Business context and reporting period
MEDNAX, Inc. (the successor to Pediatrix Medical Group, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2012. It provides neonatal, maternal-fetal, pediatric subspecialty and anesthesia physician services across 34 states and Puerto Rico. At year-end, its network included approximately 2,152 physicians. The filing reports full-year results and unaudited quarterly results; it is not a standalone Q4 filing.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net patient service revenue | $1,816.6 million | $1,588.2 million | +14.4% |
| Income from operations | $389.5 million | $355.4 million | +9.6% |
| Net income | $240.9 million | $218.0 million | +10.5% |
| Diluted EPS | $4.85 | $4.47 | +8.5% |
| Operating margin | 21.4% | 22.4% | Down 94 basis points |
| Net margin | 13.3% | 13.7% | Down 0.4 percentage points |
| Operating cash flow | $325.7 million | $271.0 million | +20.2% |
Revenue growth included $179.0 million from acquisitions; same-unit revenue grew 3.2%, from higher service volumes and net reimbursement-related improvements. Salaries and benefits rose 16.5%, faster than revenue, contributing to operating-margin contraction. The effective tax rate was 37.9% versus 38.3% in 2011.
Cash and cash equivalents were $21.3 million; working capital was $90.7 million. The company used $460.5 million in investing activities, including $441.0 million in acquisition and contingent-consideration payments, and generated $137.5 million from financing activities. The revolving credit facility was expanded to $800 million and extended to November 2017. Year-end borrowings were $144.0 million, with $650.5 million available after outstanding letters of credit. Total liabilities were $715.0 million; shareholders’ equity was $2.04 billion. Management said available operating cash, cash on hand and credit capacity should fund working capital, planned acquisitions and capital expenditures for at least 12 months.
For Q4 2012, revenue was $471.3 million, operating income $103.0 million, net income $66.1 million and diluted EPS $1.32. Q4 2011 comparables were $404.9 million, $91.5 million, $58.4 million and $1.19, respectively.
Material changes versus the prior comparable period
- Acquisitions expanded the physician network and materially contributed to growth: MEDNAX acquired 16 physician groups in 2012 for total consideration of $451.1 million, including $436.4 million cash and $14.7 million contingent consideration.
- Anesthesia increased to 27% of revenue from 21% in 2011; neonatal and other pediatric subspecialties declined to 56% from 60%.
- Same-unit revenue increased 3.2%; higher volume contributed $29.9 million and reimbursement-related factors contributed approximately $19.5 million. Increased government-program exposure partly offset reimbursement gains.
- Operating margin declined as expenses grew, including acquisition-related staffing costs and the varying margins of acquired practices. Goodwill rose to $2.17 billion from $1.75 billion; annual impairment testing found no impairment.
- Days sales outstanding improved to 48.4 from 52.3. Operating cash flow rose, helped by improved collections at existing units and better operating results.
- Year-end line-of-credit borrowings increased to $144.0 million from $29.0 million.
Outlook, risks, contingencies and unusual items
Management planned approximately $400 million of acquisitions in 2013, primarily in anesthesia, with the remainder in neonatal, maternal-fetal, pediatric cardiology and other pediatric subspecialties. The filing gives no earnings or revenue guidance. Management described the impact of healthcare reform and the 2012 Medicaid payment rule as uncertain.
Key risks include lower Medicaid and Medicare reimbursement, state budget constraints, shifts toward lower-paying government payors, changes in birth volumes, hospital contract termination, physician recruitment and retention, acquisition integration and goodwill valuation, billing and regulatory investigations, and medical-liability claims. Texas generated approximately 24% of 2012 revenue; the five largest states generated 59%. The company self-insured a significant portion of professional liability risk and reported $137.0 million in accrued professional liabilities. Government audits and investigations are expected in the ordinary course; no accrual was recorded for future matters because potential liabilities could not be reasonably estimated. Pending legal matters were not expected by management to have a material adverse effect, although outcomes were uncertain. The filing also notes reimbursement-rate risks, including scheduled Medicare reductions absent further legislative action.
MEDNAX reported no cash dividends in 2012 or 2011 and no share repurchases in Q4 2012. It typically has negative operating cash flow in Q1 because of annual physician incentive payments and retirement-plan contributions. The 2010 comparison included a $10.9 million tax-provision benefit from resolution of tax matters; no comparable benefit was reported for 2012.
Important facts for investors to verify
- How much of future revenue and earnings growth is expected to come from acquisitions versus same-unit growth, and whether the planned 2013 acquisition spending generates targeted returns.
- Whether reimbursement mix, Medicaid funding and managed-care contracting support revenue and collections; monitor DSO, receivables and contractual-adjustment estimates.
- Whether expense growth moderates and operating margins stabilize as acquired practices are integrated.
- Credit-facility covenant compliance, borrowing levels, interest-rate exposure and funding needs for acquisitions.
- Assumptions underlying the $137.0 million professional-liability reserve, goodwill valuation and contingent acquisition payments.
- Progress and financial effects of healthcare reform, Medicare payment changes, state Medicaid decisions and any government investigations or material legal developments.