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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for MEDNAX, Inc. (formerly Pediatrix Medical Group, Inc.). Effective December 31, 2008, the company completed a holding company formation transaction establishing MEDNAX, Inc. as the parent company. The company operates as a national provider of neonatal, pediatric, and maternal-fetal medical services. The filing notes that the United States economic slowdown and disruptions in capital markets are ongoing, though the company did not experience a volume decline or adverse payor mix shift in the first quarter of 2009.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net patient service revenue increased 23.8% ($58.3 million). Approximately 82.7% of this increase was attributable to acquisitions completed after December 31, 2007. Same-unit revenue increased 4.1% due to higher patient volumes and improved pricing.
• Expense Increases: Practice salaries and benefits rose 28.2% to $194.0 million, driven by new physicians and staff supporting acquisition growth. General and administrative expenses increased 23.2% to $36.7 million, partly due to expansion into anesthesia services.
• Profitability: While operating income increased 9.0%, the operating margin decreased from 21.2% to 18.6%. This compression is attributed to higher salary costs in neonatal practices and the addition of lower-margin anesthesia and office-based services.
• Net Income Decline: Net income decreased significantly from $55.8 million to $34.1 million. The prior year figure included a $23.2 million after-tax gain from the sale of the newborn metabolic screening laboratory business (discontinued operations), which did not recur in 2009.
• Liquidity: Working capital improved from a deficit of $32.2 million at year-end 2008 to a positive $37.8 million, primarily due to borrowings under the line of credit and quarterly earnings.

Guidance, Outlook, and Risks

• Acquisitions: The company acquired three physician group practices (two neonatology, one pediatric cardiology) for approximately $8.3 million in Q1 2009. Management expects to improve results through managed care contracting and operational efficiencies.
• Capital Resources: The company maintains a $350 million revolving credit facility, with $181.0 million outstanding as of March 31, 2009. Management believes funds from operations and the credit facility are sufficient for the next 12 months.
• Legal Proceedings:
  • SEC Settlement: In March 2009, the company settled an SEC investigation regarding historical stock option granting practices. The settlement involved a permanent injunction but no civil penalty or monetary damages.
  • DOJ Investigation: The company is cooperating with the U.S. Attorney's office regarding the same stock option matters; the outcome is unpredictable.
  • Corporate Integrity Agreement: The company is under a five-year agreement with the Office of Inspector General (OIG) following a 2006 settlement regarding billing practices. Failure to comply could result in exclusion from federal healthcare programs.
• Risk Factors: Risks include the economic slowdown, potential shifts in payor mix toward government programs, and the possibility that insurance coverage may be inadequate for professional liability claims.

Investor Verification Checklist

• Verify the sustainability of the 4.1% same-unit revenue growth amidst the broader economic slowdown.
• Monitor the impact of the new anesthesia services and office-based acquisitions on the overall operating margin, which has compressed to 18.6%.
• Review the status of the ongoing U.S. Attorney's office investigation regarding stock option practices.
• Assess the adequacy of the $98.1 million liability recorded for professional liability risks against potential future claims.
• Confirm compliance with the Corporate Integrity Agreement covenants to avoid exclusion from federal healthcare programs.