Pediatrix Medical Group, Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion highlights the principal factors that have affected our financial condition and results of operations, as well as our liquidity and capital resources, for the periods described. This discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the notes thereto included in this Quarterly Report. In addition, reference is made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission on February 20, 2024 (the “2023 Form 10-K”). As used in this Quarterly Report, the terms “Pediatrix”, the “Company”, “we”, “us” and “our” refer to the parent company, Pediatrix Medical Group, Inc., a Florida corporation, and the consolidated subsidiaries through which its businesses are actually conducted (collectively, “PMG”), together with PMG’s affiliated business corporations or professional associations, professional corporations, limited liability companies and partnerships (“affiliated professional contractors”). Certain subsidiaries of PMG have contracts with our affiliated professional contractors, which are separate legal entities that provide physician services in certain states. The following discussion contains forward-looking statements. Please see the Company’s 2023 Form 10-K, including Item 1A, Risk Factors, for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. In addition, please see “Caution Concerning Forward-Looking Statements” below.

Overview

Pediatrix is a leading provider of physician services including newborn, maternal-fetal, and other pediatric subspecialty care. Our national network is comprised of affiliated physicians who provide clinical care in 37 states. Our affiliated physicians provide neonatal clinical care, primarily within hospital-based neonatal intensive care units (“NICUs”), to babies born prematurely or with medical complications; and maternal-fetal and obstetrical medical care to expectant mothers experiencing complicated pregnancies, primarily in areas where our affiliated neonatal physicians practice. We also provide services across multiple other pediatric subspecialties.

General Economic Conditions and Other Factors

Our operations and performance depend significantly on economic conditions. During the three months ended June 30, 2024, the percentage of our patient service revenue being reimbursed under government-sponsored healthcare programs (“GHC Programs”) decreased as compared to the three months ended June 30, 2023. However, we could experience shifts toward GHC Programs if changes occur in economic behaviors or population demographics within geographic locations in which we provide services, including an increase in unemployment and underemployment as well as losses of commercial health insurance. Payments received from GHC Programs are substantially less for equivalent services than payments received from commercial insurance payors. In addition, costs of managed care premiums and patient responsibility amounts continue to rise, and accordingly, we may experience lower net revenue resulting from increased bad debt due to patients’ inability to pay for certain services.

Practice Portfolio Management Plan and Impairment of Long-Lived Assets

During the second quarter of 2024, we formalized our physician practice optimization plans, resulting in a decision to exit almost all of our affiliated office-based practices, other than maternal-fetal medicine. Over the course of many years, we expanded our pediatric service lines and footprint to provide specialized care to more patients, including through our office-based portfolio of practices. This added complexity to our operations over time and, accordingly, increased costs that resulted in operating challenges primarily for our office-based portfolio of practices. Recognizing this and our need to adapt to the current healthcare climate, during the second quarter, we made the decision to return to a hospital-based and maternal-fetal medicine-focused organization. The exits of our pediatric office-based practices are expected to be completed by December 31, 2024. Accordingly, a recoverability assessment for each impacted individual physician practice was performed, and the estimated future cash flows related to the physician practices did not support the carrying value of the specifically identified individual long-lived assets. As a result, during the second quarter of 2024, we recorded fixed asset impairments of $20.1 million, intangible asset impairments of $7.7 million and operating lease right-of-use asset impairments of $8.1 million. The operating lease right-of-use impairments are recorded within the transformational and restructuring related expenses line item.

Loss on Disposal of Businesses

During the second quarter of 2024, we made the decision to exit our primary and urgent care service line based on a review of the cost and time that would be required to build the platform to scale. We divested one of our two previously acquired primary and urgent care practices during the second quarter and divested of the second of our two acquired primary and urgent care practices subsequent to the end of the second quarter. The total loss on disposal of these two businesses was $10.9 million, resulting from the loss on sale for one practice and marking the net assets to their fair value less costs to sell for the other practice.

