Business context and reporting period
This is MEDNAX, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The filing describes a physician-services business spanning neonatology, anesthesia, maternal-fetal medicine and other pediatric specialties, plus recently acquired revenue-cycle management and consulting businesses. The filing identifies the registrant as MEDNAX, Inc.; the supplied metadata labels the company Pediatrix Medical Group, Inc.
During the first nine months of 2014, MEDNAX acquired seven physician practices and two complementary services businesses, and entered two joint ventures. The results include acquired operations only from their respective acquisition dates, limiting comparability with 2013.
Financial performance and liquidity
Amounts below are in millions, except per-share data and margins.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $626.5 | $554.7 | $1,788.4 | $1,586.6 |
| Income from operations | $138.1 | $123.3 | $371.9 | $328.2 |
| Operating margin | 22.0% | 22.2% | 20.8% | 20.7% |
| Net income attributable to MEDNAX | $86.2 | $77.0 | $228.9 | $201.5 |
| Diluted EPS | $0.86 | $0.76 | $2.28 | $2.00 |
- Q3 revenue rose 12.9%; 5.0% same-unit growth comprised 2.9% from reimbursement-related factors and 2.1% from patient volumes. Acquisitions contributed $44.5 million of the quarterly revenue increase.
- Nine-month revenue rose 12.7%; same-unit growth was 3.6%, split between 2.6% reimbursement-related factors and 1.0% volume. Acquisitions contributed $146.8 million of the increase.
- Practice salaries and benefits were $394.8 million in Q3 and $1,139.1 million for nine months. General and administrative expense as a share of revenue declined to 9.7% from 9.9% in Q3 and to 10.1% from 10.2% for nine months.
- Net cash from operations was $243.8 million for nine months, versus $266.1 million in 2013. Net cash used in investing was $362.6 million, including $346.1 million of acquisition payments; net financing cash provided was $159.4 million.
- Cash and cash equivalents were $71.8 million at September 30, 2014, compared with $31.1 million at year-end 2013. Working capital was $151.8 million, up from $41.3 million.
- Outstanding line-of-credit borrowings were $287.5 million, with $512.4 million available under the existing facility. Total liabilities were $973.1 million. A 1 percentage-point interest-rate change was estimated to affect annual pretax income by about $2.9 million.
- Days sales outstanding increased to 50.7 days from 46.3 days at year-end, which management attributed primarily to integrating acquired practices. Accounts receivable increased by $59.8 million during the nine months.
Material changes, outlook and risks
- Q3 operating margin decreased 18 basis points year over year, while the nine-month margin increased 11 basis points. Nine-month operating cash flow fell despite higher earnings, principally reflecting accounts-receivable and accounts-payable/accrual cash-flow changes.
- Management cited acquisition growth, hospital-based anesthesia and neonatal volumes, modest managed-care contracting improvements, and Affordable Care Act “parity revenue” as revenue drivers. Parity revenue was $17.2 million for Q3 and $48.2 million for nine months, contributing approximately $0.05 and $0.15 to diluted EPS, respectively.
- Payor mix shifted slightly toward government-sponsored programs in Q3. Management cautioned that government reimbursement is substantially lower than commercial reimbursement and that economic conditions, patient payment responsibility and insurance-exchange plans could affect collections and bad debt.
- Management expected operating cash generation, cash on hand and credit availability to fund working capital, anticipated acquisitions, capital expenditures, share repurchases and contractual obligations for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Subsequent to quarter-end, MEDNAX entered a new credit agreement on October 29, 2014: a $1.3 billion unsecured revolving facility and a $200 million term loan, maturing October 29, 2019; the facility may be increased to $1.8 billion subject to conditions. It includes leverage and interest-coverage covenants and restrictions, including on certain distributions.
- On October 30, 2014, the board authorized up to $600 million of additional share repurchases. The amount and timing are discretionary and depend on market conditions and other factors. The company had already repurchased approximately 2.2 million shares for $127.8 million during the nine months.
- Management identified possible risks from government audits and investigations, malpractice and other litigation, and limits or exclusions in insurance coverage; it self-insures a portion of professional-liability risk. The filing says no accrual was recorded for government inquiries because potential liability could not be reasonably estimated. Management believed pending litigation would not have a material adverse effect, while noting outcomes are uncertain.
- Medicare physician payment reductions of approximately 20% were scheduled for April 1, 2015 absent further congressional action; cumulative scheduled reductions could reach approximately 40% by 2016. The filing also notes uncertainty about the Affordable Care Act’s effects and implementation.
Important facts for investors to verify
- How much of growth and future performance comes from acquired practices versus same-unit reimbursement and patient volumes, and whether acquired operations meet expected integration and productivity targets.
- Whether accounts-receivable growth and higher DSO improve as acquisitions are integrated, and whether parity revenue or payor-mix changes materially affect collections and margins.
- Current borrowing, availability, interest costs and covenant compliance under the post-quarter-end credit agreement, including the effect of financing acquisitions and repurchases.
- The execution, funding and timing of the additional $600 million repurchase authorization alongside acquisition and operating cash needs.
- Developments in Medicare reimbursement policy, government audits, malpractice claims and insurance adequacy, including potential effects on cash flows and professional-liability reserves.