The following discussion highlights the principal factors that have affected our
financial condition and results of operations, as well as our liquidity and
capital resources, for the periods described. This discussion should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements and
the notes thereto included in this Quarterly Report. In addition, reference is
made to our audited consolidated financial statements and notes thereto and
related Management's Discussion and Analysis of Financial Condition and Results
of Operations included in our most recent Annual Report on Form 10-K. As used in
this Quarterly Report, the terms "MEDNAX", the "Company", "we", "us" and "our"
refer to MEDNAX, Inc. and its consolidated subsidiaries (collectively "MDX"),
together with MDX's affiliated professional associations, corporations and
partnerships ("affiliated professional contractors"). Certain subsidiaries of
MDX have contracts with our affiliated professional contractors, which are
separate legal entities that provide physician services in certain states and
Puerto Rico.
Overview
MEDNAX is a leading provider of physician services including newborn,
maternal-fetal, other pediatric subspecialties, and anesthesia care. Our
national network is composed of affiliated physicians, including those who
provide neonatal clinical care in 34 states and Puerto Rico, primarily within
hospital-based neonatal intensive care units, to babies born prematurely or with
medical complications. We also have affiliated physicians who provide
maternal-fetal and obstetrical medical care to expectant mothers experiencing
complicated pregnancies primarily in areas where our affiliated neonatal
physicians practice. Our network includes other pediatric subspecialists,
including those who provide pediatric cardiology care, pediatric intensive care,
hospital-based pediatric care and pediatric surgical care. In addition, we have
physicians who provide anesthesia care to patients in connection with surgical
and other procedures as well as pain management.
During the six months ended June 30, 2012, we completed the acquisition of seven
physician group practices consisting of three anesthesiology practices, one
neonatology practice, one maternal-fetal medicine practice, one pediatric
cardiology practice and one other pediatric subspecialty practice. During the
six months ended June 30, 2011, we completed the acquisition of three physician
group practices consisting of one maternal-fetal medicine practice, one
pediatric cardiology practice and one other pediatric subspecialty practice.
Based on past results, we expect that we can improve the results of these
practices through improved managed care contracting, improved collections,
identification of growth initiatives, as well as operating and cost savings,
based upon the significant infrastructure we have developed.
Our results of operations for the six months ended June 30, 2012 and 2011
include the results of operations for these physician group practices from their
respective dates of acquisition and therefore are not comparable in some
respects.
The United States is continuing to be affected by unfavorable economic
conditions, and the number of unemployed workers remains significant. During the
six months ended June 30, 2012, the percentage of our patient services being
reimbursed under government-sponsored healthcare programs increased as compared
to the same period in 2011. We could experience additional payor shifts to
government-sponsored programs if economic conditions do not improve or if they
deteriorate further. Payments received from government-sponsored programs are
substantially less for equivalent services than payments received from
commercial insurance payors. In addition, although certain states are expecting
some revenue increases when compared to the past few years, many states continue
to experience lower than anticipated revenue and continue to face significant
budget shortfalls. These shortfalls could lead to reduced or delayed funding for
state Medicaid programs and, in turn, reduced or delayed reimbursement for
physician services.
In March 2010, the "Patient Protection and Affordable Care Act," (the
"Healthcare Reform Act"), was enacted. The Healthcare Reform Act contains a
number of provisions that could affect us over the next several years. These
provisions include establishing health insurance exchanges to facilitate the
purchase of qualified health plans, expanding Medicaid eligibility, subsidizing
insurance premiums and creating incentives for businesses to provide healthcare
benefits. Additionally, in May 2012, the Centers for Medicare & Medicaid
Services published a proposed rule under the Healthcare Reform Act that certain
physicians who provide eligible primary care services would generally be paid at
Medicare rates in effect in calendar years 2013 and 2014 instead of
state-established Medicaid rates. Generally, state Medicaid rates are lower than
federally-established Medicare rates. We are currently evaluating the proposed
rule, but we cannot predict with any assurance whether the rule will be adopted
as proposed.
Many of the Healthcare Reform Act's most significant reforms do not take effect
until 2014 and thereafter, and their details will be shaped significantly by
additional regulations that have yet to be proposed. Moreover, enactment of the
Healthcare Reform Act has been controversial and has prompted numerous legal
challenges to its constitutionality. The Supreme Court recently upheld most of
the Healthcare Reform Act; however, it remains unclear whether there will be any
changes made to certain provisions of the Healthcare Reform Act through future
acts of Congress or executive actions and implementations. As a result, we
cannot predict with any assurance the ultimate effect of the Healthcare Reform
Act and related regulations and interpretive legislation on our Company, nor can
we provide any assurance that its provisions will not have a material adverse
effect on our business, financial condition, results of operations or cash
flows.
