MEDNAX, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing identifies the registrant as MEDNAX, Inc. (the company name in the request is Pediatrix Medical Group, Inc.). Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted.
Business context and results
MEDNAX provides physician services in neonatal, maternal-fetal, pediatric subspecialty and anesthesia care. Its consolidated results include affiliated professional contractors. During the first nine months of 2011, it acquired seven physician practices; acquisition contributions make comparisons with 2010 less directly comparable.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net patient service revenue | $407.7m | $351.1m | $1,183.4m | $1,033.1m |
| Income from operations | $95.0m | $81.4m | $263.9m | $227.0m |
| Operating margin | 23.3% | 23.2% | 22.3% | 22.0% |
| Net income | $58.2m | $61.3m | $159.6m | $148.9m |
| Diluted EPS | $1.19 | $1.29 | $3.28 | $3.14 |
Q3 revenue rose 16.1%; acquisitions contributed $39.2m of the increase, while same-unit revenue grew 5.0% (3.1% from reimbursement-related factors and 1.9% from higher service volume). Nine-month revenue rose 14.6%; acquisitions contributed $112.7m, and same-unit revenue grew 3.7%. Management attributed same-unit reimbursement growth primarily to improved commercial contracting and modest price increases, partly offset by a higher share of government-sponsored patients.
Practice salaries and benefits were $246.7m in Q3 and $725.9m year to date, increasing 16.4% and 14.5%, respectively, mainly with staffing and acquisition-related growth. General and administrative costs grew more slowly than revenue; they were 10.6% of revenue in Q3 versus 10.7%, and 10.8% year to date versus 11.1%. Nine-month operating margin improved 32 basis points, which management attributed primarily to acquisition effects, partly offset by higher operating expenses.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $180.9m, versus $155.5m in 2010. Management cited improved operating results and changes in accrued expenses, partly offset by higher receivables and tax payments.
- Investing cash outflow was $106.0m, including $79.9m of acquisition and contingent purchase payments and $28.6m of capital expenditure. The latter included an $18.5m office building.
- Financing cash outflow was $65.4m, including $96.5m in net line-of-credit repayments, partly offset by $28.3m of stock issuance proceeds and $6.9m of excess tax benefits.
- Cash and cash equivalents were $35.7m at September 30, 2011; short- and long-term investments totaled $42.2m. Working capital was $118.9m, up from $74.9m at year-end 2010. Accounts receivable were $207.1m, and days sales outstanding rose to 46.7 from 45.3 at year-end, primarily due to acquisitions.
- Line-of-credit borrowings were $50.0m at quarter-end, with $5.3m of letters of credit and $294.7m available under the then-current facility. On October 21, 2011, the company amended and restated its credit agreement, increasing capacity from $350m to $500m and extending maturity to October 21, 2016; capacity may rise to $570m subject to conditions. The agreement includes leverage and fixed-charge coverage covenants and restrictions on distributions.
- Professional liability exposure totaled $123.4m, including $11.7m classified as current. The company self-insures a portion through a captive subsidiary.
Material changes, outlook and risks
- Q3 net income fell 5.1% year over year despite higher revenue and operating income, principally because Q3 2010 included a $10.9m tax benefit from resolving tax matters. Excluding that benefit, management reported Q3 2011 net income growth of 15.7% and diluted EPS of $1.19 versus $1.06. For the first nine months, reported net income increased 7.2%; excluding the 2010 tax benefit, management reported growth of 15.7%.
- The effective tax rate was 38.3% in Q3 2011 and 39.0% for the first nine months, compared with 24.7% and 34.1% in 2010, respectively; 2010 rates benefited from the tax resolution.
- Acquisitions: seven physician practices were acquired for total consideration of $81.0m, including $72.3m cash and $8.7m contingent consideration. Management expects to improve acquired practices through contracting, collections, growth initiatives and operating efficiencies. The purchase-price allocation for one practice was not yet final; management expected no material additional adjustment.
- No specific financial guidance was provided. Management said operating cash, cash on hand and available credit were expected to fund working capital, anticipated acquisitions, capital expenditures and contractual obligations for at least the next 12 months. It also expected covenant compliance through 2011.
- Management cited risks from economic weakness and shifts toward lower-reimbursing government payors, state Medicaid budget constraints, healthcare reform uncertainty, and the possibility of reduced or delayed reimbursements. Malpractice claims, inadequate insurance coverage, government audits or investigations, and adverse legal outcomes could materially affect results. The five-year Corporate Integrity Agreement expired September 20, 2011; the company intended to continue its compliance plan and said a final report would be filed with the OIG.
- The company reported no material change to previously disclosed risk factors. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How much of revenue and margin growth is sustainable same-unit performance versus acquisitions, and whether acquired practices deliver expected efficiencies.
- Whether receivables and DSO stabilize, and whether collections keep pace with revenue and acquisition growth.
- The effect of payer mix, Medicaid funding and commercial reimbursement on revenue and margins.
- Compliance with the amended credit agreement’s leverage and fixed-charge coverage covenants, and borrowing costs under its variable-rate terms.
- Whether professional-liability reserves and insurance are adequate, and the status or outcomes of government inquiries, legal matters and the post-CIA compliance report.
- The final purchase-price allocation for the acquired practice and the timing and amount of contingent consideration payments.