MEDNAX, Inc. — 2018 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; unaudited. The filing identifies the registrant as MEDNAX, Inc. Pediatrix Medical Group is the company name in the request metadata.
Business context and financial performance
MEDNAX provides physician services, including neonatal, anesthesia, radiology, maternal-fetal and pediatric subspecialty care, and related management services. Its affiliated physicians operated in 39 states and Puerto Rico; teleradiology services covered all 50 states, Washington, D.C., and Puerto Rico.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $896.7m | $869.0m | $2,714.4m | $2,547.5m |
| Operating income | $109.2m | $126.4m | $342.3m | $354.4m |
| Operating margin | 12.2% | 14.6% | 12.6% | 13.9% |
| Net income | $65.6m | $65.9m | $208.4m | $184.3m |
| Diluted EPS | $0.72 | $0.71 | $2.25 | $1.98 |
| EBITDA | $140.9m | $151.5m | $432.2m | $433.3m |
| Adjusted diluted EPS | $0.94 | $0.87 | $2.90 | $2.47 |
Cash flow, nine months: Operating cash flow was $162.3m, versus $315.7m a year earlier; investing cash outflow was $47.8m, versus $387.5m; financing cash outflow was $140.3m, versus $64.4m of inflow. Cash, cash equivalents and restricted cash ended at $54.5m. Capital expenditures were $38.1m, and acquisition payments were $27.0m.
Liquidity and debt at September 30: Cash and cash equivalents were $34.5m, restricted cash $20.0m, and short- and long-term investments totaled $95.2m. Working capital was $189.5m. Debt included $1.264bn drawn on the revolving credit facility and $750m of 5.25% senior notes due 2023; credit-facility availability was $735.8m. The company reported compliance with debt covenants and expected available resources to cover needs for at least 12 months.
Material changes versus comparable periods
- Q3 revenue rose 3.2%; management attributed $17.5m of the increase to acquisitions and $10.2m to same-unit growth. Same-unit growth reflected higher patient volumes and modest improvement in reimbursement factors.
- Q3 operating income fell 13.7%, and operating margin declined 238 basis points. The company cited the non-renewal of a hospital anesthesia contract effective July 1, 2018 and lower same-unit revenue. Net income was nearly flat; lower taxes helped offset weaker operating results.
- For the first nine months, revenue grew 6.6%, including $98.7m from acquisitions and $68.2m of same-unit growth. Operating income declined 3.4%, while net income increased 13.1%, primarily reflecting the lower effective tax rate (27.5% versus 39.0%).
- Operating cash flow declined $153.4m year over year, mainly due to 2018 tax payments for 2017 taxes deferred after the 2017 hurricanes and changes in accounts payable and accrued expenses. Days sales outstanding increased to 53.6 from 50.9 at year-end 2017.
- Practice salaries and benefits grew 6.7% in Q3, faster than revenue. The company recorded $9.9m of costs for physicians retained through year-end after the anesthesia contract non-renewal and expected similar costs in Q4.
Outlook, management commentary, risks and unusual items
- Management targeted annualized improvements by the end of 2019 of $40m in general and administrative expenses and $80m in operations; achievement is not assured. It also expected clinician compensation at existing units to grow faster than historical averages.
- On November 1, 2018, MEDNAX announced a process to potentially divest its management services business. No transaction was assured; the company could retain some or all of the service line. Management noted slower new-customer bookings and increased customer terminations, while stating that the reporting unit’s goodwill was not impaired at September 30. Its management services reporting unit carried $321.6m of goodwill.
- The company completed five physician-practice acquisitions during the first nine months, with total acquisition-date consideration of $24.4m. It also completed a transaction involving a controlling interest in assets contributed to a joint venture, generating $22.8m of proceeds.
- Share repurchases totaled $302.2m for the first nine months. A new program authorized up to $500m of additional repurchases; a $250m accelerated share repurchase was funded with credit-facility borrowings, with final share settlement pending.
- Key risks include government healthcare reimbursement and policy changes, managed-care and patient collection trends, clinician labor costs, and professional-liability exposure. The company self-insures a portion of professional-liability risk; related liabilities totaled $244.4m, with $16.7m of insurance receivables recorded.
- A securities class-action lawsuit filed in July 2018 concerns statements primarily about the anesthesia business. The company intended to defend the suit, but said its outcome and potential materiality could not yet be assessed. It also described routine government inquiries and medical-malpractice claims; outcomes and insurance adequacy are uncertain.
- Adoption of the lease-accounting standard on January 1, 2019 was expected to materially increase reported assets and liabilities, primarily for operating leases. Management said implementation was in progress.
- Interest-rate sensitivity: a 1 percentage-point rate change on the $1.264bn revolving balance would affect annual pretax income by approximately $12.6m.
Important facts for investors to verify
- Whether the potential management-services divestiture proceeds, and the resulting discontinued-operations presentation and valuation.
- Final settlement and share count under the $250m accelerated repurchase, remaining authorization under the $500m program, and the associated increase in borrowings.
- Whether clinician compensation growth and the anesthesia contract loss continue to pressure margins after Q4 2018.
- Cash conversion, receivables and DSO trends, including the timing effects from taxes and accrued liabilities.
- Developments in the securities lawsuit, professional-liability claims, government inquiries, and any future goodwill impairment indicators.
- Actual balance-sheet and covenant effects of the 2019 lease-accounting adoption.