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The following discussion contains forward-looking statements. Please see the
Company's most recent Annual Report on Form 10-K, including Item 1A, Risk
Factors, for a discussion of the uncertainties, risks and assumptions associated
with these forward-looking statements. In addition, please see "Caution
Concerning Forward-Looking Statements" below.
Results of Operations
Three Months Ended June 30, 2012 as Compared to Three Months Ended June 30, 2011
Our net patient service revenue increased $56.1 million, or 14.3%, to $449.5
million for the three months ended June 30, 2012, as compared to $393.4 million
for the same period in 2011. Of this $56.1 million increase, $40.7 million, or
72.5%, was attributable to revenue generated from acquisitions completed after
March 31, 2011. Same-unit net patient service revenue increased $15.4 million,
or 3.9%, for the three months ended June 30, 2012. The change in same-unit net
patient service revenue was the result of an increase in revenue of $9.3
million, or 2.4%, related to net reimbursement-related factors and an increase
of $6.1 million, or 1.5%, from higher overall patient service volumes. The
increase in revenue of $9.3 million related to net reimbursement-related factors
was primarily due to continued improvements in managed care contracting, an
increase in the administrative fees received from our hospital partners due to
the expansion of our services resulting from internal growth and the flow
through of revenue from modest price increases, partially offset by a decrease
in revenue caused by an increase in the percentage of our patients being
enrolled in government-sponsored programs. The increase in revenue of $6.1
million from higher patient service volumes is related to growth in our
hospital-based neonatal and anesthesia services as well as our other pediatric
physician services, primarily newborn nursery services, partially offset by
slight declines in our office-based maternal-fetal and pediatric cardiology
services. Same units are those units at which we provided services for the
entire current period and the entire comparable period.
Practice salaries and benefits increased $40.7 million, or 17.3%, to $276.0
million for the three months ended June 30, 2012, as compared to $235.3 million
for the same period in 2011. This $40.7 million increase was primarily
attributable to increased costs associated with new physicians and other staff
to support acquisition-related growth and growth at existing units, of which
$28.0 million was related to salaries and $12.7 million was related to incentive
compensation, which increased based on physician-practice operational results,
and benefits.
Practice supplies and other operating expenses increased $1.7 million, or 10.5%,
to $18.0 million for the three months ended June 30, 2012, as compared to $16.3
million for the same period in 2011. The increase was attributable to practice
supply and other costs of $1.3 million related to anesthesiology, hospital-based
and hearing screen program acquisitions and rent, medical supply and other costs
of $0.5 million related to our office-based acquisitions.
General and administrative expenses include all billing and collection functions
and all other salaries, benefits, supplies and operating expenses not
specifically related to the day-to-day operations of our physician group
practices. General and administrative expenses increased $5.5 million, or 12.9%,
to $48.2 million for the three months ended June 30, 2012, as compared to $42.7
million for the same period in 2011. This increase of $5.5 million is
attributable to the overall growth of the Company including acquisition-related
growth. General and administrative expenses as a percentage of net patient
service revenue were 10.7% for the three months ended June 30, 2012, as compared
to 10.9% for the three months ended June 30, 2011.
Depreciation and amortization expense increased $1.7 million, or 27.4%, to $7.7
million for the three months ended June 30, 2012, as compared to $6.0 million
for the same period in 2011. The increase was primarily attributable to the
amortization of intangible assets related to acquisitions and the depreciation
of fixed asset additions.
Income from operations increased $6.6 million, or 7.1%, to $99.7 million for the
three months ended June 30, 2012, as compared to $93.1 million for the same
period in 2011. Our operating margin decreased to 22.2% for the three months
ended June 30, 2012, as compared to 23.7% for the same period in 2011. This
decrease of 148 basis points was primarily due to an increase in operating
expenses during the three months ended June 30, 2012 as compared to the three
months ended June 30, 2011, as well as the variability in margins due to the mix
of practices acquired after March 31, 2011.
We recorded net interest expense of $0.5 million for the three months ended
June 30, 2012, as compared to $0.7 million for the same period in 2011. The
decrease in net interest expense was primarily due to lower average borrowings
under our $500 million amended and restated revolving credit facility ("Line of
Credit"), partially offset by a higher effective borrowing interest rate.
