MEDNAX, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. The filing issuer is MEDNAX, Inc. (the company identified in the request as Pediatrix Medical Group). Financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context
MEDNAX provides physician services in neonatology, anesthesiology, maternal-fetal medicine and pediatric subspecialties, as well as teleradiology, revenue-cycle management and consulting services. Growth during the period was substantially acquisition-driven.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $771.8M | $676.6M | $1,524.4M | $1,316.0M |
| Operating income | $147.8M | $141.0M | $272.0M | $255.8M |
| Operating margin | 19.2% | 20.8% | 17.8% | 19.4% |
| Net income attributable to MEDNAX | $82.4M | $84.1M | $150.3M | $152.8M |
| Diluted EPS | $0.89 | $0.90 | $1.62 | $1.62 |
| EBITDA (non-GAAP) | $168.1M | $156.6M | $312.1M | $285.1M |
| Adjusted diluted EPS (non-GAAP) | $1.03 | $1.02 | $1.90 | $1.85 |
For Q2, revenue increased 14.1%, but net income attributable to MEDNAX declined about 2.0%; for the first half, revenue rose 15.8% while net income declined about 1.6%. Acquisition-related revenue accounted for 86.1% of Q2’s revenue increase and 86.3% of the first-half increase. Same-unit revenue grew 2.0% in Q2 and 2.2% in the first half. Management cited modest reimbursement improvements, partly offset by lower Q2 patient volumes and a higher share of government-sponsored healthcare program patients in the first half.
Operating margins contracted by 168 basis points in Q2 and 160 basis points in the first half, primarily due to the mix of acquisitions. General and administrative expense rose to 12.0% of revenue from 10.7% in both comparative periods. Higher interest expense, primarily associated with the 5.25% senior notes due 2023, also weighed on net income.
Cash flow, liquidity and debt
- First-half operating cash flow was $116.7M, versus $92.4M in 2015. Investing activities used $228.5M, including $195.7M of acquisition payments and $19.2M of capital expenditures. Financing activities provided $112.2M, including $164.5M of net credit-agreement borrowings and $61.8M of share repurchases.
- Cash and cash equivalents were $51.9M at June 30, 2016. Working capital was $216.4M, up from $99.0M at December 31, 2015.
- At June 30, principal outstanding under the credit agreement was $698.0M ($513.0M revolving borrowings and a $185.0M term loan); the 2023 senior notes had $750.0M outstanding. Approximately $1.2B was available under the credit agreement at quarter-end. The company reported covenant compliance.
- After quarter-end, MEDNAX acquired a revenue-management services company for $400.0M, funded with revolving credit borrowings and cash. At filing, revolving borrowings were approximately $825.0M and facility availability approximately $875.0M.
- Days sales outstanding improved to 54.4 days from 55.2 days at year-end. Management said operating cash, cash on hand and credit availability should cover working capital, anticipated acquisitions and capital expenditures, repurchases, and contractual obligations for at least 12 months.
Material changes, outlook and risks
During the first half, the company completed seven physician-practice acquisitions and acquired a patient-engagement software company for total consideration of $193.0M. The subsequent $400.0M acquisition was a significant post-quarter event. The filing provides no specific numeric earnings or revenue guidance.
MEDNAX reported no Medicaid-to-Medicare parity revenue in the 2016 periods, compared with $3.0M in Q2 2015 and $9.0M in the first half of 2015. Management described reimbursement, healthcare-policy and patient-collection trends as uncertain; government-program reimbursement is generally lower than commercial reimbursement, and greater patient financial responsibility may increase bad debt. A 1% change in interest rates on the $698.0M credit-agreement balance was estimated to affect annual pretax income by approximately $7.0M.
The company reported $207.7M of professional-liability exposure, including $27.6M classified as current, and self-insures a portion through a captive insurer. It expects government audits and investigations in the ordinary course but had not accrued for such matters because potential liability could not be reasonably estimated. Management considered pending legal matters not expected to have a material adverse effect, while noting outcomes and insurance adequacy cannot be assured. No material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- Whether acquired businesses deliver expected growth and operational benefits, and how acquisition mix affects margins.
- Integration, funding and purchase-price allocation for the $400.0M post-quarter acquisition; updated debt levels and credit-facility headroom.
- Same-unit volume, reimbursement and payer mix trends, including government-program exposure and patient collections.
- Professional-liability claims, government audits or investigations, and the adequacy of reserves and insurance.
- Non-GAAP EBITDA and adjusted EPS reconciliations and their comparability with GAAP results.