Goodwill Impairment

Goodwill is tested for impairment on at least an annual basis, in accordance with the subsequent measurement provisions of the accounting guidance for goodwill. During the second quarter of 2024, we experienced a triggering event resulting from a sustained decline in our stock price that resulted in our market capitalization being lower than the book value of our equity. This impairment assessment resulted in a non-cash impairment charge of $130.0 million. Recognition of this non-cash charge against goodwill resulted in a tax benefit which generated an additional deferred tax asset of $24.2 million that increased the book value of our equity. An incremental non-cash charge was required to reduce the book value of our equity to our previously determined fair value. Accordingly, we recorded the incremental non-cash charge of $24.2 million for a total non-cash charge of $154.2 million.

“Surprise” Billing Legislation

In late 2020, Congress enacted the No Surprises Act (“NSA”) legislation intended to protect patients from “surprise” medical bills when certain services are furnished by providers who are not in-network with the patient’s insurer. Effective January 1, 2022, if the patient’s insurance plan or coverage is subject to the NSA, providers are not permitted to send patients an unexpected or “surprise” medical bill that arises from out-of-network emergency care provided at certain out-of-network facilities or at certain in-network facilities by out-of-network emergency providers, as well as nonemergency care provided at certain in-network facilities by out-of-network providers without the patient’s informed consent (as defined by the NSA). Many states have legislation on this topic and will continue to modify and review their laws pertaining to surprise billing.

For claims subject to the NSA, insurers are required to calculate the patient’s total cost-sharing amount pursuant to rules set forth in the NSA and its implementing regulations which, in some cases, can be calculated by reference to the applicable qualifying payment amount for the items or services received. The patient’s cost-sharing amount for out-of-network services covered by the NSA must be no more than the patient’s in-network cost-sharing amounts. Patient cost-sharing amounts for items and services subject to the NSA count toward the patient’s health plan deductible and out-of-pocket cost-sharing limits. For claims subject to the NSA, providers are generally not permitted to balance bill patients beyond this cost-sharing amount. An out-of-network provider is only permitted to bill a patient more than the cost-sharing amount allowed under the NSA for certain types of services if the provider satisfies all aspects of an informed consent process set forth in the NSA’s implementing regulations. Providers that violate these surprise billing prohibitions may be subject to state enforcement action or federal civil monetary penalties.

For claims subject to the NSA, including many emergency care services, out-of-network providers will be paid an amount determined by the patient’s insurer; if a provider is not satisfied with the initial amount paid for the services, the provider can pursue recourse through an independent dispute resolution process. The outcome of each IDR dispute is generally binding on both the provider and payor with respect to the particular claims at issue in that dispute but may not affect an insurer’s future offers of payment. Accordingly, we cannot predict how these IDR results will compare to the rates that our affiliated physicians customarily receive for their services. These measures could limit the amount we can charge and recover for services we furnish where we have not contracted with the patient’s insurer, and therefore could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.

Healthcare Reform

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively the “ACA”) has altered how health care is delivered and reimbursed in the U.S. and contain various provisions, including the establishment of health insurance exchanges to facilitate the purchase of qualified health plans, expanded Medicaid eligibility, subsidized insurance premiums and additional requirements and incentives for businesses to provide healthcare benefits. Other provisions have expanded the scope and reach of the FCA and other healthcare fraud and abuse laws. The status of the ACA may be subject to change as a result of political, legislative, regulatory, and administrative developments, as well as judicial proceedings. As a result, we could be affected by potential changes to various aspects of the ACA, including changes to subsidies, healthcare insurance marketplaces and Medicaid expansion. We cannot say for certain whether there will be additional future challenges to the ACA or what impact, if any, such challenges may have on our business. Changes resulting from various legal proceedings, and any legislative or administrative change to the current healthcare financing system, could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.

