Business context and reporting period
MEDNAX, Inc. (the filing registrant) reported unaudited results for the three and nine months ended September 30, 2010, compared with the same 2009 periods. The company manages affiliated physician practices, including neonatology, maternal-fetal medicine, pediatric cardiology and anesthesiology. Results include acquired practices from their acquisition dates and are not fully comparable on that basis.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net patient service revenue | $351.1 million | $331.3 million | $1,033.1 million | $955.0 million |
| Income from operations | $81.4 million | $78.3 million | $227.0 million | $209.7 million |
| Operating margin | 23.2% | 23.7% | 22.0% | 22.0% |
| Net income | $61.3 million | $48.1 million | $148.9 million | $125.4 million |
| Diluted EPS | $1.29 | $1.03 | $3.14 | $2.71 |
| Operating cash flow | Not presented for quarter | $155.5 million | $168.5 million |
Revenue rose 6.0% in Q3 and 8.2% year to date; net income rose 27.3% and 18.7%, respectively. Acquisition-related revenue accounted for most of the increase: $17.2 million of Q3 growth and $61.6 million of nine-month growth. Same-unit revenue increased 0.8% in Q3 and 1.8% year to date. Q3 same-unit volume growth was modest, including a 0.6% decline in NICU patient days; year-to-date same-unit volume declined 0.2%.
Q3 operating margin declined 47 basis points, mainly from slower same-unit revenue growth and higher amortization, partly offset by administrative efficiencies. General and administrative expense was 10.7% of revenue in Q3 versus 11.4%; for nine months it was 11.1% versus 11.6%. Q3 depreciation and amortization included $1.2 million of accelerated amortization from termination of a hospital contract.
Liquidity, debt and capital allocation
At September 30, 2010, cash and cash equivalents were $61.4 million, short-term investments $14.2 million, working capital $22.7 million, and total liabilities $427.7 million. Working capital improved from a $54.0 million deficit at December 31, 2009. Total long-term debt and capital lease obligations were approximately $0.2 million, and the $350 million revolving credit facility had no outstanding principal at quarter-end; $5.9 million of letters of credit left $344.1 million available.
Nine-month operating cash flow was $155.5 million. Investing cash outflow was $84.0 million, including $64.1 million of acquisition and contingent-consideration payments and $10.1 million of capital expenditures. Financing cash outflow was $36.6 million, primarily reflecting $50.0 million of net revolver repayments. Management said operating cash, cash on hand and available credit should be sufficient for working capital, anticipated acquisitions, capital expenditures and obligations for at least 12 months.
During the first nine months, MEDNAX acquired eight physician practices for $63.7 million in total consideration, including $9.0 million of contingent consideration. After quarter-end, it acquired two anesthesiology practices for $244.0 million, funded with cash and revolver proceeds. At filing date, revolver borrowings were $161.5 million.
Outlook, risks and unusual items
- Tax item: A third-quarter resolution of tax matters reduced the income tax provision by $10.9 million. Reported effective tax rates were 24.7% for Q3 and 34.1% year to date; excluding the resolution’s benefit, management reported 38.1% and 38.9%, respectively. This materially boosted reported earnings and EPS.
- Reimbursement and policy: Management cited a shift toward lower-paying government-sponsored programs and potential state Medicaid funding pressure. A temporary Medicare fee adjustment raised rates by about 2% retroactive to June 1, 2010; absent further congressional action, the filing said a roughly 23% reduction was scheduled for December 1, 2010. The effects of healthcare reform and reimbursement changes remained uncertain.
- Acquisition and operating execution: Management expected to improve acquired practices through contracting, collections, growth initiatives and cost savings. No numerical earnings or revenue guidance was provided.
- Contingencies: Risks include government audits and investigations, a continuing U.S. Attorney inquiry concerning historical stock-option practices, medical-malpractice claims and potential limits on insurance coverage. The company self-insures part of professional-liability risk; the recorded liability was $115.2 million. Management believed the company complied with its Corporate Integrity Agreement at quarter-end. The filing reported no material changes to previously disclosed risk factors.
Most important facts to verify
- Whether post-quarter anesthesiology acquisitions and the resulting $161.5 million revolver balance affect leverage, interest expense and covenant headroom.
- How much reported earnings growth depended on the $10.9 million tax benefit, versus ongoing operating performance.
- Whether Medicare rates, Medicaid funding and payer mix materially change reimbursement and same-unit revenue.
- Whether acquisition integration, NICU patient-day trends, collections and professional-liability costs support margins and cash generation.
- The development of the stock-option inquiry, government compliance reviews and malpractice exposures.