Business context and reporting period
MEDNAX, Inc. (the registrant named in this filing; now associated with the Pediatrix Medical Group name) filed this unaudited Form 10-Q for the quarter ended March 31, 2018. It provides physician services across neonatal, anesthesia, radiology, maternal-fetal and pediatric specialties, along with management and consulting services.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net revenue | $901.9 million | $835.6 million; up 7.9% |
| Income from operations | $104.4 million | $106.0 million; down 1.5% |
| Operating margin | 11.6% | 12.7%; down 111 basis points |
| Net income | $63.4 million | $54.7 million |
| Diluted EPS | $0.68 | $0.59 |
| EBITDA (non-GAAP) | $133.6 million | $133.0 million |
| Adjusted diluted EPS (non-GAAP) | $0.89 | $0.75 |
| Net cash used in operating activities | $113.6 million | $21.8 million used |
Revenue growth comprised $37.8 million from acquisitions and $28.5 million from same-unit growth. Same-unit gains reflected reimbursement-related factors and higher patient-service volumes. Practice salaries and benefits rose 10.4%, faster than revenue.
At March 31, 2018, cash and cash equivalents were $40.9 million, working capital was $265.7 million, and total current assets and liabilities were $622.7 million and $357.0 million, respectively. Debt included $1.224 billion outstanding under the revolving credit agreement and $750 million of 5.25% senior notes due 2023. Revolver availability was $775.8 million. The company reported compliance with debt covenants.
Material changes and drivers
- Revenue increased 7.9%; same-unit revenue rose 3.5%, including 2.1% from reimbursement-related factors and 1.4% from service volumes.
- Operating income and margin declined as operating expenses grew faster than revenue, particularly clinician compensation. Management expected clinician compensation growth at existing units to remain above historical averages.
- Net income increased despite lower operating income, helped by a lower effective tax rate of 27.5%, versus 39.0% in Q1 2017, following the corporate tax-rate reduction enacted in 2017.
- Operating cash outflow widened, mainly because of first-quarter tax payments for 2017 taxes deferred after the 2017 hurricanes and higher receivables. Days sales outstanding rose to 54.2 from 50.9 at year-end, with management attributing the increase partly to a temporary receivables buildup during revenue-cycle process changes.
- Cash declined from $60.2 million at year-end. Net revolving-credit borrowings increased by $113.5 million during the quarter.
Outlook, risks and unusual items
Management said cash from operations, cash on hand and available credit were expected to fund working capital, anticipated acquisitions and capital expenditures, share repurchases, and contractual obligations for at least the next 12 months. No numerical earnings or revenue guidance was provided.
- The company acquired four physician practices for total consideration of $20.8 million and completed a transaction involving assets held for sale, receiving $22.8 million from the sale of a controlling interest and retaining a 49% equity-method interest in the joint venture.
- Management services results were below prior forecasts due mainly to slower new-customer bookings and increased customer terminations. The company said goodwill was not impaired, but identified possible future impairment if performance assumptions deteriorate; the reporting unit had $321.6 million of goodwill.
- Revenue depends substantially on government programs and third-party payors. Management cited potential effects from healthcare-policy changes, reimbursement pressures, shifts toward government payors, and lower patient ability to pay.
- Professional-liability exposure includes self-insured risk. Recorded professional-liability obligations were $250.5 million, with a $16.7 million related insurance receivable. The company also warned that government audits and legal matters could have material effects, though outcomes and liabilities could not be reliably estimated.
- A 1% change in interest rates on the revolving-credit balance was estimated to affect annual pretax income by approximately $12 million. The company expected the new lease accounting standard, effective January 1, 2019, to materially increase recognized balance-sheet assets and liabilities.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether receivables and DSO improved after the revenue-cycle process transition, and whether collections normalized.
- Whether clinician compensation continues to grow faster than revenue and places further pressure on operating margins.
- Progress in management-services customer bookings and retention, including assumptions supporting the goodwill valuation.
- Revolver borrowings, interest costs, covenant headroom, and liquidity as debt and investment needs evolve.
- Exposure and developments involving professional-liability claims, government audits, and reimbursement or healthcare-policy changes.