible for the provision of dental care. Each of our service agreements is for an initial term of 40 years.
We are constantly evaluating potential acquisition and affiliation transactions with dental practices and acquisitions of other dental-related companies that would expand our business capabilities. However, because our amended revolving credit agreement and our term loan have certain borrowing limitations (see "Liquidity and Capital Resources"), we expect that the number of new affiliations and acquisitions in 2008 will be at levels lower than we achieved in recent years.
Revenue Overview
Net Revenue
Our net revenue includes management fees earned by us pursuant to the terms of the service agreements with the affiliated practices, as well as reimbursement of clinic expenses paid by us on their behalf, and other revenue which includes patient revenue of Arizona's Tooth Doctor for Kids ("Tooth Doctor"), fees earned by our TPA, fees earned by our dental laboratory and revenue earned under the transition services agreement with PDG.
The following table provides the components of our net revenue for the three and nine months ended September 30, 2008 and 2007 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Reimbursement of expenses $ 47,064 $ 45,356 $ 143,585 $ 131,283
Business service fees 13,915 14,839 43,365 46,951
Revenue earned under service agreements 60,979 60,195 186,950 178,234
Other revenue 7,236 6,967 21,352 20,938
Revenue earned under transition service agreement
with PDG 3,333 - 17,696 -
Net revenue $ 71,548 $ 67,162 $ 225,998 $ 199,172
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Fees earned under service agreements include reimbursement of expenses incurred by us on behalf of the affiliated practices in connection with the operation and administration of dental facilities and service fees charged to the affiliated practices pursuant to the terms of the service agreements for management services and capital provided by us. Expenses incurred for the operation and administration of the dental facilities include salaries and benefits for non-dentist personnel working at the dental facilities (the administrative staff and, where permitted by law, the dental assistants and hygienists), lab fees, dental supplies, office occupancy costs of the dental facilities, depreciation related to the fixed assets at the dental facilities and other expenses such as professional fees, marketing costs and general and administrative expenses.
For additional information on components of our net revenue, see Note 7 of "Notes to Interim Consolidated Financial Statements."
Patient Revenue of the Affiliated Practices
We believe it is important to understand patient revenue of the affiliated practices. This includes the practices that we do not control, nor own any equity interests in, and are affiliated with us by means of service agreements. We do not consolidate the financial statements of these affiliated practices with ours, and accordingly their patient revenue is not a measure of our financial performance under generally accepted accounting principles because it is not our revenue. It is, however, a financial measure we use, along with the patient revenue of Tooth Doctor, to monitor operating performance and to help identify and analyze trends of the affiliated practices which may impact our business. Most of the operating expenses incurred by us, pursuant to service agreements, are on behalf of the affiliated practices in the operation of dental facilities. These expenses are significantly affected by the patient revenue of the affiliated practices.
The affiliated practices generate revenue from providing care to patients and receive payment from patients and dental benefit providers, or payors, under fee-for-service, PPO plans and managed care capitation plans. Patient revenue reflects the amounts billed by an affiliated practice at its established rates reduced by any contractual adjustments and allowances for uncollectible accounts. Contractual adjustments represent discounts off established rates negotiated pursuant to certain dental benefit plan provider contracts. While payor mix varies from market to market, the following table provides the aggregate payor mix of all affiliated practices, including Tooth Doctor, for the nine months ended September 30:
Nine Months Ended
September 30,
2008 2007
Fee-for-service 19% 27%
PPO and dental referral plans 70% 60%
Capitated managed care plans 11% 13%
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For the affiliated practices that we do not own and are affiliated with us by means of a service agreement, after collection of fees from patients and third-party insurers for the provision of dental care and payment to us of our service fee and reimbursement of clinic expenses incurred by us on their behalf, the amounts remaining are used by these affiliated practices for compensation of dentists and, in certain states, hygienists and/or dental assistants who are employed by these affiliated practices.