Interest expense for the three months ended June 30, 2012 and 2011 consisted
primarily of interest charges, commitment fees and amortized debt costs related
to our Line of Credit and accretion expense.
Our effective income tax rate was 39.0% for the three months ended June 30,
2012, as compared to 39.5% for the same period in 2011.
Net income increased by 8.2% to $60.5 million for the three months ended
June 30, 2012, as compared to $55.9 million for the same period in 2011.
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Diluted net income per common and common equivalent share was $1.22 on weighted
average shares outstanding of 49.5 million for the three months ended June 30,
2012, as compared to $1.15 on weighted average shares outstanding of
48.7 million for the same period in 2011.
Six Months Ended June 30, 2012 as Compared to Six Months Ended June 30, 2011
Our net patient service revenue increased $96.4 million, or 12.4%, to $872.1
million for the six months ended June 30, 2012, as compared to $775.7 million
for the same period in 2011. Of this $96.4 million increase, $71.1 million, or
73.8%, was attributable to revenue generated from acquisitions completed after
December 31, 2010. Same-unit net patient service revenue increased $25.3
million, or 3.3%, for the six months ended June 30, 2012. The change in
same-unit net patient service revenue was the result of an increase in revenue
of $13.4 million, or 1.7%, from higher overall patient service volumes across
all of our specialties and an increase of approximately $11.9 million, or 1.6%,
related to net reimbursement-related factors. The increase in revenue of $13.4
million from higher patient service volumes is related to growth across all of
our services, primarily in our hospital-based neonatal and anesthesia practices,
as well as our other pediatric physician services, primarily newborn nursery
services, and growth in our office-based maternal-fetal and pediatric cardiology
services. The increase in revenue of $11.9 million related to net
reimbursement-related factors was primarily due to continued improvements in
managed care contracting, an increase in the administrative fees received from
our hospital partners due to the expansion of our services resulting from
internal growth and the flow through of revenue from modest price increases,
partially offset by a decrease in revenue caused by an increase in the
percentage of our patients being enrolled in government-sponsored programs. Same
units are those units at which we provided services for the entire current
period and the entire comparable period.
Practice salaries and benefits increased $69.0 million, or 14.4%, to $548.2
million for the six months ended June 30, 2012, as compared to $479.2 million
for the same period in 2011. This $69.0 million increase was primarily
attributable to increased costs associated with new physicians and other staff
to support acquisition-related growth and growth at existing units, of which
$50.5 million was related to salaries and $18.5 million was related to benefits
and incentive compensation.
Practice supplies and other operating expenses increased $3.6 million, or 11.5%,
to $34.9 million for the six months ended June 30, 2012, as compared to $31.3
million for the same period in 2011. The increase was attributable to practice
supply and other costs of $2.0 million related to anesthesiology, hospital-based
and hearing screen program acquisitions and rent, medical supply and other costs
of $0.9 million related to our office-based acquisitions. In addition, practice
supply and other costs at our existing units increased by $0.7 million.
General and administrative expenses include all billing and collection functions
and all other salaries, benefits, supplies and operating expenses not
specifically related to the day-to-day operations of our physician group
practices. General and administrative expenses increased $10.6 million, or
12.5%, to $95.1 million for the six months ended June 30, 2012, as compared to
$84.5 million for the same period in 2011. This increase of $10.6 million is
attributable to the overall growth of the Company, including acquisition-related
growth. General and administrative expenses as a percentage of net patient
service revenue were 10.9% for the six months ended June 30, 2012 and 2011.
Depreciation and amortization expense increased $3.0 million, or 25.3%, to $14.8
million for the six months ended June 30, 2012, as compared to $11.8 million for
the same period in 2011. The increase was primarily attributable to the
amortization of intangible assets related to acquisitions and the depreciation
of fixed asset additions.
Income from operations increased $10.3 million, or 6.1%, to $179.1 million for
the six months ended June 30, 2012, as compared to $168.8 million for the same
period in 2011. Our operating margin decreased to 20.5% for the six months ended
June 30, 2012, as compared to 21.8% for the same period in 2011. This decrease
of 123 basis points was primarily due to an increase in operating expenses
during the six months ended June 30, 2012 as compared to the six months ended
June 30, 2011, as well as the variability in margins due to the mix of practices
acquired after December 31, 2010.
We recorded net interest expense of $0.6 million for the six months ended
June 30, 2012, as compared to $1.2 million for the same period in 2011. The
decrease in net interest expense was primarily due to lower average borrowings
under our Line of Credit, partially offset by a higher effective borrowing
interest rate. Interest expense for the six months ended June 30, 2012 and 2011,
consisted primarily of interest charges, commitment fees and amortized debt
costs related to our Line of Credit and accretion expense.