In addition to the ACA, there could be changes to other GHC Programs, such as a change to the Medicaid program design or Medicaid coverage and reimbursement rates set forth under federal or state law. These changes, if implemented, could eliminate the guarantee that everyone who is eligible and applies for Medicaid benefits would receive them and could potentially give states new authority to restrict eligibility, cut benefits and/or make it more difficult for people to enroll. Moreover, the expiration of the COVID-19 national emergency and public health emergency declarations in May 2023 may impact the coverage for and access to certain services for Medicaid patients. Expiration of the national emergency and public health emergency declarations will also end waivers for the provision of certain services, and returning our services to a pre-pandemic regulatory state similarly may increase our exposure to legal, regulatory, compliance and clinical risks.

Medicaid Expansion

The ACA also allows states to expand their Medicaid programs through federal payments that fund most of the cost of increasing the Medicaid eligibility income limit from a state’s historic eligibility levels to 133% of the federal poverty level. All of the states in which we operate, however, already cover children in the first year of life and pregnant women if their household income is at or below 133% of the federal poverty level. Recently, Democrats in Congress have sought to expand Medicaid or Medicaid-like coverage in states that have not yet expanded Medicaid. They also have sought to reduce payments to certain hospitals in some of these states. Should any of these changes take effect, we cannot predict with any assurance the ultimate effect on reimbursements for our services.

Non-GAAP Measures

In our analysis of our results of operations, we use various GAAP and certain non-GAAP financial measures. We have incurred certain expenses that we do not consider representative of our underlying operations, including transformational and restructuring related expenses. Accordingly, we report adjusted earnings before interest, taxes and depreciation and amortization (“Adjusted EBITDA”), defined as net income before interest, taxes, depreciation and amortization, and transformational and restructuring related expenses. Earnings per share has also been adjusted (“Adjusted EPS”) and consists of diluted net income per common and common equivalent share adjusted for amortization expense, stock-based compensation expense, transformational and restructuring related expenses and impacts from discrete tax events. For the three and six months ended June 30, 2024, both Adjusted EBITDA and Adjusted EPS are being further adjusted to exclude loss on disposal of businesses and impairment losses.

We believe these measures, in addition to income from operations, net income and diluted net income per common and common equivalent share, provide investors with useful supplemental information to compare and understand our underlying business trends and performance across reporting periods on a consistent basis. These measures should be considered a supplement to, and not a substitute for, financial performance measures determined in accordance with GAAP. In addition, since these non-GAAP measures are not determined in accordance with GAAP, they are susceptible to varying calculations and may not be comparable to other similarly titled measures of other companies. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

For a reconciliation of each of Adjusted EBITDA and Adjusted EPS to the most directly comparable GAAP measures for the three and six months ended June 30, 2024 and 2023, refer to the tables below (in thousands, except per share data).

(1) A blended tax rate of 25% was used to calculate the tax effects of the adjustments for the three months ended June 30, 2024 and 2023, other than for goodwill impairment for the relevant period. Tax effects for the goodwill impairment approximate 10% due to a portion of the expense being non-deductible.

(1) A blended tax rate of 25% was used to calculate the tax effects of the adjustments for the six months ended June 30, 2024 and 2023, other than for goodwill impairment for the relevant period. Tax effects for the goodwill impairment approximate 10% due to a portion of the expense being non-deductible.

Results of Operations

Three Months Ended June 30, 2024 as Compared to Three Months Ended June 30, 2023

Our net revenue was $504.3 million for the three months ended June 30, 2024, as compared to $500.6 million for the same period in 2023. The increase in net revenue of $3.7 million, or 0.7%, was primarily attributable to an increase in same-unit revenue, partially offset by a decrease in revenue from non-same unit activity, primarily resulting from practice dispositions. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue increased by $13.5 million, or 2.8%. The increase in same-unit revenue was comprised of an increase of $11.6 million, or 2.4%, from net reimbursement-related factors and $1.9 million, or 0.4%, related to patient service volumes. The net increase in revenue related to net reimbursement-related factors was primarily due to an increase in revenue resulting from a favorable shift in payor mix and an increase in administrative fees from our hospital partners. The increase in revenue from patient service volumes was related to increases in maternal-fetal medicine and certain hospital-based pediatric subspecialty services, partially offset by modest declines in primary and urgent care and neonatology services.

