MEDNAX, Inc. (now Pediatrix Medical Group, Inc.) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company’s continuing business was focused on newborn, maternal-fetal, and pediatric physician services. Anesthesiology was divested in May 2020; a sale of radiology was agreed in September 2020 and was not yet completed at quarter-end. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue from continuing operations | $460.6 | $454.9 | $1,317.3 | $1,321.2 |
| Operating income | $20.5 | $48.6 | $65.8 | $131.6 |
| Operating margin | 4.4% | 10.7% | 5.0% | 10.0% |
| Income (loss) from continuing operations | $(2.7) | $12.9 | $(14.1) | $32.3 |
| Adjusted EBITDA from continuing operations | $72.8 | $69.3 | $161.6 | $187.0 |
| Adjusted EPS from continuing operations | $0.37 | $0.38 | $0.70 | $0.96 |
| Net loss, including discontinued operations | $(41.0) | $(1,255.9) | $(732.2) | $(1,507.0) |
Q3 revenue increased 1.3%; same-unit revenue declined 0.4%, as lower patient volumes were largely offset by reimbursement-related factors, including approximately $14.2 million of CARES Act relief. For the first nine months, same-unit revenue declined 1.9%, with patient-service volume down 4.6%; reimbursement-related factors, including approximately $20.0 million of CARES Act relief, partly offset that decline. Adjusted EBITDA and adjusted EPS are non-GAAP measures.
Cash flow and liquidity: Continuing-operations operating cash flow was $71.6 million for the first nine months, versus $36.2 million in 2019; continuing-operations investing and financing cash flows were $(28.2) million and $(3.5) million, respectively. Cash and cash equivalents were $294.5 million at September 30, 2020, versus $107.9 million at year-end 2019; short-term investments were $81.6 million. Working capital was $290.0 million. Continuing-operations DSO improved to 48.2 days from 51.0.
Debt: Long-term debt and finance lease liabilities were $1,742.3 million. This included $750 million of 5.25% notes due 2023 and $1.0 billion of 6.25% notes due 2027. The company had no revolver borrowings and reported $899.8 million of availability at quarter-end, after the facility’s temporary capacity reduction and outstanding letters of credit. It reported compliance with applicable covenants and expected to remain compliant.
Material changes, outlook, and risks
- Operating margin declined substantially year over year, reflecting COVID-19-related volume pressure and higher transformation and restructuring expenses. Excluding those expenses, Q3 operating margin was 11.9% versus 13.5%; for the nine months it was 9.6% versus 12.4%.
- COVID-19 reduced elective procedures, radiology studies, and appointments at office-based practices. Management said volumes began normalizing in May and substantially recovered from June through September; it had not observed, nor then anticipated, a significant NICU volume impact. The pandemic’s ultimate effects remained uncertain.
- The anesthesiology sale closed May 6 for $50 million cash, subject to adjustments, plus a contingent economic interest potentially worth up to $250 million. The company recorded a preliminary $648.7 million loss on sale for the first nine months; final proceeds and any adjustment remained subject to valuation and working-capital true-ups. It estimated a $1.68 billion capital loss carryforward and recorded a $419 million valuation allowance because realization of the tax benefit was considered more likely than not not to occur.
- The radiology sale agreement set $885 million cash consideration, subject to customary adjustments. Classification as held for sale resulted in a $47 million non-cash goodwill charge. A further gain or loss could be recorded when the transaction closes and final proceeds are known.
- Continuing-operations net loss for the first nine months was $14.1 million; consolidated net loss was $732.2 million, including $718.1 million of discontinued-operations losses. Those losses included the anesthesia disposal and impairment-related items; comparisons with 2019 are also affected by 2019 impairment charges and discontinued businesses.
- Management provided no specific forward financial guidance. It said it expected sufficient liquidity to meet obligations for at least the next 12 months, but warned that COVID-19, payer mix shifts toward lower-reimbursing government programs, clinician compensation growth, healthcare policy changes, and extended billing or collection cycles could adversely affect results.
- The company reported $297.8 million of professional-liability obligations for continuing operations, including $55.5 million current, partly offset by a $23.6 million insurance receivable. It self-insures a portion of professional-liability risk. Government audits, malpractice claims, and other litigation could create material exposure; outcomes and insurance adequacy are uncertain.
Important facts for investors to verify
- Whether the radiology divestiture closed on the stated terms, and the resulting final proceeds, transaction adjustments, and any additional gain or loss.
- The valuation and eventual realization of the anesthesia contingent interest, final sale loss, and the capital-loss tax benefit subject to the valuation allowance.
- Post-divestiture revenue, patient volumes, clinician compensation, reimbursement and payer mix, and the amount of CARES Act relief included in results.
- Liquidity, revolver availability, debt covenant compliance, and the company’s capacity to service $1.75 billion of senior notes as operating conditions evolve.
- Whether professional-liability reserves, insurance recoveries, and pending legal or government matters change materially.