Business context and reporting period
MEDNAX, Inc. (the registrant named in the filing; ticker MD) filed this unaudited Form 10-Q for the quarter ended September 30, 2019. The company provides physician services across multiple specialties in 39 states and Puerto Rico, plus teleradiology nationwide. Results distinguish continuing physician-services operations from MedData, the management-services business classified as discontinued operations and held for sale.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue from continuing operations | $888.7 | $848.8 | $2,608.2 | $2,566.4 |
| GAAP operating income (loss), continuing operations | $(1,359.8) | $104.2 | $(1,200.8) | $326.3 |
| GAAP net income (loss), consolidated | $(1,255.9) | $65.6 | $(1,507.0) | $208.4 |
| Adjusted EBITDA, continuing operations | $132.7 | $129.7 | $368.6 | $397.4 |
| Adjusted diluted EPS, continuing operations | $0.91 | $0.86 | $2.45 | $2.67 |
- Q3 continuing revenue increased 4.7% year over year; same-unit revenue rose 4.2%, reflecting 3.2% volume growth and 1.0% reimbursement-related growth. Nine-month continuing revenue rose 1.6%, while adjusted EBITDA declined 7.2%.
- The reported Q3 continuing operating margin was (153.0)% and the nine-month margin was (46.0)%, primarily due to the $1.449 billion non-cash goodwill impairment. Excluding goodwill impairment and restructuring costs, management reported margins of 12.3% for Q3 and 11.5% for the nine-month period.
- Continuing-operations operating cash flow was $210.8 million for nine months, versus $150.4 million in 2018. Investing cash outflow was $43.9 million and financing cash outflow was $183.6 million. Capital expenditures were $25.0 million; acquisition payments were $31.2 million.
- At September 30, cash was $28.9 million and short-term investments were $78.4 million. Working capital from continuing operations was $172.5 million. The revolving credit facility had $209.8 million outstanding and $990.0 million available.
- Debt included $750 million of 5.25% notes due 2023, $1.0 billion of 6.25% notes due 2027, and $209.8 million drawn on the credit facility. Interest expense was $29.9 million in Q3 and $91.7 million for nine months, up from $21.8 million and $63.3 million, respectively, in 2018.
Material changes and unusual items
- The company recorded a $1.449 billion non-cash goodwill impairment in Q3, nearly all related to anesthesiology. Management cited the reporting-unit structure change, a lower share price and valuation assumptions including a company-specific risk premium. A 1% change in the discount rate would have changed the impairment by an estimated $75–$90 million.
- MedData was classified as discontinued operations. The nine-month discontinued-operations loss was $324.0 million, including a $388.0 million loss on classification as held for sale and subsequent impairment charges. On October 31, 2019, after quarter-end, the company completed the sale for $250 million cash, subject to adjustments, plus contingent consideration of up to $50 million. Proceeds were expected to support debt repayment, repurchases and acquisitions.
- Transformational and restructuring expenses were $20.0 million in Q3 and $51.0 million for nine months. Management described consulting, restructuring, severance and contract-termination costs.
- Adoption of lease accounting in 2019 added $84.3 million of operating lease right-of-use assets and $88.8 million of lease liabilities at quarter-end.
- The company repurchased approximately 5.1 million shares for $144.9 million during the first nine months of 2019. Weighted-average shares were lower year over year, contributing to per-share comparisons.
Outlook, commentary and risks
- Management targeted $40 million in annualized general and administrative improvements and $80 million in operational improvements by year-end 2019, while noting there was no assurance the targets would be achieved. It reported $60 million of improvements achieved in 2018.
- Management expected higher-than-historical clinician compensation growth, which could pressure results. It also cited malpractice-claim trends, potential shifts toward lower-reimbursing government programs, payor and healthcare-policy changes, and uncertainty around surprise-billing legislation.
- Management expected operating cash, cash on hand and credit-facility availability to fund working capital, acquisitions, capital spending, restructuring, repurchases and obligations for at least the next 12 months. It reported compliance with debt covenants at September 30 and expected continued compliance through 2019.
- Government audits and investigations, malpractice claims, securities litigation and a derivative action were disclosed. The company said outcomes could not be predicted with certainty; it had not accrued for future government matters it could not reasonably estimate. It self-insures a portion of professional-liability risk.
Important facts for investors to verify
- Review the assumptions and sensitivity underlying the $1.449 billion goodwill impairment, particularly the anesthesiology valuation.
- Check the final MedData sale proceeds, working-capital adjustments, contingent consideration and any disposal gain or loss reported after closing.
- Track adjusted EBITDA and operating performance against GAAP results, and assess the definitions and exclusions in management’s non-GAAP measures.
- Monitor debt, covenant headroom, interest expense and the use of MedData sale proceeds.
- Assess clinician compensation, reimbursement mix, malpractice exposure, government inquiries and litigation developments.