Pediatrix Medical Group, Inc. (then MEDNAX, Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance sheet compared with December 31, 2018. The filing is by MEDNAX, Inc., the company’s name at the time. Financial statements are unaudited.
Business context and key financial results
MEDNAX provided physician services, including neonatal, anesthesia, radiology, maternal-fetal and pediatric specialty care. The company was pursuing a potential divestiture of its management services business and presented that business as discontinued operations. Unless noted otherwise, operating results below are for continuing operations.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenue | $851.2 million | $852.6 million |
| Income from operations | $78.5 million | $99.7 million |
| Operating margin | 9.2% | 11.7% |
| Income from continuing operations | $41.7 million | $60.0 million |
| Adjusted EBITDA from continuing operations | $104.9 million | $122.6 million |
| Diluted continuing-operations EPS | $0.48 | $0.64 |
| Adjusted diluted EPS from continuing operations | $0.65 | $0.82 |
| Net income (loss), including discontinued operations | $(242.9) million | $63.4 million |
| Diluted net EPS | $(2.81) | $0.68 |
Cash flow, debt and liquidity
- Cash used in operating activities was $56.8 million overall, including $60.4 million used by continuing operations. Continuing-operations investing cash outflow was $5.3 million and financing cash inflow was $66.7 million.
- Continuing-operations cash and cash equivalents were $26.5 million at quarter-end; short-term investments were $86.2 million. Working capital was $302.0 million.
- At March 31, principal debt included $392.0 million outstanding under the revolving credit agreement, $750.0 million of 5.25% notes due 2023, and $1.0 billion of 6.25% notes due 2027. The revolver had $807.9 million available. The company reported compliance with applicable covenants and expected to remain compliant during 2019.
- Operating lease adoption added $91.0 million of right-of-use assets and $95.9 million of lease liabilities to the balance sheet.
Material changes and unusual items
- Revenue declined 0.2% year over year. Same-unit revenue increased 1.0%, reflecting a 1.3% benefit from reimbursement factors, partly offset by a 0.3% decline in patient-service volumes. The filing attributed volume weakness mainly to anesthesia, partly offset by neonatology and other pediatric growth.
- Practice salaries and benefits rose 2.9% to $621.5 million. Operating income fell 21.3%; management cited faster expense growth and weaker revenue growth. Interest expense increased to $30.7 million from $19.9 million, primarily reflecting debt issuance and borrowing costs, plus a debt-cost write-off.
- The management services business was classified as held for sale and discontinued operations. A $321.6 million noncash charge, primarily against goodwill, drove a discontinued-operations net loss of $284.5 million. The company said a final sale could produce an additional gain or loss and that a divestiture was not assured.
- The company issued $500 million of additional 2027 notes and used net proceeds of approximately $491.7 million to repay credit-agreement borrowings. It repurchased approximately 2.5 million shares for $78.6 million during the quarter and another 817,950 shares for $21.4 million after quarter-end.
- Q1 included $3.5 million of transformational and restructuring expenses. A favorable tax settlement provided a $4.8 million net tax benefit; reported continuing-operations effective tax rate was 17.7%, or 27.0% excluding that benefit.
Outlook, commentary and risks
- Management targeted annualized improvements by year-end 2019 of $40 million in general and administrative expenses and $80 million in operational improvements. It reported achieving $60 million of improvements in 2018 and cautioned that the remaining targets were not assured.
- Management anticipated that clinician compensation expense at existing units would continue growing faster than historical averages. It also cited potential effects from payer mix shifts toward lower-reimbursing government programs, patient collection challenges, and uncertainty around healthcare laws and reimbursement.
- The company said cash generated from operations, cash on hand and revolver availability should fund working capital, acquisitions, capital expenditures, restructuring, buybacks and obligations for at least the next 12 months.
- Risks include government audits and investigations, medical malpractice claims and self-insured exposure. The filing disclosed a pending securities class action and a related derivative action; management said it intended to defend both, while noting outcomes could not be predicted. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether and when the management services divestiture closes, its proceeds, and any final disposal gain or loss.
- Progress toward the $120 million annualized improvement targets and the impact of clinician compensation on margins.
- Cash collection trends: continuing-operations DSO rose to 55.3 days from 52.5 days at year-end.
- Debt levels, interest costs, covenant headroom and the company’s capacity to continue share repurchases.
- Developments in the disclosed legal matters, government inquiries and professional-liability exposure.
- Comparability of adjusted EBITDA and adjusted EPS: these are non-GAAP measures with company-defined adjustments.