Business context and reporting period
The filing is MEDNAX, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. MEDNAX provides physician services—including neonatology, anesthesiology, maternal-fetal medicine, pediatric subspecialties and teleradiology—and revenue-cycle and consulting services. The filing does not identify the issuer as Pediatrix Medical Group, Inc.; investors should verify the entity and ticker.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $828.0m | $722.3m | $2,352.4m | $2,038.3m |
| Operating income | $156.9m | $151.1m | $428.9m | $406.9m |
| Operating margin | 18.9% | 20.9% | 18.2% | 20.0% |
| Net income attributable to MEDNAX | $96.5m | $90.8m | $246.8m | $243.6m |
| Diluted EPS | $1.04 | $0.97 | $2.65 | $2.59 |
| Adjusted diluted EPS (non-GAAP) | $1.09 | $1.10 | $2.99 | $2.95 |
| EBITDA (non-GAAP) | $181.2m | $168.2m | $493.2m | $453.3m |
For Q3, revenue rose 14.6%, but operating income grew 3.8% and operating margin contracted 198 basis points. For the nine months, revenue rose 15.4%, operating income increased 5.4%, and margin declined 173 basis points. Acquisition-related revenue accounted for most of the reported revenue growth. Same-unit revenue increased 1.4% in Q3 and 2.1% year to date.
- Cash flow: Nine-month operating cash flow was $312.8m, versus $264.6m. Investing used $771.9m, including $724.9m of net acquisition payments; financing provided $460.3m. Cash increased to $52.8m from $51.6m at year-end 2015.
- Liquidity: Working capital was $162.4m, up from $99.0m at December 31, 2015. DSO was 54.1 days, compared with 55.2 days at year-end.
- Debt: At quarter-end, credit-agreement borrowings were $1.05bn, comprising $864.0m on the revolver and a $182.5m term loan; $750.0m of 5.25% senior notes are due 2023. Revolver availability was approximately $835.6m. Management reported covenant compliance.
- Balance sheet: Total assets were $5.34bn, including goodwill of $3.83bn and intangible assets of $671.7m. Total liabilities were $2.68bn.
Material changes and unusual items
- MEDNAX completed 14 acquisitions in the first nine months—12 physician practices, a receivables company and a patient-engagement software company—for consideration of $722.2m, net of acquired cash. Acquisitions added $95.5m to Q3 revenue and $274.5m to nine-month revenue, per management’s analysis.
- Acquisition-related amortization and operating costs, plus the mix of acquired businesses and teleradiology services, contributed to margin pressure. General and administrative expense rose to 11.3% of revenue in Q3 from 11.1%, and to 11.7% for nine months from 10.8%.
- Interest expense increased substantially, primarily due to the $750m 2023 notes. Net non-operating expense was $16.2m in Q3 and $43.1m year to date, versus $4.9m and $11.2m, respectively, in 2015.
- A favorable tax settlement reduced uncertain-tax-position liabilities by $17.6m and benefited Q3 and nine-month net income by $10.6m. Excluding that benefit, the effective tax rate was 39.0% for Q3 and 38.8% year to date.
- No Medicaid-to-Medicare parity revenue was recorded in 2016; the comparable 2015 nine-month period included $10.5m. This reduced the year-over-year comparison.
- The company repurchased approximately 0.9m shares for $61.8m during the nine months, completing repurchases under its program for 2016 equity-compensation issuances.
Outlook, risks and contingencies
No formal earnings or revenue guidance is provided in the supplied filing text. Management expected operating cash flow, cash on hand and available credit to fund working capital, anticipated acquisitions, capital expenditures, share repurchases and contractual obligations for at least the next 12 months. Management also expected covenant compliance through 2016. These are forward-looking expectations, not guarantees.
Key risks include shifts toward lower-reimbursement government programs, patient bad debt, healthcare-law and reimbursement changes, acquisition integration and margin variability, and interest-rate exposure. Management estimated that a 1% rate change on credit-agreement borrowings would affect annual pretax income by approximately $10.5m. The company self-insures a portion of professional liability risk; related liabilities totaled $207.0m, including $27.0m current. It warned that government audits and investigations, malpractice claims and other litigation could have material adverse effects; outcomes and insurance adequacy cannot be assured. No material changes to previously reported risk factors were noted.
Important facts for investors to verify
- Confirm the issuer identity: this filing is headed MEDNAX, Inc., while the request names Pediatrix Medical Group, Inc.
- Assess how much growth is acquisition-driven versus same-unit, and whether acquired practices and service businesses can improve margins as management expects.
- Review the sustained operating-margin decline, higher interest expense and leverage alongside available revolver capacity and covenant headroom.
- Evaluate the sustainability of earnings excluding the $10.6m tax benefit and the effect of the lost parity revenue.
- Monitor receivables, professional-liability estimates, government inquiries and legal claims, including possible exposure beyond insurance coverage.