Practice salaries and benefits increased $3.8 million, or 1.1%, to $357.8 million for the three months ended June 30, 2024, as compared to $354.0 million for the same period in 2023. The $3.8 million increase was primarily attributable to an increase in clinical compensation expense, including benefits and incentive compensation, and modest increases in medical malpractice insurance expense, all at our existing units, partially offset by decreases in non-same unit activity.

Practice supplies and other operating expenses increased $1.3 million, or 4.1%, to $32.4 million for the three months ended June 30, 2024, as compared to $31.1 million for the same period in 2023. The increase was primarily attributable to practice supply, rent and other costs related to our existing units, primarily professional services and rent expense, partially offset by decreases in non-same unit activity.

General and administrative expenses primarily include all billing and collection functions and all other salaries, benefits, supplies and operating expenses not specifically related to the day-to-day operations of our affiliated physician practices and services. General and administrative expenses were $56.6 million for the three months ended June 30, 2024, as compared to $58.0 million for the same period in 2023. The net decrease of $1.4 million was primarily related to decreases in overall staffing levels and timing of certain incentive compensation expenses, partially offset by increases in salary expense for enhancement of front-end revenue cycle management staffing. General and administrative expenses as a percentage of net revenue was 11.2% for the three months ended June 30, 2024, as compared to 11.6% for the same period in 2023.

Depreciation and amortization expense was $8.8 million for the three months ended June 30, 2024, as compared to $8.9 million for the same period in 2023.

Transformational and restructuring related expenses were $13.6 million for the three months ended June 30, 2024 and primarily related to impairment of various right-of-use lease assets resulting from our practice portfolio management activities, revenue cycle management transition activities and position eliminations across various shared services and operations departments.

Goodwill impairment was $154.2 million for the three months ended June 30, 2024, resulting from the triggering event during the second quarter based on a sustained stock price decline.

Fixed assets impairments were $20.1 million for the three months ended June 30, 2024, resulting from the practice portfolio management plan.

Intangible assets impairments were $7.7 million for the three months ended June 30, 2024, resulting from the practice portfolio management plan.

Loss on disposal from businesses was $10.9 million for the three months ended June 30, 2024, resulting from the disposals of our primary and urgent care practices.

Loss from operations was $157.7 million for the three months ended June 30, 2024, as compared to income from operations of $48.5 million for the same period in 2023. Our operating margin was (31.3)% for the three months ended June 30, 2024, as compared to 9.7% for the same period in 2023. The decrease in our operating margin was primarily due to the impairment activity recorded during the second quarter and transformational and restructuring related activity, as well as net unfavorable impacts in our same-unit results driven by higher operating expenses, partially offset by same-unit revenue increases and decreases in general and administrative expenses. Excluding impairment activity and transformational and restructuring related expenses for the three months ended June 30, 2024, our income from operations was $48.8 million and our operating margin was 9.7% for such period. We believe excluding the impacts from the impairment and transformational and restructuring related activity provides a more comparable view of our operating income and operating margin.

Total non-operating expenses were $10.0 million for the three months ended June 30, 2024, as compared to $9.6 million for the same period in 2023. The net increase in non-operating expenses was primarily related to an increase in other expense from the settlement of a litigation matter, partially offset by a decrease in interest expense.

Our effective income tax rate (“tax rate”) was 8.8% for the three months ended June 30, 2024 as compared to 27.4% for the three months ended June 30, 2023. The decrease in our tax rate from 27.4% to 8.8% for the three months ended June 30, 2024 primarily relates to the effects of the non-cash goodwill impairment charge and the pre-tax loss generated excluding the impairment charge. Discrete tax impacts during the three months ended June 30, 2024 and 2023 were nominal.

