Business context and reporting period
This Form 10-Q covers the quarter and six months ended June 30, 2020. The filing identifies the registrant as MEDNAX, Inc. (NYSE: MD). Its physician-services business included neonatology, radiology, maternal-fetal medicine, pediatric cardiology and other pediatric specialties. In May 2020, MEDNAX divested its anesthesiology medical group; in June, it began exploring a possible radiology divestiture. Unless noted, financial amounts below are in millions.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Continuing-operations revenue | $509.2 | $561.2 | $1,071.1 | $1,104.2 |
| Operating income | $34.9 | $59.4 | $50.9 | $111.9 |
| Operating margin | 6.9% | 10.6% | 4.8% | 10.1% |
| Income (loss) from continuing operations | $7.6 | $20.0 | $(6.1) | $42.6 |
| Adjusted EBITDA from continuing operations | $65.2 | $94.2 | $115.3 | $165.8 |
| Adjusted EPS from continuing operations | $0.32 | $0.58 | $0.52 | $0.96 |
| Net loss | $(672.4) | $(8.2) | $(691.1) | $(251.1) |
Q2 continuing revenue declined 9.3%; six-month revenue declined 3.0%. Management attributed the declines primarily to COVID-19-related volume reductions. Same-unit revenue fell 11.7% in Q2 and 5.5% for the six-month period, mainly because patient-service volumes dropped. CARES Act relief, improved managed-care contracting and payor-mix effects partly offset the decline. Reported net losses were dominated by discontinued operations, not continuing operations.
Cash flow, liquidity and debt
- Continuing-operations cash from operations was $19.9 million for the first half, versus $7.0 million a year earlier; total operating cash flow, including discontinued operations, was $46.6 million versus $63.2 million.
- Continuing-operations investing cash use was $37.1 million, including $23.3 million of capital expenditures. Continuing-operations financing cash use was $0.6 million.
- At June 30, cash and cash equivalents were $132.2 million, short-term investments were $90.6 million, and working capital was $304.4 million. Continuing-operations DSO was 52.4 days, up from 49.9 days at year-end 2019.
- Debt comprised $750 million of 5.25% notes due 2023 and $1.0 billion of 6.25% notes due 2027. There were no borrowings outstanding under the revolving credit agreement; reported availability was $899.8 million after restrictions and letters of credit.
- The March credit-agreement amendment temporarily relaxed leverage limits, required at least $300 million of availability through Q3 2021, and restricted certain payments. Management said the company was in material compliance and expected to remain compliant over the next 12 months.
Material changes and unusual items
- COVID-19 reduced elective procedures, radiology studies and office-practice appointments beginning in mid-March. Management reported volumes beginning to normalize in May and substantially recovering during June; it said NICU volumes had not been significantly affected to date.
- The May anesthesiology sale generated $50 million cash, subject to customary adjustments, and a contingent economic interest potentially worth $0–$250 million. MEDNAX retained the group’s accounts receivable. A preliminary $644.2 million sale loss was recorded in Q2; final proceeds and the loss remain subject to valuation and working-capital adjustments.
- The sale was expected to create an approximately $1.68 billion capital-loss carryforward expiring in 2025. MEDNAX recorded a $419 million valuation allowance because management judged realization of the tax benefit more likely than not to fail.
- Q2 discontinued-operations loss was $680.0 million; the first-half loss was $685.0 million. These amounts include the anesthesiology sale loss and related tax effects, as well as other discontinued-operation items.
- Affiliated practices received approximately $12 million in CARES Act funding in Q2; applications for additional relief were pending. The company also intended to defer employer Social Security taxes during 2020.
- MEDNAX reduced executive and other nonclinical compensation, furloughed some employees, cut practice expenses and curtailed most transformation and restructuring work. It said higher-than-historic clinician compensation and malpractice costs could pressure results.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management expected COVID-19 to materially affect results but said the ultimate impact could not be predicted; it believed available cash, operations and credit capacity would meet obligations for at least 12 months. Management viewed some deferred care as potentially creating future backlog, but cautioned that a recovery was not assured.
Risks highlighted include renewed pandemic disruptions, weaker patient volumes or collections, shifts from commercial coverage to lower-reimbursing government programs, clinician and malpractice cost growth, healthcare reimbursement and surprise-billing changes, and uncertainty over the proposed radiology sale. The company also reported ordinary-course government inquiries and malpractice claims; it self-insures part of its professional-liability exposure. Its recorded professional-liability liability was $318.4 million, with a $35.4 million insurance receivable for certain covered claims. A derivative lawsuit remained pending after an amended complaint and motion to dismiss; a related securities class action had been dismissed with prejudice.
Most important facts for investors to verify
- Whether patient volumes and revenue recovered after June, and whether any COVID-19 resurgence or service deferral changes demand.
- The final anesthesiology sale proceeds, contingent-interest valuation and adjustment to the preliminary sale loss and related tax valuation allowance.
- Continuing-operations cash generation, receivables/DSO, liquidity availability and compliance with amended debt covenants.
- Whether the radiology divestiture process produces a transaction, and its potential effect on the remaining business.
- Actual clinician compensation, malpractice expense, CARES Act support and deferred payroll-tax obligations compared with management’s expectations.