Our effective income tax rate was 39.0% for the six months ended June 30, 2012,
as compared to 39.5% for the same period in 2011.
Net income increased by 7.4% to $108.9 million for the six months ended June 30,
2012, as compared to $101.4 million for the same period in 2011.
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Diluted net income per common and common equivalent share was $2.20 on weighted
average shares outstanding of 49.5 million for the six months ended June 30,
2012, as compared to $2.09 on weighted average shares outstanding of
48.5 million for the same period in 2011.
Liquidity and Capital Resources
As of June 30, 2012, we had $12.1 million of cash and cash equivalents on hand
as compared to $18.6 million at December 31, 2011. In addition, we had working
capital of $143.0 million at June 30, 2012, an increase of $60.0 million from
working capital of $83.0 million at December 31, 2011. This net increase in
working capital is primarily due to year-to-date earnings and proceeds from the
issuance of common stock under our stock incentive and stock purchase plans,
partially offset by the use of funds for practice acquisition and contingent
purchase price payments and net payments on our Line of Credit.
Our net cash provided from operating activities was $85.0 million for the six
months ended June 30, 2012, as compared to net cash provided from operating
activities of $80.8 million for the same period in 2011. This net improvement of
$4.2 million for the six months ended June 30, 2012 is primarily due to:
(i) improved operating results, partially offset by (ii) a net decrease in cash
flow related to changes in the components of our accounts payable and accrued
expenses, consisting primarily of changes in our accrued incentive compensation
liability and timing differences in our accounts payable.
During the six months ended June 30, 2012, accounts receivable increased by
$10.5 million, as compared to an increase of $12.6 million for the same period
in 2011. The net increases in accounts receivable for the six months ended
June 30, 2012 and 2011 are primarily due to higher net patient service revenue
recorded during the periods as well as increases in accounts receivable related
to recent acquisitions.
Our accounts receivable are principally due from managed care payors, government
payors, and other third-party insurance payors. We track our collections from
these sources, monitor the age of our accounts receivable, and make all
reasonable efforts to collect outstanding accounts receivable through our
systems, processes and personnel at our corporate and regional billing and
collection offices. We use customary collection practices, including the use of
outside collection agencies, for accounts receivable due from private pay
patients when appropriate. Almost all of our accounts receivable adjustments
consist of contractual adjustments due to the difference between gross amounts
billed and the amounts allowed by our payors. Any amounts written off related to
private pay patients are based on the specific facts and circumstances related
to each individual patient account.
Days sales outstanding ("DSO") is one of the key factors that we use to evaluate
the condition of our accounts receivable and the related allowances for
contractual adjustments and uncollectibles. DSO reflects the timeliness of cash
collections on billed revenue and the level of reserves on outstanding accounts
receivable. Our DSO improved to 48.8 days at June 30, 2012 as compared to 52.3
days at December 31, 2011, primarily as a result of improvement at existing
units as well as the continued integration of our recent acquisitions.
During the six months ended June 30, 2012, cash used in operating activities
related to accounts payable and accrued expenses was $57.7 million, compared to
$52.2 million for the same period in 2011. The net increase in cash used of $5.5
million related to accounts payable and accrued expenses activities is primarily
due to (i) an increase in our annual payments due under our performance-based
incentive compensation program, principally to our physicians, of which a
majority is paid annually in the first quarter and (ii) timing of our accounts
payable accruals, offset by (iii) an increase in our accruals for
performance-based incentive compensation during the six months ended June 30,
2012.
During the six months ended June 30, 2012, our net cash used in investing
activities of $75.0 million included physician practice acquisition payments and
contingent purchase price payments of $64.9 million, capital expenditures of
$6.8 million and net purchases of $3.3 million related to the purchase and
maturity of investments. Our acquisition payments were primarily related to the
purchase of three anesthesiology practices, one neonatology practice, one
maternal-fetal medicine practice, one pediatric cardiology practice and one
other pediatric subspecialty practice. Our capital expenditures were for medical
equipment, leasehold and other improvements, computer and office equipment,
software and furniture and fixtures at our office-based practices and our
corporate and regional offices. Under the current accounting guidance for
business combinations, payments of contingent consideration liabilities related
to acquisitions completed prior to January 1, 2009 are presented as cash flows
from investing activities. Payments of contingent consideration liabilities
related to acquisitions completed after January 1, 2009 are presented as cash
flows from financing activities.
