Business context and reporting period
MEDNAX, Inc. (the registrant named in the filing; the request metadata names Pediatrix Medical Group, Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2013. MEDNAX provides physician services in neonatal, maternal-fetal, pediatric subspecialty, and anesthesia care. Unless otherwise noted, financial amounts below are USD millions.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net patient service revenue | $502.7 | $422.6; up 19.0% |
| Income from operations | $91.6 | $79.4; up 15.3% |
| Operating margin | 18.2% | 18.8% |
| Net income | $55.4 | $48.4; up 14.5% |
| Diluted earnings per share | $1.10 | $0.98 |
| Net cash used in operating activities | $(18.4) | $(32.1) |
| Cash and cash equivalents at quarter-end | $34.4 | $21.3 at December 31, 2012 |
| Line of credit outstanding | $184.0 | $144.0 at December 31, 2012 |
Net interest expense was approximately $0.8 million, versus $0.1 million a year earlier; the income statement reports interest expense of $1.2 million and investment income of $0.4 million. The effective tax rate was 39.0% in both periods. Working capital was $203.7 million, up from $90.7 million at year-end. The $800 million revolving credit facility had $610.7 million available, after outstanding borrowings and letters of credit. Management reported compliance with its covenants and expected to remain compliant through 2013.
Material changes versus Q1 2012
- Of the $80.1 million revenue increase, $70.8 million came from acquisitions completed after December 31, 2011. Same-unit revenue increased 2.2%; adjusted for the extra leap-year day in 2012, it grew 3.2%.
- Same-unit revenue growth reflected $8.6 million from net reimbursement-related factors, mainly improved managed-care contracting partly offset by a higher share of government-sponsored patients, and approximately $0.7 million from volume. Adjusted same-unit volume growth was 1.2%.
- Practice salaries and benefits rose 20.9% to $329.2 million, primarily from acquisition-related and existing-unit staffing growth. General and administrative expense increased 13.8% to $53.3 million, but declined to 10.6% of revenue from 11.1%.
- Operating margin declined 57 basis points, attributed to higher operating expenses and the practice mix of acquisitions. Depreciation and amortization rose to $9.1 million, principally due to acquired intangible assets.
- Operating cash use improved year over year but remained negative. Accounts receivable increased $15.8 million during the quarter, partly reflecting recent acquisitions; days sales outstanding improved to 47.2 from 48.4 at year-end.
Outlook, risks, contingencies and unusual items
- No numerical earnings or revenue guidance is provided. Management said cash from operations, cash on hand, and credit availability should fund working capital, anticipated acquisitions, capital expenditures, and contractual obligations for at least 12 months.
- MEDNAX noted that the proportion of patients covered by government programs increased. State Medicaid budget pressures, reimbursement levels, and implementation of the Affordable Care Act create uncertainty; management could not predict the ACA’s ultimate impact. A 2% Medicare reimbursement reduction took effect April 1, 2013; management did not expect it to have a material adverse effect.
- Professional liability exposure is partly self-insured through a captive subsidiary. The recorded professional liability obligation was $144.6 million, including $17.9 million current. Insurance may not cover all claims. The company also cited potential government audits and investigations; related liabilities were not accrued because they could not be reasonably estimated. Management believed pending legal matters were not expected to materially affect results, but outcomes are uncertain.
- Q1 operating cash flow and current liabilities were affected by annual performance-based incentive payments, principally to physicians. Accrued salaries and bonuses fell by $106.8 million from year-end, mainly due to these payments.
- Borrowings are subject to variable interest rates. The filing estimates that a 1 percentage-point rate change would affect annual pretax income by approximately $1.8 million based on quarter-end debt.
Important facts for investors to verify
- Confirm the registrant and company identity: the supplied filing is for MEDNAX, Inc., while the request metadata specifies Pediatrix Medical Group, Inc.
- Assess how much future growth depends on acquisitions versus same-unit revenue, and whether the reported same-unit growth persists.
- Monitor government-payor mix, reimbursement changes, and the effects of Medicare and Medicaid policy.
- Review cash conversion, receivables and collections, incentive-payment seasonality, and the increase in revolving-credit borrowings.
- Track professional liability reserves, self-insurance exposure, and developments in government audits or legal proceedings.