MEDNAX, Inc. (now Pediatrix Medical Group) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; amounts below are in millions except per-share data. The company provides physician services in neonatology, maternal-fetal medicine, pediatric subspecialties and anesthesia.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net patient service revenue | $393.4 | $349.1 | $775.7 | $682.0 |
| Operating income | $93.1 | $82.1 | $168.8 | $145.7 |
| Operating margin | 23.7% | 23.5% | 21.8% | 21.4% |
| Net income | $55.9 | $49.4 | $101.4 | $87.6 |
| Diluted EPS | $1.15 | $1.04 | $2.09 | $1.85 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $80.8 | $50.1 |
- Q2 revenue rose 12.7%, operating income 13.4% and net income 13.3% year over year. For the first half, revenue increased 13.7%, operating income 15.9% and net income 15.7%.
- Acquisitions accounted for $34.8 million of Q2 revenue growth and $72.3 million of first-half growth. Same-unit revenue grew 2.7% in Q2 and 3.2% for the first half, reflecting reimbursement gains and higher service volumes.
- Management attributed margin improvement to acquisition-related growth and efficiencies across the operating infrastructure. G&A declined as a share of revenue: 10.9% versus 11.2% in Q2 and 10.9% versus 11.3% for the first half.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $24.0 million; short-term investments were $11.0 million. Working capital was $130.5 million, up from $74.9 million at December 31, 2010.
- Operating cash flow was $80.8 million for the first half. Investing activities used $26.8 million, including $23.4 million of capital expenditures and $11.5 million of acquisition and contingent-purchase payments, offset in part by net investment proceeds. Financing activities used $56.3 million, primarily reflecting $80.5 million of net line-of-credit repayments.
- Outstanding revolving-credit borrowings were $66.0 million, down from $146.5 million at year-end. The $350 million facility matured September 2013; $278.7 million remained available after outstanding letters of credit. The company reported compliance with covenants and expected to remain compliant through 2011.
- Professional-liability exposure totaled $118.5 million, including $11.9 million classified as current. The company self-insures a portion through a captive subsidiary.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management expected cash on hand, operating cash generation and available credit to fund working capital, anticipated acquisitions, capital expenditures and obligations for at least the next 12 months.
- Management cited possible pressure from a shift toward lower-reimbursing government programs, state Medicaid budget constraints and uncertainty over healthcare reform. Commercial contracting and modest price increases supported reimbursement growth, while Q2 maternal-fetal medicine volumes declined.
- Three physician practices were acquired in the first half for $11.3 million total consideration, including $2.8 million contingent consideration. The company also purchased an office building for approximately $18.5 million.
- First-half operating cash flow benefited from changes in accrued expenses, including incentive compensation timing, and improved results; incentive compensation is largely paid in the first quarter. Prior-year balance-sheet amounts were reclassified, including $99.8 million of professional liabilities moved from current accrued expenses to long-term liabilities.
- The company was in the final year of a five-year Corporate Integrity Agreement with the HHS OIG and stated it was in compliance. The SEC investigation concerning historical stock-option practices had been settled in 2009; the company said it would cooperate with any further U.S. Attorney activity. Ongoing government inquiries and malpractice claims could have a material adverse effect; insurance may not cover all losses. No material changes to previously reported risk factors were identified.
Important facts for investors to verify
- Whether same-unit growth, especially reimbursement improvements and patient volumes, continued after the reported quarter, and how acquisition contributions affected reported growth.
- Whether collections and receivable quality remained sound: accounts receivable rose to $194.0 million, while days sales outstanding improved to 44.9 from 45.3 at year-end.
- Facility covenant compliance, borrowing availability and interest-rate exposure; management estimated a 1% rate change would affect annual pretax income by about $0.7 million at the reported debt balance.
- Updates on the Corporate Integrity Agreement, government inquiries, malpractice claims and the adequacy of professional-liability reserves and insurance.
- Capital spending, acquisition contingent payments and the sustainability of first-half operating cash flow given incentive-compensation payment timing.