UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from ______ to ______
Commission File Number:
(Exact name of registrant as specified in its charter)
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(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
On April 22, 2022, the registrant had outstanding
Mednax, Inc.
INDEX
2
Mednax, Inc.
Consolidated Balance Sheets
(in thousands)
(Unaudited)
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March 31, 2022 |
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December 31, 2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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Accounts receivable, net |
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Prepaid expenses |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Operating and finance lease right-of-use assets |
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Deferred income tax assets |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
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$ |
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Current portion of finance lease liabilities |
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Current portion of operating lease liabilities |
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Income taxes payable |
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Total current liabilities |
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Line of credit |
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Long-term debt and finance lease liabilities, net |
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Long-term operating lease liabilities |
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Long-term professional liabilities |
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Deferred income tax liabilities |
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Other liabilities |
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Total liabilities |
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Shareholders’ equity: |
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Preferred stock; $ par value; |
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Common stock; $ par value; |
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Additional paid-in capital |
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Accumulated other comprehensive (loss) income |
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Retained deficit |
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Total Mednax, Inc. shareholders’ equity |
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Noncontrolling interest |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
3
Mednax, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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2022 |
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2021 |
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Net revenue |
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$ |
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$ |
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Operating expenses: |
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Practice salaries and benefits |
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Practice supplies and other operating expenses |
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General and administrative expenses |
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Depreciation and amortization |
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Transformational and restructuring related expenses |
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Total operating expenses |
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Income from operations |
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Investment and other income |
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Interest expense |
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Loss on early extinguishment of debt |
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Equity in earnings of unconsolidated affiliate |
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Total non-operating expenses |
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(Loss) income from continuing operations before income taxes |
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Income tax benefit |
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(Loss) income from continuing operations |
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(Loss) income from discontinued operations, net of tax |
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Net (loss) income |
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Net loss attributable to noncontrolling interest |
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Net (loss) income attributable to Mednax, Inc. |
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$ |
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$ |
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Per common and common equivalent share data: |
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(Loss) income from continuing operations: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Income from discontinued operations: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Net (loss) income attributable to Mednax, Inc.: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted average common shares: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
4
Mednax, Inc.
Consolidated Statements of Equity
(in thousands)
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Common Stock |
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Number of |
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Additional |
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Accumulated |
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Retained |
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Total |
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Shares |
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Amount |
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Capital |
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Income (Loss) |
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Deficit |
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Equity |
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2022 |
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Balance at January 1, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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( |
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( |
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Dissolution of and net loss attributable to noncontrolling interest (1) |
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— |
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— |
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— |
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( |
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( |
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Unrealized holding loss on investments, net of tax |
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— |
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— |
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— |
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( |
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— |
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( |
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Common stock issued under employee stock option, |
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— |
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— |
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— |
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Issuance of restricted stock |
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( |
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— |
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— |
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— |
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Forfeitures of restricted stock |
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( |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Repurchased common stock |
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( |
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— |
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( |
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— |
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— |
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( |
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Balance at March 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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2021 |
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Balance at January 1, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Net loss attributable to noncontrolling interest (1) |
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— |
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— |
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— |
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— |
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( |
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( |
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Unrealized holding loss on investments, net of tax |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Common stock issued under employee stock option, |
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— |
