MEDNAX, Inc. (now Pediatrix Medical Group) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. The filing registrant is MEDNAX, Inc. The company provides physician services in neonatology, maternal-fetal medicine, pediatric subspecialties and anesthesia.
Financial performance
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net patient service revenue | $422.6 million | $382.3 million; up 10.6% |
| Income from operations | $79.4 million | $75.7 million; up 4.8% |
| Operating margin | 18.8% | 19.8%; down 103 basis points |
| Net income | $48.4 million | $45.5 million; up 6.4% |
| Diluted earnings per share | $0.98 | $0.94 |
| Net cash from operating activities | $(32.1) million | $(14.5) million |
| Cash and cash equivalents | $22.4 million | $18.6 million at Dec. 31, 2011 |
| Revolver borrowings | $83.5 million | $29.0 million at Dec. 31, 2011 |
Revenue, margins and operating changes
- Revenue increased $40.3 million. Acquisitions completed after year-end 2010 contributed $31.2 million; same-unit revenue grew $9.1 million, or 2.4%.
- Same-unit growth reflected higher patient volumes (+$6.7 million) and reimbursement-related factors (+$2.4 million). Management cited growth across services, improved managed-care contracting and hospital administrative fees, partly offset by a higher share of patients covered by government programs.
- Practice salaries and benefits rose 11.6% to $272.3 million, primarily reflecting acquisition-related and existing-practice staffing growth. General and administrative expense rose 12.1% to $46.9 million; as a share of revenue it increased to 11.1% from 10.9%.
- Management attributed lower operating margin mainly to the mix of acquired practices and slightly higher operating expenses. Net interest expense declined to $0.1 million from $0.6 million. The effective tax rate was 39.0%, versus 39.5%.
Cash flow, liquidity and debt
- Operating cash use increased to $32.1 million, primarily because of cash payments for annual performance-based incentive compensation, principally to physicians. The company reported working capital of $188.4 million, up from $83.0 million at year-end, and days sales outstanding improved to 51.0 from 52.3.
- Investing activities used $29.4 million, including $28.1 million of acquisition and contingent purchase-price payments and $2.9 million of capital expenditures, partly offset by net investment proceeds.
- Financing activities provided $65.3 million, including $54.5 million of net revolver borrowings and $9.3 million from stock issuance and employee stock plans. Cash increased $3.8 million during the quarter.
- The $500 million revolving credit facility had $83.5 million outstanding and $5.5 million of letters of credit, leaving $411.0 million available. The company stated it was in material compliance with covenants and expected to remain compliant through 2012. A 1% interest-rate change would affect annual pretax income by approximately $0.8 million.
- Management expects operating cash generation, cash on hand and revolver availability to fund working capital, anticipated acquisitions, capital expenditures and contractual obligations for at least the next 12 months.
Acquisitions, outlook and risks
- Four physician practices were acquired during the quarter for total consideration of $32.9 million: $26.8 million cash and $6.1 million contingent consideration. The acquisitions added approximately $24.6 million of goodwill and $8.3 million of intangible assets. The contingent amount depends on performance measures over periods of up to five years.
- No specific earnings or revenue guidance was provided. Management said it expected to improve acquired practices through contracting, collections, growth initiatives and operating efficiencies.
- Management warned that economic weakness could shift more patients to government-sponsored programs, which generally reimburse less than commercial payors. State budget shortfalls could also reduce or delay Medicaid funding. The effects of healthcare reform remained uncertain, including pending legal challenges and future regulations.
- Professional liability exposure is partly self-insured through a captive subsidiary. Total professional liability reserves were $126.3 million, including $13.7 million classified as current. The company cautioned that insurance may not cover all unfavorable claims.
- Government audits, inquiries and investigations could have a material adverse effect; the filing states that no accrual was recorded for future matters because potential liabilities could not be reasonably estimated. The company also described pending and threatened malpractice-related matters and a prior U.S. Attorney inquiry concerning historical stock-option practices.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its most recent Form 10-K.
Important facts for investors to verify
- Confirm the company and period: this Q1 2012 report is filed by MEDNAX, Inc., the company later known as Pediatrix Medical Group.
- Track whether same-unit growth and acquisition integration offset lower-margin practice mix and rising operating costs.
- Assess the durability of operating cash generation, considering first-quarter incentive-compensation payments and the increased use of revolver borrowings.
- Monitor government-payor mix, state Medicaid funding, acquisition contingent payments, credit-facility covenant compliance and professional liability reserves.
- Review subsequent developments in government inquiries, malpractice claims and healthcare reform, as outcomes and potential financial effects were uncertain in the filing.