MEDNAX, Inc. (Pediatrix Medical Group) — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013; the filing was signed February 11, 2014. The registrant is MEDNAX, Inc., successor to Pediatrix Medical Group, Inc. Financial figures below are in U.S. dollars; amounts are rounded unless otherwise noted. The filing’s per-share data reflect a two-for-one stock split effective December 2013.
Business context
MEDNAX provides physician services in neonatal, anesthesia, maternal-fetal and pediatric specialties, primarily in hospitals and related clinical settings. At year-end it had more than 2,300 affiliated physicians across 34 states and Puerto Rico. The company operates as one reportable segment. Anesthesia represented 32% of 2013 revenue, neonatal and other pediatric specialties 52%, maternal-fetal 11%, and pediatric cardiology 5%.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net patient service revenue | $2,154.0 million | $1,816.6 million | +18.6% |
| Income from operations | $452.1 million | $389.5 million | +16.1% |
| Operating margin | 21.0% | 21.4% | Down 0.4 percentage points |
| Net income | $280.5 million | $240.9 million | +16.4% |
| Diluted earnings per share | $2.78 | $2.42 | +14.9% |
| Cash from operating activities | $405.4 million | $324.9 million | +$80.5 million |
- Revenue growth included approximately $265.0 million from acquisitions completed after December 31, 2011. Same-unit revenue increased 4.2%, driven mainly by reimbursement-related factors; same-unit patient volumes contributed 0.1% growth.
- Net margin was 13.0%, compared with 13.3% in 2012. Practice salaries and benefits rose 20.4%, faster than revenue, while general and administrative expense grew more slowly than revenue.
- 2013 quarterly results showed revenue of $567.4 million and net income of $79.0 million in Q4, versus $471.3 million and $66.1 million, respectively, in Q4 2012. Q4 diluted EPS was $0.78 versus $0.66.
- Cash and cash equivalents were $31.1 million at year-end, and working capital was $82.0 million, down from $90.7 million. Net cash used in investing activities was $263.5 million, including $238.0 million in acquisition and contingent-consideration payments. Net cash used in financing was $132.1 million.
- Outstanding borrowings under the revolving credit facility were $27.0 million; $767.7 million remained available after letters of credit. The $800 million facility matures in 2017 and includes financial covenants. The company reported covenant compliance at year-end.
- Total liabilities were $706.4 million; shareholders’ equity was $2.34 billion. The company reported professional-liability reserves of $158.7 million, including $19.3 million classified as current.
Material changes and notable items
- MEDNAX acquired 11 physician practices in 2013—six anesthesia and five neonatology groups—for total consideration of $250.1 million. The 2012 comparison included 16 acquisitions for $451.1 million.
- Revenue mix shifted toward anesthesia: its share rose to 32% from 27% in 2012, while neonatal and other pediatric specialties declined to 52% from 56%.
- The company recorded approximately $31.2 million in Medicaid parity revenue under the Affordable Care Act, contributing approximately $0.10 to diluted EPS after incentive compensation and tax effects.
- MEDNAX repurchased approximately 1.1 million shares for $51.9 million in 2013. It completed a two-for-one stock split and did not declare or pay cash dividends.
- Cash from operations increased, supported by higher earnings and accrued incentive compensation, partly offset by a $37.3 million increase in accounts receivable. Days sales outstanding improved to 46.3 from 48.4.
Outlook, risks and contingencies
- Management stated that operating cash generation, cash on hand and available credit were expected to be sufficient for working capital, anticipated acquisitions and capital expenditures, share repurchases, and contractual obligations for at least the next 12 months. No specific revenue or earnings guidance was provided.
- The company said 2014 Medicare physician reimbursement rates could face an approximately 20% reduction effective April 1 absent further Congressional action; it also described the existing 2% Medicare sequestration reduction. These were prospective risks, not reported realized reductions of that magnitude.
- Key risks include lower reimbursement or adverse changes in payor mix, Medicaid budget pressure, Affordable Care Act uncertainty, audits and billing compliance, hospital contract renewals, competition for physicians, acquisition integration, and malpractice claims. Government-sponsored programs represented 24% of net patient service revenue; contracted managed care represented 69%.
- Geographic concentration is material: the five largest states generated approximately 58% of 2013 net patient service revenue, and Texas alone contributed approximately 22%.
- Professional-liability reserves depend on actuarial estimates and MEDNAX self-insures a significant portion through a captive subsidiary. Management said pending legal matters were not expected to have a material adverse effect, but outcomes could not be predicted. Government audits and investigations were expected in the ordinary course; no accrual was recorded for potential future matters because they could not be reasonably estimated.
- Quarterly earnings and cash flow can fluctuate. The company typically experiences negative operating cash flow in the first quarter because of annual physician incentive payments and retirement-plan contributions.
Important facts for investors to verify
- How much future revenue and earnings growth is organic versus acquisition-driven, and whether acquired practices deliver the expected integration and margin benefits.
- Whether the $31.2 million Medicaid parity revenue is recurring, and how 2014 reimbursement and Medicaid expansion developments affect realized revenue and collections.
- Trends in same-unit volumes, payor mix, accounts receivable, collection rates and DSO, including the sensitivity of reported revenue to collection assumptions.
- Development of professional-liability reserves and outcomes of government audits, billing inquiries and other legal matters.
- Credit-facility covenant compliance, use of borrowing capacity, acquisition-related obligations and the effects of share repurchases on per-share results.