Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, for MEDNAX, Inc. (formerly Pediatrix Medical Group, Inc. following a holding company formation in December 2008). The Company is a large accelerated filer providing neonatal, pediatric, and maternal-fetal physician services. The reporting period includes the results of eight physician group practices acquired during the nine months ended September 30, 2009.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | As of Sep 30, 2009 |
|---|---|---|---|
| Net Patient Service Revenue | $331.3 million | $955.0 million | N/A |
| Income from Operations | $78.3 million | $209.7 million | N/A |
| Net Income | $48.1 million | $125.4 million | N/A |
| Diluted EPS (Continuing Ops) | $1.03 | $2.71 | N/A |
| Operating Margin | 23.7% | 22.0% | N/A |
| Cash and Cash Equivalents | N/A | N/A | $20.9 million |
| Line of Credit Outstanding | N/A | N/A | $85.5 million |
| Working Capital | N/A | N/A | ($60.5 million) Deficit |
| Days Sales Outstanding (DSO) | N/A | N/A | 45.6 days |
Material Changes vs. Prior Period
- Revenue Growth: Net patient service revenue increased 24.0% year-over-year for both the three and nine-month periods. For the nine months, $145.5 million (78.9%) of the increase was attributable to acquisitions completed after December 31, 2007. Same-unit revenue increased 5.2% for the nine months, driven by higher patient volumes and pricing factors.
- Profitability: Income from continuing operations increased 16.4% to $125.4 million for the nine months ended September 30, 2009. However, total Net Income decreased 3.7% to $125.4 million compared to $130.2 million in the prior year, primarily due to the absence of a $22.0 million after-tax gain from the sale of the newborn metabolic screening laboratory business in 2008 (reported as discontinued operations).
- Operating Expenses: Practice salaries and benefits increased 26.5% for the nine months, largely due to new staff supporting acquisition-related growth. General and administrative expenses increased 20.8%, partly due to expansion into anesthesia services.
- Cash Flow: Net cash provided by operating activities improved significantly to $168.5 million for the nine months ended September 30, 2009, compared to $113.1 million in the prior year, driven by improved collections (DSO decreased from 50.2 to 45.6 days) and changes in working capital components.
- Acquisitions: The Company acquired eight physician group practices for total consideration of $110.5 million ($93.1 million cash, $17.4 million contingent) during the nine months ended September 30, 2009.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expects to improve results of acquired practices through managed care contracting and operational efficiencies. The Company anticipates that funds from operations, cash on hand, and the $350 million Line of Credit will be sufficient to meet obligations for the next 12 months.
- Economic Risks: The Company notes the U.S. economic slowdown and potential for volume declines or shifts toward lower-paying government-sponsored programs if conditions do not improve. Healthcare reform legislation remains a potential risk factor.
- Legal and Regulatory:
- SEC Settlement: In March 2009, the Company settled an SEC investigation regarding stock option granting practices with a permanent injunction but no monetary penalty. An investigation by the U.S. Attorney's Office remains ongoing.
- Corporate Integrity Agreement: The Company is under a five-year agreement with the Office of Inspector General (OIG) following a 2006 settlement regarding billing practices. Failure to comply could result in exclusion from federal healthcare programs.
- Professional Liability: The Company self-insures a portion of professional liability risk. Total liability for professional liability risks was $110.2 million as of September 30, 2009.
- Tax Contingencies: The liability for unrecognized tax benefits was $58.4 million as of September 30, 2009. The Company is subject to federal and state tax examinations for years 2004 through 2008.
Investor Verification Checklist
- Verify the impact of the $110.5 million in acquisitions on future revenue and margin integration.
- Monitor the status of the ongoing U.S. Attorney's Office investigation regarding stock option practices.
- Assess the adequacy of the $110.2 million professional liability reserve given the self-insured nature of the risk.
- Review the Company's compliance status with the Corporate Integrity Agreement and potential exposure to future government audits.
- Track Days Sales Outstanding (DSO) trends to ensure continued improvement in cash collections from government and managed care payors.
- Confirm the Company's ability to maintain financial covenants under its $350 million Line of Credit, particularly the fixed charge coverage and leverage ratios.