During the six months ended June 30, 2012, our net cash used in financing
activities of $16.5 million consisted primarily of net payments on our Line of
Credit of $29.0 million and the payment of $4.9 million for contingent
consideration liabilities, partially offset by proceeds from the exercise of
employee stock options and the issuance of common stock under our stock purchase
plans of $13.8 million, and excess tax benefits related to the vesting of
restricted stock and the exercise of employee stock options of $3.7 million.
Under the current accounting guidance for business combinations, payments of
contingent consideration liabilities related to acquisitions completed after
January 1, 2009 are presented as cash flows from financing activities. Payments
of contingent consideration liabilities related to acquisitions completed prior
to January 1, 2009 are presented as cash flows from investing activities.
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Our $500 million Line of Credit, which is guaranteed by substantially all of our
subsidiaries and affiliated professional contractors, includes (1) a $50 million
sub-facility for the issuance of letters of credit and (2) a $25 million
sub-facility for swingline loans. The Line of Credit may be increased to
$570 million, subject to the satisfaction of specified conditions. At our
option, borrowings under the Line of Credit (other than swingline loans) bear
interest at (1) the alternate base rate (defined as the highest of (i) the Wells
Fargo Bank, National Association prime rate, (ii) the Federal Funds Rate plus
1/2 of 1.000% and (iii) one month LIBOR plus 1.000%) or (2) the LIBOR rate, as
defined in the Line of Credit, plus an applicable margin rate ranging from
0.125% to 0.500% for alternate base rate borrowings and 1.125% to 1.500% for
LIBOR rate borrowings, in each case based on our consolidated leverage ratio.
Swingline loans bear interest at the alternate base rate plus the applicable
margin rate. We are subject to certain covenants and restrictions specified in
the Line of Credit, including covenants that require us to maintain a minimum
fixed charge coverage ratio and not to exceed a specified consolidated leverage
ratio, to comply with laws, and restrict us from paying dividends and making
certain other distributions, as specified therein. Failure to comply with these
covenants would constitute an event of default under the Line of Credit,
notwithstanding our ability to meet our debt service obligations. The Line of
Credit includes various customary remedies for the lenders following an event of
default.
At June 30, 2012, we had no outstanding principal balance on our Line of Credit.
We had outstanding letters of credit associated with our professional liability
insurance program of $5.5 million which reduced the amount available on our Line
of Credit to $494.5 million at June 30, 2012. At June 30, 2012, we believe we
were in compliance, in all material respects, with the financial covenants and
other restrictions applicable to us under our Line of Credit. Based on our
current expectations, we believe we will be in compliance with these covenants
throughout 2012.
We maintain professional liability insurance policies with third-party insurers,
subject to self-insured retention, exclusions and other restrictions. We
self-insure our liabilities to pay self-insured retention amounts under our
professional liability insurance coverage through a wholly owned captive
insurance subsidiary. We record liabilities for self-insured amounts and claims
incurred but not reported based on an actuarial valuation using historical loss
information, claim emergence patterns and various actuarial assumptions. Our
total liability related to professional liability risks at June 30, 2012 was
$130.4 million, of which $14.1 million is classified as a current liability
within accounts payable and accrued expenses in the Condensed Consolidated
Balance Sheets.
We anticipate that funds generated from operations, together with our current
cash on hand and funds available under our Line of Credit, will be sufficient to
finance our working capital requirements, fund anticipated acquisitions and
capital expenditures, and meet our contractual obligations for at least the next
12 months.
Caution Concerning Forward-Looking Statements
Certain information included or incorporated by reference in this Quarterly
Report may be deemed to be "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements may include, but are not
limited to, statements relating to our objectives, plans and strategies, and all
statements (other than statements of historical facts) that address activities,
events or developments that we intend, expect, project, believe or anticipate
will or may occur in the future are forward-looking statements. These statements
are often characterized by terminology such as "believe," "hope," "may,"
"anticipate," "should," "intend," "plan," "will," "expect," "estimate,"
"project," "positioned," "strategy" and similar expressions and are based on
assumptions and assessments made by our management in light of their experience
and their perception of historical trends, current conditions, expected future
developments and other factors they believe to be appropriate. Any
forward-looking statements in this Quarterly Report are made as of the date
hereof, and we undertake no duty to update or revise any such statements,
whether as a result of new information, future events or otherwise.
Forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties. Important factors that could cause actual
results, developments and business decisions to differ materially from
forward-looking statements are described in the Company's most recent Annual
Report on Form 10-K, including the section entitled "Risk Factors."
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