MEDNAX, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The filing identifies the registrant as MEDNAX, Inc.; the request metadata names Pediatrix Medical Group, Inc.
Business context and results
MEDNAX provided physician services including neonatology, anesthesia, maternal-fetal medicine and pediatric subspecialties, as well as revenue-cycle management and consulting services. Q1 results include three physician-practice acquisitions from their respective acquisition dates.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $639.4 million | $566.3 million | +12.9% |
| Income from operations | $114.8 million | $104.1 million | +10.3% |
| Operating margin | 18.0% | 18.4% | -42 basis points |
| Net income attributable to MEDNAX | $68.7 million | $63.7 million | +7.9% |
| Diluted EPS | $0.72 | $0.63 | Up from prior year |
| Net cash used in operations | $53.7 million | $49.8 million | Cash use increased |
Revenue, margins and material changes
- Acquisitions completed after December 31, 2013 contributed $62.9 million of the $73.1 million revenue increase. Same-unit revenue rose 1.8%; excluding the $8.0 million year-over-year reduction in Medicaid-to-Medicare parity revenue, same-unit revenue rose 3.3%.
- Same-unit patient-service volume added $12.3 million, mainly from neonatology, other pediatric services, anesthesiology and maternal-fetal medicine; reimbursement-related factors reduced revenue by $2.1 million.
- Practice salaries and benefits rose 12.8% to $419.6 million, and general and administrative expenses rose 16.3% to $67.9 million. G&A was 10.6% of revenue versus 10.3%, partly reflecting acquisition mix. Acquisition costs and mix contributed to operating-margin compression.
- Interest expense increased to $3.3 million from $1.4 million, principally because of higher credit-facility borrowings. Net non-operating expense was $2.3 million versus net non-operating income of $0.3 million in Q1 2014. The effective tax rate was 39.0% in both periods.
- Share repurchases reduced weighted-average shares to 95.3 million from 100.7 million, supporting per-share growth. The company repurchased approximately 2.7 million shares for $233.6 million during the quarter.
Cash flow, liquidity and debt
- Cash and cash equivalents were $50.2 million at March 31, 2015, versus $47.9 million at year-end; working capital was $210.5 million, up from $50.8 million. Operating cash use reflected, in particular, annual incentive-compensation payments.
- Investing cash use was $43.6 million, including $37.7 million of acquisition payments and $5.4 million of capital expenditures. Financing provided $99.5 million, including $328.0 million of net credit-facility borrowings and offset by $233.6 million of repurchases.
- Credit-facility principal outstanding was $896.0 million: $698.5 million on the revolving line and a $197.5 million term loan. The company reported $601.3 million of remaining availability and said it was in material compliance with covenants. The facility matures in October 2019.
- Management expected operating cash generation, cash on hand and facility availability to fund working capital, anticipated acquisitions, capital expenditures, repurchases and obligations for at least the next 12 months. A 1 percentage-point interest-rate change would affect annual pretax income by approximately $9.0 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management cited acquisition opportunities and potential improvements in acquired practices through contracting, collections, growth initiatives and cost savings.
- Medicaid-to-Medicare parity revenue fell to $6.0 million from $14.0 million after federal enhanced-payment funding expired for services after December 31, 2014. Medicare payment legislation was signed into law in April 2015, providing a 0.5% increase beginning July 2015 and scheduled increases thereafter.
- Risks include reimbursement and healthcare-policy changes, patient bad debt, government audits and investigations, malpractice claims, and the adequacy of insurance. The company self-insures a portion of professional-liability exposure; reported total professional-liability liabilities were $174.0 million.
- Government audits and investigations could have a material adverse effect; no accrual was recorded for these matters because potential liability could not be reasonably estimated. Management considered pending legal matters not expected to have a material adverse effect, while noting outcomes are uncertain. The filing reported no material change to previously disclosed risk factors.
- The $600 million October 2014 repurchase authorization was effectively completed in Q1, subject to final settlement of accelerated share repurchase agreements. The March 2015 agreement involved a $200 million payment, funded by credit-facility borrowings; final share settlement was still pending.
Important facts for investors to verify
- How acquisition contributions, integration costs and acquired-practice margins affect future organic growth and profitability.
- Whether same-unit revenue and reimbursement trends improve as parity revenue declines, and the resulting effect of healthcare-policy changes.
- Credit-facility borrowings, covenant headroom, interest-rate exposure and the funding of future acquisitions and repurchases.
- Cash conversion and accounts-receivable collections: days sales outstanding rose to 50.8 days from 49.8 at year-end.
- Final settlement of the accelerated repurchase agreements, and developments in audits, investigations and professional-liability claims.