The following table sets forth for the three and nine months ended September 30, 2008 and 2007, the patient revenue of all the affiliated practices, patient revenue earned by Tooth Doctor, the amounts due to us under service agreements, and amounts retained by the affiliated practices we do not own for compensation of dentists and, where applicable, other clinical staff (in thousands):
Three Months Ended Nine Months Ended
September 30, % September 30, %
2008 2007 Change 2008 2007 Change
Patient revenue of affiliated
practices:
Platform dental group practices
affiliated with us in both periods of
comparison $ 83,565 $ 79,738 4.8 % $ 245,221 $ 228,726 7.2 %
Platform dental group practices that
affiliated with us during periods of
comparison 19,995 22,043 -9.3 % 71,664 71,720 -0.1 %
Total patient revenue 103,560 101,781 1.7 % 316,885 300,446 5.5 %
Patient revenue of Arizona's Tooth
Doctor for Kids 6,427 5,691 12.9 % 18,592 17,246 7.8 %
Patient revenue of platform dental
group practices affiliated with us by
means of service agreements 97,133 96,090 1.1 % 298,293 283,200 5.3 %
Amounts due to us under service
agreements 60,979 60,195 1.3 % 186,805 178,234 4.8 %
Amounts retained by platform dental
group practices affiliated with us by
means of service agreements $ 36,154 $ 35,895 0.7 % $ 111,488 $ 104,966 6.2 %
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Same market patient revenue growth was 4.8% for the three months ended September 30, 2008. Same market patient revenue growth for the three months ended September 30, 2008 and 2007 and for the nine months ended September 30, 2008 and 2007 excludes platform affiliations that occurred on or after January 1, 2007 and July 1, 2007, respectively, as well as the patient revenue of the 31 dental facilities comprising Park Dental for the three and nine months ended September 30, 2007 and the six dental facilities we retained for the three and nine months ended September 30, 2008. For the current quarter, same market patient revenue growth was comprised of a 5% increase in provider hours, a 0.5% increase in provider productivity and a 0.7% deterioration in reimbursement rates received from dental benefit insurers. Same market patient revenue growth was 7.2% for the nine months ended September 30, 2008. Same market patient revenue growth for the nine months ended September 30, 2008 was comprised of a 9.1% increase in provider hours, a 1.2% decrease in provider productivity and a 0.9% deterioration in reimbursement rates received from dental benefit insurers.
Amounts retained by affiliated practices we do not own increased 0.7% to $36,154,000 for the three months ended September 30, 2008 from $35,895,000 for the three months ended September 30, 2007. As a percentage of their patient revenue, amounts retained by affiliated practices decreased to 37.2% for the three months ended September 30, 2008 from 37.4% for the three months ended September 30, 2007. Amounts retained by affiliated practices we do not own increased 6.2% to $111,488,000 for the nine months ended September 30, 2008 from $104,966,000 for the nine months ended September 30, 2007. As a percentage of their patient revenue, amounts retained by affiliated practices increased to 37.4% for the nine months ended September 30, 2008, compared to 37.1% for the nine months ended September 30, 2007. This increase is due primarily to the termination of the service agreement with PDG effective December 31, 2007 as amounts retained by PDG were lower than the blended average of our affiliated practices because PDG did not employ dental hygienists and dental assistants.
Results of Operations
The following tables set forth our net revenue and results of operations for the
three and nine months ended September 30, 2008 and 2007 (in thousands):
Three Months Ended Three Months Ended
September 30, 2008 September 30, 2007
% of Net % of Net
Amount Revenue Amount Revenue % Change
Net revenue $ 71,548 100.0 % $ 67,162 100.0 % 6.5 %
Salaries and benefits 30,491 42.6 % 28,730 42.8 % 6.1 %
Lab fees and dental supplies 9,967 13.9 % 10,550 15.7 % -5.5 %
Office occupancy 8,291 11.6 % 7,885 11.7 % 5.1 %
Other operating expenses 6,726 9.4 % 5,807 8.6 % 15.8 %
General corporate expenses 3,055 4.3 % 4,164 6.2 % -26.6 %
Depreciation expense 2,658 3.7 % 2,225 3.3 % 19.5 %
Amortization of intangible assets 2,409 3.4 % 1,723 2.6 % 39.8 %
Litigation settlement (gain) expense (7 ) 0.0 % 826 1.2 % -100.8 %
Total operating expenses 63,590 88.9 % 61,910 92.2 % 2.7 %
Earnings from operations 7,958 11.1 % 5,252 7.8 % 51.5 %
Interest expense 2,390 3.3 % 823 1.2 % 190.4 %
Minority interest 140 0.2 % 102 0.2 % 37.3 %
Earnings before income taxes 5,428 7.6 % 4,327 6.4 % 25.4 %
Income taxes 2,118 3.0 % 1,626 2.4 % 30.3 %
Net earnings $ 3,310 4.5 % $ 2,701 4.0 % 22.5 %
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AMERICAN DENTAL PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
(unaudited)
Nine Months Ended Nine Months Ended
September 30, 2008 September 30, 2007
