Pediatrix Medical Group, Inc. (then MEDNAX, Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. The filing reports unaudited consolidated results. MEDNAX provided physician services in 35 states and Puerto Rico, plus teleradiology services nationwide.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $835.6 million | $752.6 million | +11.0% |
| Income from operations | $106.0 million | $124.2 million | -14.6% |
| Operating margin | 12.7% | 16.5% | -382 basis points |
| Net income attributable to MEDNAX | $54.7 million | $67.9 million | -19.4% |
| Diluted EPS | $0.59 | $0.73 | Down $0.14 |
| Adjusted diluted EPS (non-GAAP) | $0.75 | $0.87 | Down $0.12 |
| EBITDA (non-GAAP) | $131.7 million | $143.9 million | -8.5% |
Revenue growth reflected $89.9 million from acquisitions completed after year-end 2015, partly offset by a $6.9 million (0.9%) decline in same-unit revenue. Same-unit reimbursement factors declined $4.4 million and volumes declined $2.5 million. Practice salaries and benefits rose 16.4%, general and administrative expense rose 15.4%, and depreciation and amortization rose 30.8%; management attributed much of the cost growth to acquisitions, staffing and acquired intangibles. Higher borrowings also increased interest expense.
Cash flow, liquidity and debt
- Operating cash flow was negative $21.8 million, compared with negative $33.0 million in Q1 2016. Investing cash flow was negative $127.5 million, including $110.9 million of acquisition payments; financing cash flow was positive $135.4 million.
- Cash and cash equivalents were $41.8 million at March 31, 2017, down from $55.7 million at year-end. Working capital was $233.8 million, versus $138.2 million at December 31, 2016. DSO improved to 52.5 days from 54.9 days.
- Credit Agreement principal was $1.16 billion ($985 million revolving credit and $175 million term loan); the company also had $750 million of 5.25% senior notes due 2023. The revolving facility had $714.6 million available, net of letters of credit.
- Management said the company was in material compliance with its debt covenants and expected to remain compliant through 2017. It expected operating funds, cash and available credit to cover working capital, anticipated acquisitions, capital expenditures, repurchases and contractual obligations for at least 12 months.
- A 1 percentage-point change in interest rates was estimated to affect annual pretax income by approximately $11.6 million.
Material developments, outlook and risks
- The company acquired five physician practices for total consideration of $112.9 million, including its first radiology practice. Acquisitions added revenue but make year-over-year comparisons less comparable. It also sold its 75% interest in a consolidated joint venture; the resulting gain was not material.
- MEDNAX repurchased 1.0 million shares for $68.1 million, completing planned 2017 repurchases to offset equity-compensation dilution.
- Management reported a higher share of revenue reimbursed through government healthcare programs. Those payments are substantially lower than commercial reimbursement; management also cited possible patient bad debt and potential effects from healthcare policy changes, Medicaid funding changes and Medicare payment rules. No specific earnings or revenue guidance was provided.
- Professional liability exposure is partly self-insured; total related liabilities were $206.7 million at quarter-end. Government audits, inquiries and investigations may occur, but no accrual was recorded for potential future matters because amounts could not be reasonably estimated. Management said pending litigation was not expected to have a material adverse effect, while noting outcomes and insurance adequacy cannot be assured.
- Adoption of new lease accounting in 2019 was expected to materially increase reported assets and liabilities, primarily for facility leases. Other announced accounting changes were not expected to have a material impact, according to management.
- Disclosure controls were deemed effective; the filing reported no material change in internal control over financial reporting and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether acquisition integration and growth can improve profitability after the 382-basis-point operating-margin decline.
- Trends in same-unit patient volume, government-program mix, reimbursement and collections.
- Debt, interest-rate exposure, covenant headroom and liquidity as acquisition spending continues.
- Actual professional-liability claims, insurance coverage and any developments in government audits or investigations.
- Progress and financial effects of the radiology strategy, acquired practices and the 2019 lease-accounting transition.