MEDNAX, Inc. (now Pediatrix Medical Group) — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing reports full-year results and selected fourth-quarter figures; it is an annual report, not a standalone Q4 filing. MEDNAX provided neonatal, anesthesia, radiology and teleradiology, maternal-fetal, pediatric and related services.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $3,647.1 million | $3,458.3 million | +5.5% |
| Operating income | $445.8 million | $480.1 million | -7.1% |
| Operating margin | 12.2% | 13.9% | -1.7 percentage points |
| Net income attributable to MEDNAX | $268.6 million | $320.4 million | -16.2% |
| Diluted EPS | $2.93 | $3.45 | -15.1% |
| EBITDA (non-GAAP) | $568.9 million | $587.9 million | -3.2% |
| Adjusted EPS (non-GAAP) | $3.82 | $3.34 | +14.4% |
| Operating cash flow | $289.9 million | $511.4 million | -$221.5 million |
Revenue growth comprised $102.1 million from acquisitions and $86.7 million of same-unit growth (2.7%). Same-unit growth reflected $49.6 million in reimbursement-related factors and $37.1 million in patient-service volume. Government programs represented 24% of net patient-service revenue, versus 25% in 2017; contracted managed care was 70% in both years.
Fourth quarter: Revenue was $932.7 million versus $910.8 million in Q4 2017. Operating income was $103.6 million versus $125.7 million; net income was $60.2 million versus $136.1 million; diluted EPS was $0.68 versus $1.46. The prior-year quarter included a $70.0 million tax benefit from the 2017 tax-law change, affecting comparability.
Liquidity, debt and capital
- Cash and cash equivalents were $36.7 million at year-end, down from $60.2 million; working capital was $157.2 million, up from $95.8 million.
- Cash from operations fell to $289.9 million. Management attributed the decline principally to income-tax payments, lower cash flow from accounts receivable, and higher days sales outstanding. Year-end DSO was 53.5 days.
- Debt principal totaled approximately $2.0 billion: $739.5 million drawn under the revolving credit facility and $1.25 billion of senior notes ($750 million due 2023 at 5.25%; $500 million due 2027 at 6.25%). Variable-rate credit-facility borrowings were $739.5 million; a 1% rate change was estimated to affect pretax income by $7.4 million annually.
- The $2.0 billion revolving facility matured in October 2022, with approximately $1.3 billion available at year-end. The company reported covenant compliance. It stated that cash, operating funds and available credit were expected to cover needs for at least the next 12 months.
- Repurchased approximately 7.0 million shares for $302.2 million during 2018. No cash dividends were paid.
Material changes and management outlook
- Practice salaries and benefits rose 8.5% to $2.54 billion, faster than revenue. The company cited acquisition and growth staffing, higher clinician compensation, and $18.1 million of costs for physicians retained after a hospital anesthesia contract ended July 1, 2018. Operating margin contracted as expenses grew faster than revenue and the contract loss affected results.
- Management reported $25 million of G&A cost reductions from shared-services initiatives. It targeted annualized improvements by the end of 2019 of $40 million in G&A and $80 million in operational improvements; achievement was not assured. It planned information-technology and other investments to support these efforts.
- Nine physician-practice acquisitions were completed in 2018. Management anticipated a modest level of acquisition activity in 2019, focused mainly on radiology, neonatology and pediatric subspecialties.
- In November 2018, MEDNAX began a process to potentially divest its management-services business. No sale was assured, and the business remained classified as held and used at year-end. Its reporting unit had lower-than-forecast results, including slower customer bookings and increased customer terminations; goodwill was not impaired, but future impairment remained a risk.
- Management cited soft U.S. birth trends: 2017 births declined about 2% year over year, and it expected softness to continue near term. 2018 provisional birth data was not available in the filing.
Risks, contingencies and unusual items
- Reimbursement and payor-mix risks include lower government-program rates, Medicaid and ACA uncertainty, audits and retroactive payment adjustments, and patient collection risk. A 0.5%–1.5% change in estimated collections could affect revenue by $10.2 million–$30.5 million, based on the filing’s sensitivity analysis.
- Hospital contracts can generally be terminated without cause; contract losses, lower administrative fees, or physician recruitment and retention pressures could affect revenue and margins. Revenue was geographically concentrated: the five largest states generated approximately 52% of 2018 revenue, with Texas at approximately 20%.
- Professional-liability exposure is significant: accrued liabilities were $244.0 million at year-end, substantially self-insured through a captive insurer. Reserves depend on actuarial estimates and actual claims may differ.
- A securities class action filed in July 2018 alleged violations relating primarily to statements about the anesthesia business. MEDNAX said it considered the suit without merit and intended to defend it; the filing said outcome and materiality could not yet be assessed. Government audits and investigations and ordinary-course litigation also pose potential exposure.
- Other notable risks include approximately $4.38 billion in goodwill, highly regulated healthcare operations, privacy and cybersecurity threats, and interest-rate exposure. The company expected the new lease-accounting standard effective in 2019 to materially increase balance-sheet assets and liabilities.
Key facts for investors to verify
- Whether the 2019 cost and operational improvement targets were achieved, and the recurring costs or investments required to deliver them.
- Subsequent operating performance after the anesthesia contract loss, clinician compensation growth, and continuing softness in births.
- Cash conversion, receivables and DSO trends, including the collectability assumptions behind reported revenue.
- Debt reduction, interest-rate sensitivity, covenant headroom, and the use of remaining share-repurchase authorization.
- Any outcome of the management-services divestiture process, goodwill impairment indicators, or material developments in litigation and government reviews.