% of Net % of Net
Amount Revenue Amount Revenue % Change
Net revenue $ 225,998 100.0 % $ 199,172 100.0 % 13.5 %
Salaries and benefits 97,347 43.1 % 83,895 42.1 % 16.0 %
Lab fees and dental supplies 33,091 14.6 % 31,230 15.7 % 6.0 %
Office occupancy 25,784 11.4 % 22,294 11.2 % 15.7 %
Other operating expenses 20,206 8.9 % 16,867 8.5 % 19.8 %
General corporate expenses 10,150 4.5 % 10,867 5.5 % -6.6 %
Depreciation expense 8,116 3.6 % 6,535 3.3 % 24.2 %
Amortization of intangible assets 7,205 3.2 % 4,648 2.3 % 55.0 %
Litigation settlement (gain) expense (30,821 ) -13.6 % 2,174 1.1 % 0.0 %
Total operating expenses 171,078 75.7 % 178,510 89.6 % -4.2 %
Earnings from operations 54,920 24.3 % 20,662 10.4 % 165.8 %
Interest expense 7,264 3.2 % 2,026 1.0 % 258.5 %
Minority interest 431 0.2 % 349 0.2 % 23.5 %
Earnings before income taxes 47,225 20.9 % 18,287 9.2 % 158.2 %
Income taxes 18,417 8.1 % 7,179 3.6 % 156.5 %
Net earnings $ 28,808 12.7 % $ 11,108 5.6 % 159.3 %
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Financial Presentation of Litigation Settlement
On February 29, 2008, under the terms of a settlement agreement entered into on December 26, 2007 among American Dental Partners, Inc., PDHC, one of our Minnesota subsidiaries, PDG, Dental Specialists of Minnesota, P.A. and Northland Dental Partners, P.L.L.C. to settle outstanding litigation among the parties, we transferred the operating assets of 25 of 31 Park Dental facilities and associated tradenames to PDG, forgave outstanding accounts receivable due from PDG and entered into a transition services agreement with PDG to provide interim management services through September 30, 2008.
In addition to our actual results, we believe it is necessary to provide a pro forma financial presentation to exclude temporary and non-recurring items related to the litigation settlement as we believe that such pro forma presentation is important to understanding future trends of our underlying and ongoing operations. The pro forma information are non-GAAP financial measures.
The following table reconciles the actual results of operations to our pro forma non-GAAP financial measures for the three months ended September 30, 2008 (in thousands):
Pro Forma Adjustments
Settlement Management Pro
Actual Assets Services Forma
Net revenue $ 71,548 $ - $ 3,333 $ 68,215
Operating expenses
Salaries and benefits 30,491 - 246 30,245
Lab fees and dental supplies 9,967 - - 9,967
Office occupancy expenses 8,291 - 60 8,231
Other operating expenses 6,726 - 108 6,618
General corporate expenses 3,055 - - 3,055
Litigation gain (7 ) (7 ) - -
EBITDA 13,025 7 2,919 10,099
Depreciation 2,658 - 14 2,644
Amortization 2,409 - - 2,409
Earnings from operations 7,958 7 2,905 5,046
Interest expense, net 2,390 - - 2,390
Minority interest 140 - - 140
Earnings before income taxes 5,428 7 2,905 2,516
Income taxes 2,118 982
Net earnings 3,310 1,534
Amortization of service agreements, net of tax 1,364 1,364
Cash net earnings $ 4,674 $ 2,898
Diluted net earnings per common share $ 0.25 $ 0.12
Diluted cash net earnings per common share $ 0.35 $ 0.22
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Pro forma adjustments for settlement assets includes miscellaneous income and expenses, including professional fees associated with the PDG litigation.
Pro forma adjustments for management services include revenue earned under the transition services agreement with PDG and estimated expenses to provide such services.
The following table reconciles the actual results of operations to our pro forma non-GAAP financial measures for the three months ended September 30, 2007 (in thousands):
Pro Forma Adjustments
Settlement Management
Actual Assets Services Pro Forma
Net revenue $ 67,162 $ 8,825 $ 2,588 $ 55,749
Operating expenses
Salaries and benefits 28,730 4,970 481 23,279
Lab fees and dental supplies 10,550 1,626 - 8,924
Office occupancy expenses 7,885 1,167 49 6,669
Other operating expenses 5,807 715 58 5,034
General corporate expenses 4,164 - - 4,164
Litigation expenses 826 826 - -
EBITDA 9,200 (479 ) 2,000 7,679
Depreciation 2,225 347 13 1,865
Amortization 1,723 - - 1,723
Earnings from operations 5,252 (826 ) 1,987 4,091
Interest expense, net 823 - - 823
Minority interest 102 - - 102
Earnings before income taxes 4,327 (826 ) 1,987 3,166
Income taxes 1,626 1,189
Net earnings $ 2,701 $ 1,977
Amortization of service agreements, net of tax 1,024 1,024
Cash net earnings $ 3,725 $ 3,001
Diluted net earnings per common share $ 0.20 $ 0.15
Diluted cash net earnings per common share $ 0.28 $ 0.22
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For comparability purposes with the three months ended September 30, 2008, pro forma adjustments for settlement assets include: (i) revenue due to us from PDG for the operating expenses of the 25 dental facilities transferred to PDG as part of the litigation settlement and (ii) professional fees related to the litigation of $826,000.
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