MEDNAX, Inc. (Pediatrix Medical Group) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The filing identifies the registrant as MEDNAX, Inc. Financial statements are unaudited and consolidated.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net patient service revenue | $554.7m | $473.1m | $1,586.6m | $1,345.3m |
| Income from operations | $123.3m | $107.4m | $328.2m | $286.5m |
| Operating margin | 22.2% | 22.7% | 20.7% | 21.3% |
| Net income | $77.0m | $65.9m | $201.5m | $174.8m |
| Diluted EPS | $1.52 | $1.32 | $3.99 | $3.53 |
| Net cash from operating activities | Not presented quarterly | Not presented quarterly | $266.8m | $219.7m |
- Q3 revenue grew 17.3% and net income 16.8%; nine-month revenue grew 17.9% and net income 15.3%. Acquisitions accounted for most reported revenue growth: $65.0m of Q3 growth and $204.8m of nine-month growth.
- Same-unit revenue rose 3.7% in Q3 and 2.8% year to date. Reimbursement-related factors drove growth, while patient volumes declined slightly. Q3 volume weakness was principally in hospital-based neonatal practices.
- Practice salaries and benefits rose 18.8% in Q3 and 20.0% for nine months. Management attributed the increases mainly to staffing for acquired and existing practices. G&A grew more slowly than revenue, and its share of revenue declined.
- Operating margin fell 46 basis points in Q3 and 61 basis points year to date, mainly reflecting the acquired-practice mix; operating efficiencies partially offset the decline. Net interest expense also increased, to $1.1m in Q3 and $3.2m for nine months.
Liquidity, debt, and capital allocation
- At September 30, 2013, cash and cash equivalents were $16.2m, short-term investments $4.9m, working capital $99.0m, and total assets $2,979.9m. Working capital was $8.3m higher than at year-end 2012.
- Line-of-credit borrowings were $123.5m; $671.2m remained available after outstanding letters of credit. The facility is an $800m revolver, expandable to $1.0bn subject to conditions. The company reported compliance with its covenants and expected to remain compliant through 2013.
- Nine-month cash use included $218.8m in investing activities, principally $193.5m of acquisition and contingent-purchase payments, and $53.0m in financing activities. Cash declined $5.0m to $16.2m over the period.
- The company repurchased approximately 528,000 shares for $51.9m in Q3 at an average $98.19 per share. Management stated that operating cash flow, cash on hand, and available credit should fund working capital, anticipated acquisitions and capital expenditures, the repurchase program, and obligations for at least 12 months.
- Days sales outstanding improved to 45.2 days from 48.4 days at December 31, 2012. Accounts receivable increased to $272.8m from $248.1m.
Acquisitions, outlook, and risks
- MEDNAX acquired eight physician practices in the first nine months of 2013—five anesthesiology and three neonatology practices—for $205.6m total consideration, including $13.4m of contingent consideration. Acquisition accounting added about $189.0m of goodwill and $24.9m of intangible assets. Goodwill rose to $2,354.2m.
- No specific earnings or revenue guidance was provided. Management noted that interim results are not necessarily indicative of full-year results and said acquisition practices may benefit from improved contracting, collections, growth initiatives, and cost efficiencies.
- Medicaid parity payments contributed approximately $10.5m of Q3 revenue and $13.4m for nine months, or approximately $0.06 and $0.08 of diluted EPS, respectively. Management said the timing and frequency of future payments were uncertain.
- Risks include changes in government reimbursement and Medicaid funding, Affordable Care Act implementation and enrollment uncertainty, and potential shifts toward lower-reimbursing government programs. The 2% Medicare sequestration reduction began April 1, 2013; management did not expect a material impact.
- The company cited ordinary-course government audits and investigations, malpractice claims, hospital indemnification obligations, and the possibility that insurance may not cover all professional-liability losses. Professional-liability liabilities totaled $154.1m, including $17.2m current; no accrual was made for uncertain potential government audit matters because the liability could not be reasonably estimated.
- Management estimated that a 1% change in interest rates would affect annual pretax income by approximately $1.2m, based on the September 30 credit-line balance. Disclosure controls were deemed effective; no material changes in internal control were reported. The filing reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Separate acquisition-driven growth from same-unit revenue and assess the durability of reimbursement and Medicaid parity benefits.
- Track acquired-practice integration, operating margins, staffing costs, and neonatal patient-volume trends.
- Review acquisition consideration, contingent liabilities, goodwill and intangible-asset growth, and future acquisition cash needs.
- Monitor collections and receivables, professional-liability estimates and claims, and liquidity following buybacks and acquisitions.
- Confirm credit-facility covenant headroom and sensitivity to interest rates, and follow changes in reimbursement policy and state Medicaid funding.