Business context and reporting period
MEDNAX, Inc. (the registrant in this filing) reported unaudited results for the quarter and six months ended June 30, 2012. It provides physician services in neonatal, maternal-fetal, pediatric subspecialty and anesthesia care. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net patient service revenue | $449.5 | $393.4 | $872.1 | $775.7 |
| Income from operations | $99.7 | $93.1 | $179.1 | $168.8 |
| Operating margin | 22.2% | 23.7% | 20.5% | 21.8% |
| Net income | $60.5 | $55.9 | $108.9 | $101.4 |
| Diluted earnings per share | $1.22 | $1.15 | $2.20 | $2.09 |
For the first six months, operating cash flow was $85.0 versus $80.8 a year earlier. Investing cash outflow was $75.0, including $64.9 for acquisitions and contingent purchase payments and $6.8 for capital expenditures. Financing cash outflow was $16.5. Cash ended the period at $12.1. Working capital was $143.0, up from $83.0 at year-end 2011. There were no borrowings outstanding under the $500 million revolving credit facility; $494.5 million remained available after letters of credit. Capital lease obligations were $0.4 million in total. The filing reports no separate gross-margin measure.
Material changes versus the prior comparable period
- Q2 revenue grew 14.3%; six-month revenue grew 12.4%. Acquisitions contributed $40.7 million of Q2 growth and $71.1 million of six-month growth. Same-unit revenue increased 3.9% and 3.3%, respectively.
- Same-unit growth reflected higher service volumes and improved reimbursement-related revenue, including managed-care contracting and hospital administrative fees. Growth was partly offset by a larger share of patients covered by lower-paying government programs.
- Operating income rose more slowly than revenue, and operating margin contracted 148 basis points in Q2 and 123 basis points for the six months. Management attributed the decline to higher operating costs and the mix of acquired practices.
- Net income increased 8.2% for Q2 and 7.4% for the six months. Diluted EPS increased to $1.22 and $2.20, respectively; weighted-average diluted shares also increased.
- The company acquired seven physician practices in the first half for total consideration of $70.6 million. Goodwill increased to $1,807.6 million from $1,746.8 million at December 31, 2011.
Outlook, risks and unusual items
No specific earnings or revenue guidance was provided. Management expected operating cash, cash on hand and available credit to fund working capital, anticipated acquisitions, capital expenditures and obligations for at least the next 12 months, and expected covenant compliance through 2012. These are forward-looking expectations, not guarantees.
- Management cited economic weakness and potential further shifts toward government-sponsored payors, whose reimbursement is lower; state budget shortfalls could also affect Medicaid funding. The effect of healthcare reform and proposed Medicaid payment rules remained uncertain.
- Professional liability exposure is partly self-insured through a captive subsidiary. The recorded professional liability risk was $130.4 million, including $14.1 million classified as current. Insurance may not cover all future claims.
- Government audits, inquiries and investigations could materially affect results, but no accrual was recorded for potential future matters because the exposure could not be reasonably estimated. The filing also describes a prior U.S. Attorney inquiry regarding historical stock-option practices and ordinary-course malpractice litigation.
- Acquisition-related contingent consideration included $6.1 million recorded for 2012 acquisitions; the possible undiscounted payment under those agreements ranged from zero to $6.7 million. Acquisitions and incentive-compensation payment timing affected cash flows.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its latest Form 10-K.
Investor facts to verify
- How much of ongoing revenue growth is organic, and whether same-unit volume and reimbursement trends persist.
- Whether operating margins recover as acquired practices are integrated and whether compensation and other operating costs remain elevated.
- Acquisition returns, goodwill and contingent consideration, including the cash required for future purchase payments.
- Collections and receivables: DSO improved to 48.8 days from 52.3 days at year-end, while net receivables rose to $240.9 million.
- Professional liability reserves, insurance sufficiency, government audits and legal matters, and any changes in Medicaid reimbursement or payor mix.
- Revolving-credit covenant headroom and liquidity needs if acquisition spending or operating cash flow differs from management expectations.