Business context and reporting period
MEDNAX, Inc. (the registrant named in this filing) reported unaudited results for the three months ended March 31, 2014, compared with the first quarter of 2013. The company provides physician services, including neonatology, anesthesia, maternal-fetal medicine and pediatric subspecialties.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Net patient service revenue | $566.3 million | $502.7 million |
| Income from operations | $104.1 million | $91.6 million |
| Operating margin | 18.4% | 18.2% |
| Net income | $63.7 million | $55.4 million |
| Diluted EPS | $0.63 | $0.55 |
| Cash from operating activities | $(49.8) million | $(18.4) million |
- Revenue increased 12.7%; net income rose 15.0%. The filing reports a 39.0% effective tax rate in both periods.
- Cash and cash equivalents were $19.8 million at March 31, versus $31.1 million at year-end 2013. Working capital was $173.8 million, up from $41.3 million.
- Line-of-credit borrowings were $248.0 million, compared with $27.0 million at year-end. The company reported $546.7 million available under the facility after outstanding letters of credit.
- Investing cash outflow was $74.2 million, including $69.4 million in acquisition payments. Financing provided $112.7 million, including $221.0 million in net line-of-credit borrowings, partly offset by $117.0 million of share repurchases.
- Professional-liability exposure totaled $164.4 million, including $18.6 million classified as current. A 1% change in interest rates would affect annual pretax income by approximately $2.5 million, based on quarter-end borrowings.
Material changes versus the prior period
- Acquisitions completed after December 31, 2012 contributed $47.9 million of the $63.6 million year-over-year revenue increase. Same-unit revenue grew 3.1%; reimbursement-related factors added 3.4%, while patient-service volumes declined 0.3%.
- Same-unit reimbursement growth reflected $14.0 million of Medicaid payment-parity revenue, improved managed-care contracting and modest price increases, partly offset by a slightly higher share of government-program patients.
- Operating margin improved by 17 basis points, primarily from general and administrative expense growing more slowly than revenue. Net interest and other income also benefited from a litigation settlement.
- Operating cash use increased by $31.4 million, primarily reflecting incentive-compensation payments and a larger increase in accounts receivable. Days sales outstanding rose to 50.2 days from 46.3 at year-end, which management attributed mainly to acquired-practice integration.
- The company acquired three physician practices for $69.4 million in cash and repurchased approximately 2.0 million shares for $117.0 million. Goodwill recorded for the acquisitions was $63.8 million.
Outlook, commentary and risks
- Management stated that operating cash generation, cash on hand and available credit should fund working capital, anticipated acquisitions, capital expenditures and contractual obligations for at least 12 months. It expected to remain in compliance with credit-facility covenants during 2014. No earnings or revenue guidance was provided.
- Management cited economic weakness, possible shifts toward lower-reimbursement government payors, patient inability to pay, and uncertain Affordable Care Act effects as risks. It noted that the harsh winter affected anesthesia volumes.
- Congressional action in March 2014 temporarily prevented scheduled Medicare physician-rate cuts through March 2015. The filing warned that, absent further action, cuts of approximately 20% could take effect in April 2015 and cumulative reductions could reach approximately 40% by 2016.
- Government audits and investigations could have a material adverse effect; no accrual was recorded because potential liabilities could not be reasonably estimated. The company also faces malpractice claims and self-insures part of its professional-liability risk; insurance may not cover all adverse outcomes.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- How much of future growth comes from same-unit performance versus acquisitions, and whether acquired practices improve as management expects.
- Whether higher DSO and accounts-receivable balances normalize as acquired practices are integrated and collections improve.
- The sustainability of reimbursement-related growth, including Medicaid parity revenue, and the impact of payor mix and patient bad debt.
- Future Medicare payment policy, credit-facility covenant headroom and borrowing costs as debt increased materially during the quarter.
- The adequacy of professional-liability reserves and insurance, and developments in government inquiries or legal proceedings.