Net loss was $153.0 million for the three months ended June 30, 2024, as compared to net income of $28.3 million for the same period in 2023. Adjusted EBITDA was $57.9 million for the three months ended June 30, 2024, as compared to $59.1 million for the same period in 2023. The decrease in our Adjusted EBITDA was primarily due to net unfavorable impacts in our same-unit results, primarily from higher operating expenses.

Diluted net loss per common and common equivalent share was $1.84 on weighted average shares outstanding of 83.3 million for the three months ended June 30, 2024, as compared to diluted net income per common and common equivalent share of $0.34 on weighted average shares outstanding of 82.7 million for the same period in 2023. Adjusted EPS was $0.34 for the three months ended June 30, 2024, as compared to $0.39 for the same period in 2023.

Six Months Ended June 30, 2024 as Compared to Six Months Ended June 30, 2023

Our net revenue was $999.4 million for the six months ended June 30, 2024, as compared to $991.6 million for the same period in 2023. The increase in revenue of $7.8 million, or 0.8%, was primarily attributable to increases in same-unit revenue, partially offset by a decrease in revenue from non-same unit activity, primarily resulting from practice dispositions. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue increased by $27.9 million, or 2.9%. The increase in same-unit net revenue was comprised of an increase of $15.8 million, or 1.6%, from net reimbursement-related factors and an increase of $12.1 million, or 1.3%, related to patient service volumes. The net increase in revenue related to net reimbursement-related factors was primarily due to an increase in revenue resulting from a favorable shift in payor mix and an increase in administrative fees from our hospital partners. The increase in revenue from patient service volumes was related to increases in our neonatology, newborn nursery, maternal-fetal medicine, and certaince hospital-based pediatric subspecialty services, partially offset by declines in primary and urgent care and pediatric cardiology services.

Practice salaries and benefits increased $10.7 million, or 1.5%, to $726.9 million for the six months ended June 30, 2024, as compared to $716.3 million for the same period in 2023. The $10.7 million increase was primarily attributable to an increase in clinical compensation expense and a modest increase in medical malpractice expense at our existing units, partially offset by decreases in benefits and incentive compensation at our existing units as well as decreases in non-same unit activity.

Practice supplies and other operating expenses increased $1.7 million, or 2.7%, to $63.5 million for the six months ended June 30, 2024, as compared to $61.8 million for the same period in 2023. The increase was primarily attributable to practice supply, rent and other costs at our existing units, including increases in rent expense, collection fees and professional services expenses, partially offset by decreases in medical supplies and other office expenses.

General and administrative expenses primarily include all billing and collection functions and all other salaries, benefits, supplies and operating expenses not specifically identifiable to the day-to-day operations of our physician practices and services. General and administrative expenses were $116.8 million for the six months ended June 30, 2024, as compared to $117.1 million for the same period in 2023. The net decrease of $0.3 million is primarily related to lower information technology expenses, professional services fees, travel expenses, and decreases in expenses from net staffing reductions, partially offset by increases in salary expense for enhancement of revenue cycle management staffing. General and administrative expenses as a percentage of net revenue were 11.7% for the six months ended June 30, 2024, as compared to 11.8% for the same period in 2023.

Depreciation and amortization expense was $19.1 million for the six months ended June 30, 2024, as compared to $17.9 million for the same period in 2023. The increase of $1.2 million was primarily related to an increase in depreciation expense for non-same unit activity.

Transformational and restructuring related expenses were $22.1 million for the six months ended June 30, 2024 and primarily related to the impairment of various right-of-use lease assets resulting from our practice portfolio management activities, position eliminations across various shared services and operations departments and revenue cycle management transition activities.

Goodwill impairment was $154.2 million for the six months ended June 30, 2024, resulting from the triggering event during the second quarter based on a sustained stock price decline.

