MEDNAX, Inc. (Pediatrix Medical Group) — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also presents unaudited quarterly results. The registrant is MEDNAX, Inc., the parent company and successor to Pediatrix Medical Group, Inc.
Business context
MEDNAX provides physician services in neonatology, anesthesiology, maternal-fetal medicine, radiology, pediatric cardiology and other pediatric specialties, plus revenue-cycle and consulting services. At year-end it reported more than 3,600 affiliated physicians across 35 states and Puerto Rico, and teleradiology coverage nationwide. Revenue is primarily from physician services reimbursed by commercial and government payors.
Financial performance
| Metric | FY 2016 | FY 2015 | Change / context |
|---|---|---|---|
| Net revenue | $3,183.2 million | $2,780.0 million | +14.5%; acquisitions contributed $356.4 million of the increase, while same-unit revenue rose 1.8% |
| Income from operations | $571.7 million | $557.9 million | +2.5% |
| Operating margin | 18.0% | 20.1% | Down 2.1 percentage points |
| Net income attributable to MEDNAX | $324.9 million | $336.3 million | Down 3.4% |
| Diluted EPS | $3.49 | $3.58 | Down 2.5% |
| EBITDA (non-GAAP) | $661.3 million | $622.7 million | +6.2% |
| Adjusted diluted EPS (non-GAAP) | $3.99 | $4.07 | Down 2.0%; 2016 excludes a $10.6 million tax benefit |
| Cash from operating activities | $443.8 million | $368.7 million | Increased $75.1 million |
Operating-cost growth exceeded revenue growth: practice salaries and benefits rose 15.8%, general and administrative expense rose 21.8%, and depreciation and amortization rose 39.0%. Management attributed margin compression mainly to the mix of acquired businesses, including non-practice service businesses. Net interest expense increased substantially, contributing to lower net income.
Fourth quarter: Revenue was $830.8 million versus $741.7 million in Q4 2015. Income from operations was $142.8 million versus $151.0 million; net income attributable to MEDNAX was $78.1 million versus $92.7 million, and diluted EPS was $0.84 versus $0.99.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $55.7 million; working capital was $138.2 million, up from $99.0 million.
- Total principal debt was $1.714 billion: $963.5 million under the credit agreement and $750 million of 5.25% senior notes due 2023. Of total debt, $963.5 million was exposed to variable rates. A 1% rate change would affect annual pretax income by approximately $9.6 million.
- The revolving credit facility had $916.1 million of available capacity at year-end; it matures in October 2019. The company reported material compliance with debt covenants.
- Investing cash outflow was $821.2 million, including $762.3 million of acquisition payments and $39.3 million of capital expenditures. Financing cash inflow was $381.6 million, including $430.0 million of net credit-agreement borrowings; share repurchases were $61.8 million.
- Professional liability reserves totaled $202.1 million, including $29.0 million classified as current. The company paid no cash dividends in 2016 and stated it did not currently intend to pay dividends.
Material changes, outlook and risks
- MEDNAX completed 15 acquisitions in 2016: 13 physician practices and two complementary service businesses, for total consideration of $759.6 million, net of acquired cash. Acquisition-related revenue was the main driver of annual growth.
- Same-unit revenue grew 1.8%, with a $34.2 million increase from reimbursement-related factors and $12.6 million from patient volumes. The absence of Medicaid-to-Medicare parity revenue reduced year-over-year revenue by $12.0 million; no parity revenue was recorded in 2016.
- Payor mix was 70% contracted managed care, 23% government, 6% other third parties and 1% private pay, broadly unchanged from 2015. Management noted a slight increase in the share of patient-service revenue reimbursed by government programs.
- A favorable settlement of a tax matter produced a $10.6 million tax benefit in 2016. The reported effective tax rate was 36.8%; excluding that benefit, management calculated a 38.9% rate.
- No specific earnings or revenue guidance was provided. Management expected operating cash, cash on hand and credit availability to fund working capital, anticipated acquisitions, capital expenditures, share repurchases and obligations for at least the next 12 months.
- Principal risks include reimbursement reductions or delays, Medicaid and ACA policy changes, payor-mix shifts, hospital contract losses or lower administrative fees, physician recruiting and retention, acquisition integration and leverage, variable-rate exposure, billing/compliance investigations, malpractice claims and reserve estimation, and cybersecurity/privacy incidents. Texas generated approximately 19% of 2016 revenue; the five largest states generated approximately 51%.
Important facts for investors to verify
- Whether acquisitions can deliver expected growth and efficiencies, and how much future growth is organic rather than acquired.
- Whether margins stabilize as acquisition-related costs, amortization and interest expense affect earnings.
- Trends in same-unit volumes, reimbursement, government payor exposure, collections and accounts-receivable reserves; year-end DSO was 54.9 days.
- Debt repayment capacity, covenant headroom and sensitivity to interest-rate increases, alongside continued acquisition spending.
- Developments in reimbursement policy, hospital contract renewals, government investigations and professional liability estimates.