MEDNAX, Inc. (now Pediatrix Medical Group) — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed October 29, 2015. The filing is by MEDNAX, Inc.; the request metadata identifies Pediatrix Medical Group.
Business context and results
MEDNAX provided hospital-based and office-based physician services—including neonatology, anesthesiology, maternal-fetal medicine and pediatric specialties—and teleradiology, revenue-cycle management and consulting services. Results include acquisitions from their respective closing dates, limiting comparability with 2014.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $722.3 million | $626.5 million | $2,038.3 million | $1,788.4 million |
| Operating income | $151.1 million | $138.1 million | $406.9 million | $371.9 million |
| Operating margin | 20.9% | 22.0% | 20.0% | 20.8% |
| Net income attributable to MEDNAX | $90.8 million | $86.2 million | $243.6 million | $228.9 million |
| Diluted EPS | $0.97 | $0.86 | $2.59 | $2.28 |
| EBITDA (non-GAAP) | $168.2 million | $149.5 million | $453.3 million | $404.0 million |
| Adjusted EPS (non-GAAP) | $1.10 | $0.96 | $2.95 | $2.56 |
Q3 revenue rose 15.3%, but same-unit revenue declined 1.2%; excluding the year-over-year decline in Medicaid parity revenue, same-unit revenue rose 1.4%. Nine-month revenue increased 14.0%, with same-unit revenue up 0.4%, or 2.6% excluding the parity revenue decline. Acquisitions accounted for most reported revenue growth. Higher general and administrative costs and acquisition mix contributed to margin compression. Diluted EPS benefited in part from lower weighted-average shares following repurchases.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $264.6 million, versus $243.8 million in 2014. Investing used $823.4 million, including $806.3 million of net acquisition payments and $19.9 million of capital expenditures. Financing provided $571.8 million, including $790.0 million of net credit-facility borrowings and $235.1 million of share repurchases.
- Cash and cash equivalents were $60.9 million at September 30, 2015, compared with $47.9 million at year-end 2014. Working capital was $168.6 million, up from $50.8 million. Days sales outstanding increased to 51.8 from 49.8 days, primarily due to recent acquisitions.
- Credit-facility borrowings were approximately $1.4 billion ($1.2 billion revolver and $192.5 million term loan); $534.4 million remained available. The unsecured facility totals $1.7 billion, matures in October 2019, and includes customary covenants. The company reported material compliance and expected to remain compliant through 2015.
- Management expected operating cash, cash on hand and available credit to fund working capital, anticipated acquisitions, capital expenditures, repurchases and obligations for at least the next 12 months.
Material changes, outlook and risks
- Eleven acquisitions were completed in the first nine months, including a radiology and telemedicine business acquired for approximately $507.4 million and physician practices and a receivables business. Total acquisition-date consideration was approximately $840.9 million. Management cited opportunities to improve collections, contracting, growth and operating efficiency; these are expectations, not assured outcomes.
- In June, the revolving commitment was increased from $1.3 billion to $1.7 billion. A further increase to $2.2 billion may be available subject to conditions.
- Medicaid parity revenue declined from $17.2 million to $1.5 million in Q3 and from $48.2 million to $10.5 million year to date, following expiration of federal enhanced funding for services after 2014. Government-program payer mix also increased, pressuring reimbursement. No formal earnings or revenue guidance was provided.
- A 1 percentage-point change in interest rates would affect annual pretax income by approximately $13.6 million, based on facility borrowings at period-end.
- Professional-liability exposure included a $209.8 million recorded liability, with $28.4 million current; MEDNAX self-insures a portion of this risk. The filing warns that insurance may not cover all claims and that government audits, investigations and legal proceedings could adversely affect results, although management did not expect pending legal matters to have a material adverse effect.
- Uncertain-tax-position liabilities were $29.4 million. Settlement discussions could reduce the liability by $15–$18 million within 12 months; an estimated $7–$10 million of that potential reduction could benefit the effective tax rate. The outcome was not certain.
Important facts for investors to verify
- Whether acquired businesses deliver expected integration benefits and how acquisition-driven growth compares with same-unit performance.
- Trends in reimbursement, Medicaid parity, government-program mix, patient collections and DSO.
- Debt levels, remaining revolver availability, covenant compliance and sensitivity to interest-rate changes.
- Final acquisition purchase-price allocations and any resulting goodwill or intangible-asset adjustments.
- Resolution of tax discussions and the adequacy of professional-liability reserves and insurance coverage.