MEDNAX, Inc. (Pediatrix Medical Group) — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 14, 2018. The registrant in the filing is MEDNAX, Inc., the successor to Pediatrix Medical Group, Inc. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context
MEDNAX provides physician services in neonatology, anesthesia, maternal-fetal medicine, radiology and teleradiology, pediatric cardiology and other pediatric specialties. It also provides revenue-cycle management and consulting services. At year-end, its network included more than 4,075 affiliated physicians. It completed 10 physician-practice acquisitions in 2017, with total acquisition-date consideration of approximately $554 million.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenue | $3,458.3 million | $3,183.2 million |
| Income from operations; operating margin | $480.1 million; 13.9% | $571.7 million; 18.0% |
| Net income attributable to MEDNAX | $320.4 million | $324.9 million |
| Diluted EPS | $3.45 | $3.49 |
| EBITDA (company-defined, non-GAAP) | $587.9 million | $666.5 million |
| Adjusted EPS (company-defined, non-GAAP) | $3.34 | $3.99 |
| Cash from operating activities | $511.4 million | $443.8 million |
| Cash used in investing activities | $576.6 million | $821.2 million |
| Cash from financing activities | $89.7 million | $381.6 million |
- Revenue rose 8.6%; acquisitions contributed $256.0 million of the increase. Same-unit revenue grew 0.7%, from reimbursement factors and patient volumes.
- Practice salaries and benefits rose 15.1% to $2,337.7 million. As a share of revenue, this expense increased to 67.6% from 63.8%; total operating expenses rose to 86.1% of revenue from 82.0%.
- Management attributed weaker operating income and margins mainly to higher operating costs and modest same-unit growth. Clinician compensation was increasing faster than in prior periods; malpractice costs also rose amid unfavorable claims experience.
- The reported 2017 effective tax rate was 21.9%, including a $70.0 million benefit from the Tax Cuts and Jobs Act’s reduction of the corporate tax rate. Excluding that benefit, the company reported an effective rate of 39.0%. FY2016 included a separate $10.6 million tax benefit; excluding it, the rate was 38.9%.
- Year-end cash and cash equivalents were $60.2 million, working capital was $95.8 million, and total assets were $5,867.3 million. The filing also reported $20.0 million of restricted cash.
- Principal debt was $1,860.5 million: $1,110.5 million drawn on the revolving credit facility and $750.0 million of 5.25% senior notes due 2023. The facility had $889.3 million of availability. Of the drawn credit-facility balance, $1.1 billion was exposed to variable rates; management estimated a 1 percentage-point rate change would affect annual pretax income by $11.1 million.
- Operating cash flow increased, partly due to higher income taxes payable and lower growth in accounts receivable; it was partly offset by lower earnings. Acquisition payments were $531.7 million and capital expenditures were $49.3 million. The company repurchased $70.2 million of stock and paid no cash dividends.
Changes, outlook and risks
- Revenue growth slowed on a same-unit basis to 0.7% from 1.8% in 2016. Government-program payors represented 25% of patient-service net revenue, up from 23%; contracted managed care remained 70%.
- Management said operating cash, cash on hand and available credit were expected to cover working capital, anticipated acquisitions and capital expenditures, share repurchases, and contractual obligations for at least the next 12 months. This is a liquidity assessment, not earnings guidance; the filing provides no specific FY2018 revenue or earnings forecast.
- Growth strategy centers on acquisitions, expanding services with existing hospital partners, and developing radiology, teleradiology and complementary service businesses. Management expected ongoing pressure from faster clinician-compensation growth.
- Key exposures include reimbursement reductions or delays, shifts toward lower-paying government programs, ACA and Medicaid changes, hospital contract termination or reduced administrative fees, clinician recruitment and retention, acquisition integration, billing audits and regulatory compliance, cybersecurity and privacy, and medical-malpractice claims. Texas accounted for approximately 19% of revenue; the five largest states together accounted for 51%.
- Professional-liability reserves were $250.2 million, including $138.5 million for incurred-but-not-reported claims; the company self-insures a significant portion through its captive insurer. Government audits and investigations are expected in the ordinary course, but potential outcomes were not quantified in the filing.
- Quarterly results are seasonal and may fluctuate with service days, payroll taxes, incentive compensation, acquisitions and patient volumes. The fourth quarter included the tax-law benefit; FY2017 Q4 net income attributable to MEDNAX was $136.1 million, versus $78.1 million in FY2016 Q4.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Four radiology practices acquired in 2017 were excluded from the year-end internal-control assessment and audit, representing about 2% of assets and 3% of revenue.
Important facts for investors to verify
- How sustainable acquired growth and the 0.7% same-unit revenue increase are, and whether acquisition returns justify the $531.7 million cash outlay.
- Whether clinician compensation and malpractice costs continue to outpace revenue growth, and how that affects operating margins and earnings.
- Underlying earnings excluding the $70.0 million tax benefit, and the comparability of company-defined EBITDA and Adjusted EPS with GAAP results.
- Debt repayment capacity, variable-rate exposure, credit-agreement covenant headroom and refinancing needs.
- Accounts-receivable estimates: year-end gross receivables were $1.79 billion and DSO was 50.9 days; management estimated a 0.5%–1.5% collection-rate change could affect revenue by $9.0–$26.9 million.
- Developments in government reimbursement, hospital contracts, regulatory investigations and professional-liability reserves, including whether acquired practices are fully integrated into internal controls.