Fixed assets impairments were $20.1 million for the six months ended June 30, 2024, resulting from the practice portfolio management plan.

Intangible assets impairments were $7.7 million for the six months ended June 30, 2024, resulting from the practice portfolio management plan.

Loss on disposal from businesses was $10.9 million for the six months ended June 30, 2024, resulting from the disposals of the primary and urgent care practices.

Loss from operations was $141.8 million for the six months ended June 30, 2024, as compared to income from operations of $78.5 million for the same period in 2023. Our operating margin was (14.2)% for the six months ended June 30, 2024, as compared to 7.9% for the same period in 2023. The decrease in our operating margin was primarily due to the impairment activity recorded during the second quarter and transformational and restructuring related activity, as well as net unfavorable impacts in our same-unit results driven by higher operating expenses, partially offset by same-unit revenue increases and decreases in general and administrative expenses. Excluding impairment activity and transformational and restructuring related expenses for the six months ended June 30, 2024, our income from operations was $73.2 million and our operating margin was 7.3% for such period. We believe excluding the impacts from the impairment and transformational and restructuring related activity provides a more comparable view of our operating income and operating margin.

Total non-operating expenses were $18.1 million for the six months ended June 30, 2024, as compared to $18.9 million for the same period in 2023.

Our tax rate was 6.8% for the six months ended June 30, 2024 compared to 28.8% for the six months ended June 30, 2023. The tax rates for the six months ended June 30, 2024 and 2023 include net discrete tax benefits of $2.0 million and $0.9 million, respectively. After excluding discrete tax impacts, during the six months ended June 30, 2024 and 2023, our tax rate was 8.1% and 27.3%, respectively. We believe excluding discrete tax impacts on our tax rate provides a more comparable view of our effective income tax rate. The decrease in our tax rate from 27.3% to 8.1% for the six months ended June 30, 2024 primarily relates to the effects of the non-cash goodwill impairment charge and the pre-tax loss generated excluding the impairment charge.

Net loss was $149.0 million for the six months ended June 30, 2024, as compared to net income of $42.5 million for the six months ended June 30, 2023. Adjusted EBITDA was $95.1 million for the six months ended June 30, 2024, as compared to $99.2 million for the same period in 2023. The decrease in our Adjusted EBITDA was primarily due to net unfavorable impacts in our same-unit results, primarily from higher operating expenses.

Diluted net loss per common and common equivalent share was $1.79 on weighted average shares outstanding of 83.1 million for the six months ended June 30, 2024, as compared to diluted net income per common and common equivalent share of $0.52 on weighted average shares outstanding of 82.4 million for the same period in 2023. Adjusted EPS was $0.54 for the six months ended June 30, 2024, as compared to $0.62 for the same period in 2023.

Liquidity and Capital Resources

As of June 30, 2024, we had $19.4 million of cash and cash equivalents as compared to $73.3 million at December 31, 2023. Additionally, we had working capital of $119.1 million at June 30, 2024, an increase of $24.5 million from working capital of $94.5 million at December 31, 2023.

Cash Flows from Continuing Operations

Cash (used in) provided from operating, investing and financing activities is summarized as follows (in thousands):

Operating Activities

During the six months ended June 30, 2024, our net cash used in operating activities for continuing operations was $13.3 million, compared to $8.0 million for the same period in 2023. The net increase in cash used of $5.3 million was primarily due to decreases in cash flow from accounts receivable, partially offset by increases in cash flow from income tax-related activity as well as accounts payable and accrued expenses.

During the six months ended June 30, 2024, cash outflow from accounts receivable was $0.9 million, as compared to a cash inflow of $28.9 million for the same period in 2023. The decrease in cash flow from accounts receivable for the six months ended June 30, 2024 as compared to the prior year period was primarily due to the prior year period reflecting a significant improvement in collections.

