Pediatrix Medical Group, Inc. (MEDNAX, Inc.) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. The filing identifies the registrant as MEDNAX, Inc. The company provides physician services in neonatal, maternal-fetal, pediatric subspecialty, and anesthesia care.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net patient service revenue | $382.3 million | $332.9 million; up 14.8% |
| Income from operations | $75.7 million | $63.6 million; up 19.1% |
| Operating margin | 19.8% | 19.1% |
| Net income | $45.5 million | $38.3 million; up 18.8% |
| Diluted earnings per share | $0.94 | $0.81 |
| Cash from operating activities | $(14.5) million | $(41.6) million |
| Cash and cash equivalents | $15.0 million | $26.3 million at Dec. 31, 2010 |
| Working capital | $142.5 million | $74.9 million at Dec. 31, 2010 |
| Line of credit borrowings | $176.5 million | $146.5 million at Dec. 31, 2010 |
Revenue growth included $37.4 million from acquisitions completed after year-end 2009. Same-unit revenue grew 3.7%: reimbursement-related factors contributed 2.2% and higher service volume 1.5%. General and administrative expense declined to 10.9% of revenue from 11.4%. The effective tax rate was 39.5% in both periods. Cash used in investing was $33.1 million, including $20.3 million of capital expenditures and $10.1 million in acquisition and contingent purchase payments. Financing activities provided $36.3 million, mainly from $30.0 million of net line-of-credit borrowings.
Material changes and management commentary
- Q1 2011 included three physician-practice acquisitions; Q1 2010 included four. The 2011 acquisitions covered maternal-fetal medicine, pediatric cardiology, and another pediatric subspecialty. Management expects to develop acquired practices through improved contracting and collections, growth initiatives, and operating efficiencies.
- Management attributed improved same-unit reimbursement partly to better commercial-payor contracting and a favorable shift from government-sponsored to commercial coverage. It cautioned that weak economic conditions and state budget pressures could increase government-payor exposure or delay Medicaid reimbursement; government rates are generally lower than commercial rates.
- Operating cash flow remained negative, though it improved year over year. The company attributed the improvement mainly to operating results and less cash use from accrued expenses; annual performance-based incentive compensation payments are generally made in Q1.
- The company purchased an office building for approximately $18.5 million. It reported DSO of 44.3 days, down from 45.3 days at year-end.
Outlook, risks, and contingencies
No specific revenue or earnings guidance was provided. Management expected cash generated from operations, cash on hand, and available credit to cover working capital, anticipated acquisitions and capital expenditures, and contractual obligations for at least the next 12 months. The $350 million revolving facility matures September 3, 2013; $168.2 million was available at March 31 after outstanding borrowings and letters of credit. Management stated it was in material compliance with covenants and expected compliance through 2011. A 1% interest-rate change would affect annual pretax income by approximately $1.8 million.
Key risks include reimbursement and Medicaid funding changes, healthcare reform and its uncertain implementation, government audits and investigations, medical-malpractice claims, and the adequacy of insurance for professional-liability exposure. The company reported $116.1 million of professional-liability exposure, including $12.2 million classified as current, and self-insures a portion through a captive subsidiary. It was in the final year of a five-year Corporate Integrity Agreement and stated it was compliant as of March 31, 2011. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of subsequent revenue growth comes from same-unit operations versus acquisitions, and whether the favorable commercial-payor mix persists.
- Whether operating cash flow turns positive after Q1 incentive-compensation payments and how collections, receivables, and DSO develop.
- Acquisition integration results, contingent consideration, and the returns on the office building and other capital spending.
- Borrowing levels, credit-facility covenant compliance, interest-rate exposure, and available liquidity.
- Developments in reimbursement policy, the Corporate Integrity Agreement, government inquiries, and professional-liability claims and insurance coverage.