MEDNAX, Inc. (formerly Pediatrix Medical Group, Inc.) — FY2014 Form 10-K
Reporting period: Year ended December 31, 2014. The filing includes unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing. MEDNAX provides neonatal, anesthesia, maternal-fetal and other pediatric physician services, and added revenue-cycle and consulting services during 2014.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net revenue | $2,438.9 | $2,154.0 | +13.2% |
| Income from operations | $513.0 | $452.1 | +13.5% |
| Operating margin | 21.0% | 21.0% | Unchanged |
| Net income attributable to MEDNAX | $317.3 | $280.5 | +13.1% |
| Diluted EPS | $3.18 | $2.78 | +14.4% |
| Cash from operating activities | $422.6 | $405.4 | +$17.2 |
Same-unit revenue rose 3.8%: reimbursement-related factors contributed 2.3% and patient volumes 1.5%. Acquisitions completed after 2012 contributed approximately $205.4 million to 2014 revenue growth. The reported effective tax rate was 37.6%, compared with 37.4% in 2013.
Fourth quarter: Revenue was $650.5 million versus $567.4 million in Q4 2013; net income attributable to MEDNAX was $88.4 million versus $79.0 million; diluted EPS was $0.89 versus $0.78.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $47.9 million, up from $31.1 million; working capital was $50.8 million, up from $41.3 million.
- Net cash used in investing was $503.6 million, including $479.4 million of acquisition payments and $18.1 million of capital expenditures. Financing activities provided $97.8 million.
- Year-end borrowings were $568.0 million, compared with $27.0 million a year earlier: $368.0 million revolving debt and a $200.0 million term loan. The new unsecured credit agreement provides a $1.3 billion revolver and matures in October 2019; $931.8 million was available at year-end. The company reported covenant compliance.
- Management expected operating cash generation, cash on hand and available credit to fund working capital, planned acquisitions, capital expenditures, repurchases and contractual obligations for at least the following 12 months. A 1 percentage-point interest-rate change was estimated to affect annual pretax income by about $5.7 million.
Material changes and notable items
- MEDNAX acquired 11 physician practices and two complementary service businesses for total consideration of $488.6 million. It also entered two cardiology-related joint ventures.
- The company repurchased approximately 7.1 million shares for $488.4 million during 2014 and authorized an additional $600 million repurchase program in October. No cash dividends were paid in 2014 or 2013.
- Enhanced Medicaid-to-Medicare payment parity generated approximately $65.0 million of 2014 revenue and $0.20 of diluted EPS, versus $31.2 million and $0.10 in 2013. Federal funding was scheduled to end for services after December 31, 2014 absent legislative action; continuation was uncertain in the filing.
- Goodwill increased to $2.776 billion from $2.394 billion, primarily due to acquisitions; annual impairment testing found no impairment. Professional-liability reserves totaled $168.4 million. Potential contingent acquisition payments were up to $37.5 million through 2019.
Outlook, risks and contingencies
The filing gives no specific revenue or earnings guidance. Management described continued acquisition, same-unit and organic growth, broader hospital relationships, telemedicine and expansion of outsourced services as strategic priorities. The company reported that same-unit volume gains varied by specialty, with declines in maternal-fetal medicine and pediatric cardiology partly offset by growth in anesthesia, neonatology and other pediatric services.
- Reimbursement: Government programs represented 25% of net revenue, versus 24% in 2013; contracted managed care represented 68%. Medicaid rate pressure, loss of enhanced parity, payor-mix shifts and collection delays could weigh on revenue and cash flow. The filing also cited a possible approximately 20% Medicare physician-fee-schedule reduction effective April 1, 2015 if Congress did not act, as well as 2% Medicare sequestration reductions.
- Concentration and operations: The five largest states generated 62% of 2014 net revenue; Texas alone contributed 24%. Hospital contracts may be terminated or not renewed, and the business depends on recruiting and retaining physicians and other clinicians.
- Regulatory and legal exposure: The filing highlights healthcare billing, fraud-and-abuse, corporate-practice-of-medicine, privacy and antitrust compliance risks. Government audits and investigations are expected in the ordinary course; potential liabilities were not accrued because they could not be reasonably estimated. Medical malpractice claims are partly self-insured, and reserve estimates are actuarial.
- Other risks: Acquisitions and integration, variable-rate debt, cybersecurity and information-system disruptions, and fluctuations in quarterly results could adversely affect performance. First-quarter operating cash flow is typically negative due largely to annual physician incentive payments.
Investor verification priorities
- Confirm whether Medicaid parity funding or state-level replacements continued after December 31, 2014, and assess the resulting revenue and EPS impact.
- Review subsequent Medicare reimbursement actions and the sensitivity of the business to government reimbursement and payor mix.
- Track debt, interest costs, covenant headroom, acquisition spending and the remaining share-repurchase authorization.
- Assess acquired-practice integration and organic growth, including specialty-level patient volumes and same-unit revenue.
- Monitor accounts-receivable quality: DSO increased to 49.8 days from 46.3, and management estimated a 0.5%–1.5% change in collection assumptions could affect revenue by approximately $6 million–$18 million.
- Review developments in government investigations, malpractice claims and professional-liability reserves, as actual outcomes may differ materially from estimates.