DSO is one of the key factors that we use to evaluate the condition of our accounts receivable and the related allowances for contractual adjustments and uncollectibles. DSO reflects the timeliness of cash collections on billed revenue and the level of reserves on outstanding accounts receivable. Our DSO for continuing operations was 49.5 days at June 30, 2024 as compared to 50.5 days at December 31, 2023 and 49.2 days at June 30, 2023. The change in our DSO was primarily related to an increase in cash collections at our existing units.

Investing Activities

During the six months ended June 30, 2024, our net cash used in investing activities of $29.1 million consisted primarily of capital expenditures of $12.3 million, net purchases of investments of $8.7 million and acquisition payments of $8.2 million.

Financing Activities

During the six months ended June 30, 2024, our net cash used in financing activities of $6.5 million primarily consisted of net payments on our Term A Loan (as defined below).

Liquidity

On February 11, 2022, we issued $400.0 million of 5.375% unsecured senior notes due 2030 (the “2030 Notes”). We used the net proceeds from the issuance of the 2030 Notes, together with $100.0 million drawn under our Revolving Credit Line (as defined below), $250.0 million of Term A Loan and approximately $308.0 million of cash on hand, to redeem (the “Redemption”) the 2027 Notes, which had an outstanding principal balance of $1.0 billion, and to pay costs, fees and expenses associated with the Redemption and the Credit Agreement Amendment (as defined below).

Also in connection with the Redemption, we amended and restated the Credit Agreement (the "Credit Agreement"), and such amendment and restatement (the “Credit Agreement Amendment”), concurrently with the issuance of the 2030 Notes. The Credit Agreement, as amended by the Credit Agreement Amendment (the “Amended Credit Agreement”), among other things, (i) refinanced the prior unsecured revolving credit facility with a $450.0 million unsecured revolving credit facility, including a $37.5 million sub-facility for the issuance of letters of credit (the “Revolving Credit Line”), and a new $250.0 million term A loan facility (“Term A Loan”) and (ii) removed JPMorgan Chase Bank, N.A., as the administrative agent under the Credit Agreement and appointed Bank of America, N.A. as the administrative agent for the lenders under the Amended Credit Agreement.

The Amended Credit Agreement matures on February 11, 2027 and is guaranteed on an unsecured basis by substantially all of our subsidiaries and affiliated professional contractors. At our option, borrowings under the Amended Credit Agreement bear interest at (i) the Alternate Base Rate (defined as the highest of (a) the prime rate as announced by Bank of America, N.A., (b) the Federal Funds Rate plus 0.50% and (c) Term Secured Overnight Financing Rate ("SOFR") for an interest period of one month plus 1.00% with a 1.00% floor) plus an applicable margin rate of 0.50% for the first two fiscal quarters after the date of the Credit Agreement Amendment, and thereafter at an applicable margin rate ranging from 0.125% to 0.750% based on our consolidated net leverage ratio or (ii) Term SOFR rate (calculated as the Secured Overnight Financing Rate published on the applicable Reuters screen page plus a spread adjustment of 0.10%, 0.15% or 0.25% depending on if we select a one-month, three-month or six-month interest period, respectively, for the applicable loan with a 0% floor), plus an applicable margin rate of 1.50% for the first two full fiscal quarters after the date of the Credit Agreement Amendment, and thereafter at an applicable margin rate ranging from 1.125% to 1.750% based on our consolidated net leverage ratio. The Amended Credit Agreement also provides for other customary fees and charges, including an unused commitment fee with respect to the Revolving Credit Line ranging from 0.150% to 0.200% of the unused lending commitments under the Revolving Credit Line, based on our consolidated net leverage ratio.

