Pediatrix Medical Group, Inc. (then MEDNAX, Inc.) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The filing identifies the registrant as MEDNAX, Inc. and presents the management services business as discontinued operations. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless stated otherwise.
Business context and results
MEDNAX provided physician services across 39 states and Puerto Rico, including neonatology, anesthesia, radiology, maternal-fetal medicine and pediatric specialties. It also provided teleradiology services nationwide. The company was pursuing a sale of its management services organization to focus on physician services; no completed sale is reported in this filing.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Continuing-operations revenue | $868.3m | $865.0m | $1,719.5m | $1,717.6m |
| Income from operations | $80.5m | $122.4m | $159.0m | $222.1m |
| Operating margin | 9.3% | 14.1% | 9.2% | 12.9% |
| Income from continuing operations | $35.5m | $74.8m | $77.2m | $134.8m |
| Adjusted EBITDA from continuing operations | $131.0m | $145.2m | $235.9m | $267.7m |
| Adjusted diluted EPS from continuing operations | $0.89 | $0.98 | $1.54 | $1.80 |
| Net income (loss), including discontinued operations | ($8.2m) | $79.4m | ($251.1m) | $142.8m |
Financial position, cash flow and capital
- Cash and cash equivalents: $24.5m at June 30, 2019, versus $25.5m at December 31, 2018. Short-term investments were $82.8m. Management reported continuing-operations working capital of $247.0m, up $118.0m from year-end.
- Cash flow, six months: Continuing-operations operating cash flow was $54.9m, compared with $15.2m in 2018; investing cash outflow was $19.8m and financing cash outflow was $40.4m. Capital expenditures were $16.5m.
- Debt and availability: Revolver borrowings were $351.5m, with $848.3m available under the $1.2bn facility after letters of credit. Senior notes principal totaled $1.75bn: $750m of 5.25% notes due 2023 and $1.0bn of 6.25% notes due 2027. The company reported compliance with applicable debt covenants.
- Other: The company repurchased approximately 5.0m shares for $144.5m during the first half. It acquired three physician practices for $11.5m cash.
Material changes and drivers
- Q2 continuing revenue increased 0.4%; same-unit revenue grew 1.6%, reflecting volume growth of 1.1% and reimbursement-related growth of 0.5%. First-half continuing revenue was nearly flat, up 0.1%.
- Operating income fell 34.2% in Q2 and 28.4% for the first half. Management attributed margin pressure to operating expenses growing faster than revenue. Practice salaries and benefits rose 2.7% in Q2 and 2.8% in the first half; management cautioned that clinician compensation growth may remain above historical averages.
- Q2 included $27.5m of transformational and restructuring expenses. First-half expenses were $31.0m, including severance, contract termination and consulting costs. Interest expense also rose, primarily due to higher average borrowing costs following senior-note issuances.
- Discontinued operations generated a Q2 loss of $43.8m and a first-half loss of $328.3m. These results included non-cash held-for-sale impairment charges of $66.4m in Q2 and $388.0m for the first half. The first-quarter charge reduced the management services unit’s goodwill to zero; a further Q2 write-down affected amortizing intangible assets.
Outlook, risks and contingencies
- Management targeted annualized improvements of $40m in general and administrative expenses and $80m in operational improvements by the end of 2019. It stated that $60m of improvements had been achieved in 2018 and that it remained committed to the remaining improvements, while noting there was no assurance they would be achieved.
- No specific revenue or earnings guidance is provided in the filing. Management expected operating cash, cash on hand and revolver availability to fund working capital, acquisitions, capital spending, restructuring, buybacks and obligations for at least the next 12 months.
- The potential divestiture remained uncertain; management said there was no assurance it would occur and that final proceeds or changes in estimated value could result in further gain or loss.
- Key business exposures discussed include reimbursement and payor-mix shifts, clinician compensation, healthcare policy changes, potential surprise-billing legislation, and malpractice claims. Professional-liability exposure was $260.0m, including $44.8m classified as current, with a $26.3m related insurance receivable. The company self-insures a portion of this risk.
- The filing reported a securities class action and a derivative action that the company intended to defend; their outcomes could not be assessed. Government audits and investigations may also occur, and no accrual was recorded for those matters because potential liabilities could not be reasonably estimated.
- A 1% interest-rate change on revolver borrowings outstanding at quarter-end was estimated to affect annual pretax income by approximately $3.5m.
Most important facts for investors to verify
- Whether the management services divestiture closes, its proceeds, and any additional impairment or disposal gain or loss.
- Whether the targeted 2019 cost and operational improvements are achieved and offset continued clinician compensation growth.
- Trends in continuing-operations revenue, margins, operating cash generation and interest expense.
- Debt levels, covenant compliance, revolver availability and the effect of floating-rate exposure.
- Developments in malpractice exposure, government inquiries and the disclosed securities and derivative litigation.