MEDNAX, Inc. (formerly Pediatrix Medical Group) — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. MEDNAX provides neonatal, maternal-fetal, pediatric subspecialty, anesthesia and pain-management physician services. At year-end, its network included 1,839 affiliated physicians in 34 states and Puerto Rico.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net patient service revenue | $1,588.2 million | $1,401.6 million | +13.3% |
| Income from operations | $355.4 million | $312.9 million | +13.6% |
| Operating margin | 22.4% | 22.3% | +0.1 percentage point |
| Net income | $218.0 million | $202.7 million | +7.6% |
| Diluted EPS | $4.47 | $4.26 | +4.9% |
| Cash from operating activities | $271.0 million | $240.6 million | +$30.5 million |
Revenue growth included $140.1 million from acquisitions. Same-unit revenue rose 3.5%, reflecting a 2.5% contribution from reimbursement-related factors and 1.0% from higher service volumes. Acquisitions accounted for about 75% of the total revenue increase. Practice salaries and benefits rose 13.5%, broadly in line with revenue growth; general and administrative expense increased 10.4% and declined to 10.7% of revenue from 11.0%.
The 2010 comparison benefits from a $10.9 million tax-provision reduction from the resolution of tax matters. Excluding that item, 2011 net income increased 13.7% versus adjusted 2010 net income of $191.8 million; adjusted 2010 diluted EPS was $4.03 versus $4.47 in 2011. The effective tax rate was 38.3% in 2011 versus 34.9% reported in 2010 (38.4% excluding the tax benefit).
Fourth quarter: Revenue was $404.9 million versus $368.5 million in Q4 2010; operating income was $91.5 million versus $85.9 million; net income was $58.4 million versus $53.8 million; and diluted EPS was $1.19 versus $1.12.
Cash flow, debt and liquidity
- Operating cash flow was $271.0 million. Investing cash outflow was $190.6 million, including $154.9 million of acquisition and contingent-consideration payments and $31.3 million of capital expenditures. Financing cash outflow was $88.1 million, primarily reflecting net credit-line repayments.
- Year-end cash was $18.6 million; working capital was $83.0 million, up from $74.9 million. Current assets were $337.3 million and current liabilities $254.3 million.
- Credit-line borrowings were $29.0 million, with $465.5 million available after letters of credit. The amended unsecured revolving facility has $500 million of capacity and matures in October 2016. Capital-lease obligations were $0.5 million.
- Management said operating cash, cash on hand and available credit were expected to fund working capital, planned acquisitions, capital expenditures and obligations for at least 12 months. The company reported compliance with credit covenants at year-end.
- Days sales outstanding rose to 52.3 from 45.3. Management attributed the increase to acquired-practice billing integration, acquisition-related revenue and a state payment-system change. Gross accounts receivable was $806.4 million; management estimated that a 0.5%–1.5% change in collection assumptions could affect revenue by $4.0–$12.1 million.
Changes, outlook and risks
- MEDNAX acquired 10 physician practices in 2011 for $159.5 million in total consideration, including $13.0 million of contingent consideration. Anesthesia grew to 21% of revenue from 16% in 2010; the company continued integrating acquired practices.
- Management planned approximately $300 million of acquisitions in 2012—about one-third in neonatal, maternal-fetal, pediatric cardiology and other pediatric specialties, and the remainder in anesthesia. No consolidated revenue or earnings guidance is provided in the supplied filing text.
- Major exposures include government reimbursement and Medicaid funding changes, shifts from commercial to lower-paying government coverage, healthcare reform and extensive billing, fraud-and-abuse, privacy and corporate-practice-of-medicine regulation. The filing noted that, absent further congressional action, Medicare physician rates were scheduled for an approximately 27% reduction on January 1, 2013.
- Other risks include declining U.S. birth rates, physician recruitment and retention, hospital contract termination, acquisition execution, concentration in five states (58% of revenue; Texas alone 21%), and professional-liability reserve uncertainty. Professional-liability liabilities totaled $122.8 million, including $79.5 million for incurred-but-not-reported claims.
- The company expects government audits and investigations in the ordinary course and had not accrued for future matters whose potential liability could not be reasonably estimated. It disclosed prior cooperation with a U.S. Attorney’s office concerning historical stock-option practices; the filing does not report a new resolution. Management considered pending legal proceedings not likely to have a material adverse effect, but outcomes and insurance adequacy remain uncertain.
- Goodwill was $1.75 billion, up with acquisitions; annual impairment testing found no impairment in 2011. Management highlighted ordinary quarterly seasonality, including first-quarter physician incentive payments and higher early-year payroll taxes.
Investor verification priorities
- Check whether acquisition contributions, integration progress and the planned 2012 acquisition spending translated into sustainable organic growth and returns.
- Track DSO, collections and receivables reserves, particularly the effects of acquired-practice integration and the state payment-system change.
- Monitor payor mix, Medicaid reimbursement and state funding, and subsequent legislative or regulatory action affecting Medicare physician rates.
- Review professional-liability reserve development, contingent acquisition payments and any updates to government inquiries or litigation.
- Confirm borrowing, covenant headroom and cash needs as acquisition spending proceeds; also assess the concentration of revenue in Texas and other major states.