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— |
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— |
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Issuance of restricted stock |
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( |
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— |
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— |
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— |
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Forfeitures of restricted stock |
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( |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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Repurchased common stock |
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( |
) |
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( |
) |
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( |
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— |
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— |
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( |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
5
Mednax, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
( |
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$ |
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Loss (income) from discontinued operations |
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( |
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Adjustments to reconcile net income (loss) to net cash from operating activities: |
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Depreciation and amortization |
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Amortization of premiums, discounts and issuance costs |
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Loss on early extinguishment of debt |
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Stock-based compensation expense |
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Deferred income taxes |
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( |
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Other |
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( |
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( |
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Changes in assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Prepaid expenses and other current assets |
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Other long-term assets |
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( |
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Accounts payable and accrued expenses |
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( |
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( |
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Income taxes receivable |
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( |
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Long-term professional liabilities |
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( |
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Other liabilities |
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( |
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Net cash used in operating activities – continuing operations |
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Net cash (used in) provided by operating activities - discontinued operations |
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( |
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Net cash used in operating activities |
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( |
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Cash flows from investing activities: |
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Acquisition payments, net of cash acquired |
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( |
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( |
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Purchases of investments |
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( |
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( |
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Proceeds from maturities or sales of investments |
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Purchases of property and equipment |
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( |
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Other |
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Net cash used in investing activities – continuing operations |
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( |
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( |
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Net cash provided by investing activities - discontinued operations |
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Net cash used in investing activities |
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( |
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Cash flows from financing activities: |
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Borrowings on credit agreement |
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Payments on credit agreement |
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( |
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Redemption of senior notes, including call premium |
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( |
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( |
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Proceeds from senior notes and term loan |
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Payments for financing costs |
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( |
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Payments on finance lease obligations |
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( |
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( |
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Proceeds from issuance of common stock |
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Repurchases of common stock |
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( |
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( |
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Other |
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( |
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Net cash used in financing activities – continuing operations |
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( |
) |
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( |
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Net cash used in financing activities |
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( |
) |
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( |
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Net decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
6
Mednax, Inc.
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
1. Basis of Presentation and New Accounting Pronouncements:
The accompanying unaudited Consolidated Financial Statements of the Company and the notes thereto presented in this Form 10-Q have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial statements, and do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of interim periods. The financial statements include all the accounts of Mednax, Inc. and its consolidated subsidiaries (collectively, “MDX”) together with the accounts of MDX’s affiliated business corporations or professional associations, professional corporations, limited liability companies and partnerships (the “affiliated professional contractors”). Certain subsidiaries of MDX have contractual management arrangements with its affiliated professional contractors, which are separate legal entities that provide physician services in certain states and Puerto Rico. The terms “Mednax” and the “Company” refer collectively to Mednax Inc., its subsidiaries and the affiliated professional contractors.
The Company is a party to a joint venture in which it owns a
The consolidated results of operations for the interim periods presented are not necessarily indicative of the results to be experienced for the entire fiscal year. In addition, the accompanying unaudited Consolidated Financial Statements and the notes thereto should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s most recent Annual Report on Form 10-K (the “Form 10-K”).
2. Coronavirus Pandemic (“COVID-19”):
COVID-19 has had an impact on the demand for medical services provided by the Company's affiliated clinicians. Beginning in mid-March 2020 and through the second quarter of 2020, the Company’s affiliated office-based practices, which specialize in maternal-fetal medicine, pediatric cardiology, and numerous pediatric subspecialties, experienced a significant elevation of appointment cancellations compared to historical normal levels. The Company believes COVID-19, either directly or indirectly, also had an impact on its neonatology intensive care unit (“NICU”) patient volumes. Overall, the Company's operating results were significantly impacted by COVID-19 beginning in mid-March 2020, but volumes began to normalize in mid-2020 and substantially recovered throughout 2020 with no material impacts from COVID-19 or its variants in 2021 or thus far in 2022. However, due to the continued uncertainties surrounding the timeline of and impacts from COVID-19 and with multiple variant strains still circulating, the Company is unable to predict the ultimate impact on its business, financial condition, results of operations, cash flows and the trading price of its securities at this time.