The Amended Credit Agreement contains customary covenants and restrictions, including covenants that require us to maintain a minimum interest coverage ratio, a maximum consolidated total consolidated net leverage ratio and to comply with laws, and restrictions on the ability to pay dividends, incur indebtedness or liens and make certain other distributions subject to baskets and exceptions, in each case, as specified therein. Failure to comply with these covenants would constitute an event of default under the Amended Credit Agreement, notwithstanding the ability of the company to meet its debt service obligations. The Amended Credit Agreement includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Amended Credit Agreement. In addition, we may increase the principal amount of the Revolving Credit Line or incur additional term loans under the Amended Credit Agreement in an aggregate principal amount such that on a pro forma basis after giving effect to such increase or additional term loans, we are in compliance with the financial covenants, subject to the satisfaction of specified conditions and additional caps in the event that the Amended Credit Agreement is secured.

At June 30, 2024, we had an outstanding principal balance on the Amended Credit Agreement of $221.9 million, composed of the Term A Loan. There was no balance outstanding under the Revolving Credit Line. We had $450.0 million available on our Amended Credit Agreement at June 30, 2024.

At June 30, 2024, we had an outstanding principal balance of $400.0 million on the 2030 Notes. Our obligations under the 2030 Notes are guaranteed on an unsecured senior basis by the same subsidiaries and affiliated professional contractors that guarantee our Amended Credit Agreement. Interest on the 2030 Notes accrues at the rate of 5.375% per annum, or $21.5 million, and is payable semi-annually in arrears on February 15 and August 15, beginning on August 15, 2022.

The indenture under which the 2030 Notes are issued, among other things, limits our ability to (1) incur liens and (2) enter into sale and lease-back transactions, and also limits our ability to merge or dispose of all or substantially all of our assets, in all cases, subject to a number of customary exceptions. Although we are not required to make mandatory redemption or sinking fund payments with respect to the 2030 Notes, upon the occurrence of a change in control, we may be required to repurchase the 2030 Notes at a purchase price equal to 101% of the aggregate principal amount of the 2030 Notes repurchased plus accrued and unpaid interest.

At June 30, 2024, we believe we were in compliance, in all material respects, with the financial covenants and other restrictions applicable to us under the Amended Credit Agreement and the 2030 Notes. We believe we will be in compliance with these covenants throughout 2024.

We maintain professional liability insurance policies with third-party insurers, subject to self-insured retention, exclusions and other restrictions. We self-insure our liabilities to pay self-insured retention amounts under our professional liability insurance coverage through a wholly owned captive insurance subsidiary. We record liabilities for self-insured amounts and claims incurred but not reported based on an actuarial valuation using historical loss information, claim emergence patterns and various actuarial assumptions. Our total liability related to professional liability risks at June 30, 2024 was $283.7 million, of which $29.0 million is classified as a current liability within accounts payable and accrued expenses in the Consolidated Balance Sheet. In addition, there is a corresponding insurance receivable of $29.4 million recorded as a component of other assets for certain professional liability claims that are covered by insurance policies.

We anticipate that funds generated from operations, together with our current cash on hand and funds available under our Amended Credit Agreement, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and capital expenditures, fund expenses related to our transformational and restructuring activities, fund our share repurchase programs and meet our contractual obligations for at least the next 12 months from the date of issuance of this Quarterly Report on Form 10-Q.

Caution Concerning Forward-Looking Statements

Certain information included or incorporated by reference in this Quarterly Report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, and all statements, other than statements of historical facts, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements in this Quarterly Report are made as of the date hereof, and we undertake no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the 2023 Form 10-K, including the section entitled “Risk Factors.”

We are subject to market risk primarily from exposure to changes in interest rates based on our financing, investing and cash management activities. We intend to manage interest rate risk through the use of a combination of fixed rate and variable rate debt. We borrow under our Amended Credit Agreement at various interest rate options based on the Alternate Base Rate or SOFR rate depending on certain financial ratios. At June 30, 2024, we had an outstanding principal balance of $221.9 million on our Amended Credit Agreement under our Term A Loan. Considering the total outstanding balance, a 1% change in interest rates would result in an impact to income before taxes of approximately $2.2 million per year.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2024.

Changes in Internal Controls Over Financial Reporting

No changes in our internal control over financial reporting occurred during the three months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.