MEDNAX, Inc. (now Pediatrix Medical Group) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The filing identifies the registrant as MEDNAX, Inc. It provides physician services in neonatology, anesthesia, maternal-fetal medicine and other pediatric specialties.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net patient service revenue | $595.5M | $529.2M | $1,161.9M | $1,031.9M |
| Operating income | $129.7M | $113.4M | $233.8M | $204.9M |
| Operating margin | 21.8% | 21.4% | 20.1% | 19.9% |
| Net income attributable to MEDNAX | $79.0M | $69.2M | $142.7M | $124.6M |
| Diluted EPS | $0.79 | $0.68 | $1.42 | $1.23 |
- Revenue rose 12.5% in Q2 and 12.6% year to date. Acquisitions contributed $49.5M of Q2 growth and $97.8M of six-month growth; same-unit revenue increased 3.3% and 3.2%, respectively.
- Same-unit gains reflected reimbursement factors, including Affordable Care Act Medicaid-to-Medicare parity revenue, modest managed-care contracting improvements and, to a lesser extent, volume growth. The company recorded $16.0M of parity revenue in Q2 and $31.0M for the first half.
- Net cash provided by operating activities was $84.4M for the first half, down from $108.2M. Investing used $144.9M, including $135.5M for acquisitions; financing provided $47.1M.
- At June 30, cash and cash equivalents were $17.7M, short-term investments $7.6M, working capital $144.9M and line-of-credit borrowings $178.5M. The $800M revolving facility had $621.2M available, net of letters of credit. The company reported covenant compliance.
- Accounts receivable, net, increased to $327.4M from $285.4M at year-end; days sales outstanding rose to 50.0 from 46.3, primarily due to integration of acquired practices.
Material changes, outlook and risks
- During the first half, MEDNAX acquired six physician practices and a consulting services company for total consideration of $138.6M. It also formed two joint ventures in June: one 75%-owned and consolidated, and one 37.5%-owned and accounted for under the equity method.
- The company repurchased approximately 2.2 million shares for $126.7M during the first half. The filing reports no formal earnings guidance; management expected operating cash, cash on hand and credit availability to fund working capital, anticipated acquisitions, capital expenditures, share repurchases and obligations for at least 12 months.
- Management cited uncertainty around economic conditions, payor mix, patient ability to pay, implementation of the Affordable Care Act and Medicaid expansion. A Medicare physician-payment reduction of approximately 20% was scheduled for April 2015 absent further congressional action; the filing also notes the existing 2% Medicare sequestration reduction.
- Professional liability exposure is partly self-insured. Related liabilities totaled $163.4M, including $19.6M current. The company warned that insurance may not cover all claims. Government audits or investigations and malpractice or other litigation could have material adverse effects; no accrual was recorded for potential government matters because exposure could not be reasonably estimated.
- Other notable items: first-half results included income from a favorable litigation settlement; contingent consideration liabilities were $32.9M at June 30 versus $43.0M at December 31, 2013. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Facts investors should verify
- How much growth and margin performance is sustainable from same-unit operations versus acquisitions and parity-related reimbursement.
- Whether the higher DSO and receivables balance normalize as acquired practices are integrated and collections improve.
- Acquisition returns, integration progress, and the financial contribution and accounting treatment of the two joint ventures.
- Credit-facility balances, covenant headroom, interest-rate exposure and capacity to fund acquisitions and repurchases; a 1% rate change was estimated to affect annual pretax income by about $1.8M.
- Developments in Medicare payment policy, Medicaid expansion, payor mix, patient bad debt, professional-liability claims and government reviews.