Business context and reporting period
MEDNAX, Inc. (the registrant named in the filing; request metadata identifies Pediatrix Medical Group, Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2016. The company provides physician services, including neonatology, anesthesiology, maternal-fetal medicine and pediatric subspecialties, as well as teleradiology and related services.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net revenue | $752.6 million | $639.4 million; up 17.7% |
| Income from operations | $124.2 million | $114.8 million; operating margin 16.5% vs. 18.0% |
| Net income attributable to MEDNAX | $67.9 million | $68.7 million; down 1.2% |
| Diluted EPS | $0.73 | $0.72 |
| Adjusted EPS (non-GAAP) | $0.87 | $0.83; up 4.8% |
| EBITDA (non-GAAP) | $143.9 million | $128.6 million; up 12.0% |
| Operating cash flow | $(33.0) million | $(53.7) million |
| Cash and cash equivalents | $55.5 million | $51.6 million at December 31, 2015 |
| Working capital | $238.7 million | $99.0 million at December 31, 2015 |
Net cash used in investing activities was $76.1 million, including $59.5 million of acquisition payments and $10.4 million of capital expenditures. Financing activities provided $113.1 million, including $168.0 million of net borrowings and $58.6 million used for share repurchases. At March 31, 2016, the company reported $514.0 million drawn on its revolver, a $187.5 million term loan and $750.0 million of 5.25% senior notes due 2023. Revolver availability was $1.2 billion. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue increased $113.2 million; $96.5 million of the increase came from acquisitions completed after December 31, 2014. Same-unit revenue rose 2.6%, reflecting 1.5% volume growth and 1.1% reimbursement-related growth.
- Same-unit revenue growth excluding the $6.0 million year-over-year reduction in Medicaid parity revenue was 3.6%. The company recognized no parity revenue in Q1 2016, versus $6.0 million in Q1 2015.
- Operating expenses rose with company growth and acquisitions. General and administrative expense increased 32.4% to $90.0 million, and G&A as a share of revenue rose to 12.0% from 10.6%. Management attributed the increase in G&A ratio primarily to acquisition mix.
- Operating margin fell 145 basis points, primarily due to differing margins among acquired practices. Higher interest expense, related to the 2023 notes and increased credit-agreement borrowings, contributed to lower net income despite revenue and operating-income growth.
- Accounts receivable increased to $465.8 million from $444.7 million at year-end; days sales outstanding rose to 56.3 from 55.2 days. The company cited acquisitions, existing-unit receivables and short-term coding staff shortages that increased unbilled charges.
- The company acquired four physician practices for total consideration of $56.8 million, including $3.5 million of contingent consideration, and repurchased 0.9 million shares for $58.6 million.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said operating cash generation, cash on hand and credit-facility availability are expected to fund working capital, anticipated acquisitions and capital expenditures, repurchases and contractual obligations for at least the next 12 months.
- Management expects to improve acquired practices through contracting, collections, growth initiatives and operating efficiencies; results include acquired practices only from their respective acquisition dates.
- Risks include shifts toward lower-reimbursement government healthcare programs, patient inability to pay, uncertainty around healthcare reform and reimbursement rules, and possible impacts from future Medicare payment and quality-program changes. Management said the 2% Medicare sequestration reduction was not expected to have a material adverse effect.
- Government audits and investigations may occur in the ordinary course; no accrual was recorded for potential future matters because the facts and potential liabilities could not be reasonably estimated. The company also faces malpractice and other legal claims, indemnification obligations, and exposure above insurance limits; it self-insures part of professional liability risk. Professional-liability obligations totaled $205.6 million, including $27.5 million current.
- A 1% change in interest rates on the $701.5 million outstanding under the credit agreement would affect annual pretax income by approximately $7.0 million. The company stated it expected to remain in covenant compliance through 2016.
- New accounting standards on share-based payments, leases and revenue recognition were under evaluation; their adoption dates were 2017, 2019 and 2018, respectively. Recently adopted business-combination and consolidation guidance had no reported impact.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for MEDNAX, Inc., although the request metadata names Pediatrix Medical Group, Inc.
- Assess whether acquisition-driven revenue growth can translate into sustained same-unit growth and margin recovery, given the lower reported operating margin.
- Monitor collections, DSO and unbilled charges, alongside the timing and seasonality of incentive-compensation payments that affected operating cash flow.
- Review debt, interest-rate exposure, covenant headroom and acquisition funding needs, including the substantial 2023 notes and revolving borrowings.
- Track reimbursement mix, the loss of parity revenue, patient bad-debt exposure, and the development of government audits or professional-liability claims.