MEDNAX, Inc. (now Pediatrix Medical Group) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing was submitted by MEDNAX, Inc. The company provides physician and related services across neonatal, anesthesia, radiology, maternal-fetal and pediatric specialties, plus management and consulting services. Financial amounts below are in millions unless noted.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $915.9 | $842.9 | $1,817.8 | $1,678.5 |
| Operating income | $128.7 | $121.9 | $233.1 | $227.9 |
| Operating margin | 14.1% | 14.5% | 12.8% | 13.6% |
| Net income | $79.4 | $63.7 | $142.8 | $118.4 |
| Diluted EPS | $0.85 | $0.69 | $1.53 | $1.27 |
| EBITDA (non-GAAP) | $157.7 | $148.7 | $291.2 | $281.7 |
| Adjusted diluted EPS (non-GAAP) | $1.07 | $0.85 | $1.96 | $1.60 |
- Q2 revenue rose 8.7%; management attributed $46.7 million of the increase to acquisitions and $26.3 million to same-unit growth. Same-unit growth reflected higher volumes and improved reimbursement, partly offset by a greater share of patients covered by government healthcare programs.
- For the first half, revenue increased 8.3%, including $84.6 million from acquisitions and $54.6 million of same-unit growth. Practice salaries and benefits grew faster than revenue, up 10.6% in Q2 and 10.5% year to date.
- Operating income increased, but operating margins fell 41 basis points in Q2 and 76 basis points for the first half as expenses grew faster than revenue. Higher interest expense also reduced earnings growth. The lower effective tax rate—27.5% versus 39.0%—contributed to higher net income.
- Operating cash flow was $21.6 million for the first half, down from $115.8 million in 2017. The company cited increased receivables and tax payments made in 2018 for 2017 taxes deferred after hurricanes. DSO increased to 52.5 days from 50.9 at year-end 2017.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $38.1 million; restricted cash was $20.0 million. Working capital was $213.7 million, versus $95.8 million at December 31, 2017.
- Outstanding borrowings included $1.15 billion under the $2.0 billion revolving credit facility and $750 million of 5.25% senior notes due 2023. Revolver availability was $850.3 million after letters of credit. The credit facility matures in October 2022; the company reported compliance with applicable covenants.
- First-half investing cash use was $39.0 million, including $26.3 million of capital expenditures and $25.6 million of acquisition payments, partly offset by $22.8 million from a sale of a controlling interest in assets. Financing cash use was $4.8 million, including $52.2 million of stock repurchases, partly offset by $39.0 million of net credit-facility borrowings.
- Management expected operating cash generation, existing cash and credit availability to meet working capital, acquisition, capital expenditure, repurchase and contractual needs for at least the next 12 months.
Material developments, outlook and risks
- The company acquired five physician practices during the first half for total consideration of $24.4 million. It also completed a transaction involving a joint venture in which it retained a 49% economic interest.
- Management targeted annualized improvements by the end of 2019 of $40 million in general and administrative expenses and $80 million in operational improvements; achievement was not assured.
- On August 2, 2018, the board authorized up to $500 million of additional share repurchases, beyond the existing dilution-offset program. Repurchases were expected to begin in the near term.
- A hospital partner’s anesthesia contract ended July 1, 2018. Certain physicians were expected to remain employed through year-end, creating continuing salary and benefit expense despite the contract’s non-renewal.
- Management services results were below prior forecasts due mainly to slower new-customer bookings and higher customer terminations. Goodwill assigned to that reporting unit was $321.6 million and was not impaired at June 30; future underperformance could lead to impairment.
- Risks include shifts toward lower-reimbursement government programs, clinician compensation growth, healthcare policy and reimbursement changes, and professional liability exposure. The company reported $242.9 million of professional liability obligations, partly self-insured; insurance may not cover all claims. Government audits and investigations are possible. A securities class action filed July 10, 2018 concerning statements primarily about the anesthesia business was in its early stages; the company said it intended to defend the suit.
- The company expected the lease-accounting standard effective January 1, 2019 to materially increase reported right-of-use assets and lease liabilities. The CFO announced an intent to retire on July 27, 2018, with a successor search planned.
Key facts for investors to verify
- Whether same-unit growth, new bookings and customer retention support continued revenue growth, and whether clinician cost growth moderates.
- Receivables, DSO and operating cash conversion, including the timing and recurrence of tax and incentive-compensation payments.
- Debt, interest-rate sensitivity and covenant headroom; the filing estimated that a 1% rate change on credit-facility borrowings would affect annual pretax income by about $11 million.
- Progress toward the stated 2019 cost and operational improvement targets, and the performance and impairment assumptions for the management services goodwill.
- The financial and legal implications of the ended anesthesia contract, securities lawsuit, professional liability claims and the newly authorized $500 million repurchase program.