CARES Act
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act is a relief package intended to assist many aspects of the American economy, including providing financial aid to the healthcare industry to reimburse healthcare providers for lost revenue and expenses attributable to COVID-19. The Department of Health and Human Services (“HHS”) is administering this program and began disbursing funds in April 2020, of which the Company’s affiliated physician practices within continuing operations received an aggregate of $
3. Cash Equivalents and Investments:
As of March 31, 2022 and December 31, 2021, the Company's cash equivalents consisted entirely of money market funds totaling $
Investments held are all classified as current and at March 31, 2022 and December 31, 2021 are summarized as follows (in thousands):
7
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March 31, 2022 |
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December 31, 2021 |
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Corporate securities |
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$ |
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$ |
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Municipal debt securities |
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U.S. Treasury securities |
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Certificates of deposit |
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Federal home loan securities |
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$ |
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$ |
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4. Fair Value Measurements:
The accounting guidance establishes a fair value hierarchy that prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels:
Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following table presents information about the Company’s financial instruments that are accounted for at fair value on a recurring basis at March 31, 2022 and December 31, 2021 (in thousands):
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Fair Value |
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|||||
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Fair Value |
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March 31, 2022 |
|
|
December 31, 2021 |
|
||
Assets: |
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|
|
|
|
|
|
|
||
Money market funds |
|
Level 1 |
|
$ |
|
|
$ |
|
||
Short-term investments |
|
Level 2 |
|
|
|
|
|
|
||
Mutual Funds |
|
Level 1 |
|
|
|
|
|
|
||
The following table presents information about the Company’s financial instruments that are not carried at fair value at March 31, 2022 and December 31, 2021 (in thousands):
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
Carrying |
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|
Fair |
|
|
Carrying |
|
|
Fair |
|
||||
Liabilities: |
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|
|
|
|
|
|
|
|
|
|
||||
2027 Notes |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||
2030 Notes |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
||||
The Company redeemed the full principal balance of its
The carrying amounts of cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value due to the short maturities of the respective instruments.
5. Accounts Receivable and Net Revenue:
Accounts receivable, net consists of the following (in thousands):
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
|
|
|
|
|
|
||
Gross accounts receivable |
|
$ |
|
|
$ |
|
||
Allowance for contractual adjustments and uncollectibles |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Patient service revenue is recognized at the time services are provided by the Company’s affiliated physicians. The Company’s performance obligations related to the delivery of services to patients are satisfied at the time of service. Accordingly, there are no performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period with respect to patient service revenue. Almost all of the Company’s patient service revenue is reimbursed by government-sponsored healthcare programs (“GHC Programs”) and third-party insurance payors. Payments for services rendered to the Company’s patients are generally less than billed charges. The Company monitors its revenue and receivables from these sources and records an estimated contractual allowance to properly account for the anticipated differences between billed and reimbursed amounts.
8
Accordingly, patient service revenue is presented net of an estimated provision for contractual adjustments and uncollectibles. The Company estimates allowances for contractual adjustments and uncollectibles on accounts receivable based upon historical experience and other factors, including days sales outstanding (“DSO”) for accounts receivable, evaluation of expected adjustments and delinquency rates, past adjustments and collection experience in relation to amounts billed, an aging of accounts receivable, current contract and reimbursement terms, changes in payor mix and other relevant information. Contractual adjustments result from the difference between the physician rates for services performed and the reimbursements by GHC Programs and third-party insurance payors for such services.
Collection of patient service revenue the Company expects to receive is normally a function of providing complete and correct billing information to the GHC Programs and third-party insurance payors within the various filing deadlines and typically occurs within 30 to 60 days of billing.
Some of the Company’s hospital agreements require hospitals to pay the Company administrative fees. Some agreements provide for fees if the hospital does not generate sufficient patient volume in order to guarantee that the Company receives a specified minimum revenue level. The Company also receives fees from hospitals for administrative services performed by its affiliated physicians providing medical director or other services at the hospital.
The following table summarizes the Company’s net revenue by category (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net patient service revenue |
|
$ |
|
|
$ |
|
||
Hospital contract administrative fees |
|
|
|
|
|
|
||
Other revenue |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
The approximate percentage of net patient service revenue by type of payor was as follows:
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Contracted managed care |
|
|
% |
|
|
% |
||
Government |
|
|
|
|
|
|
||
Other third-parties |
|
|
|
|
|
|
||
Private-pay patients |
|
|
|
|
|
|
||
|
|
|
% |
|
|
% |
||
6. Business Combinations and Discontinued Operations:
Business Combinations
During the three months ended March 31, 2022, the Company completed the acquisition of
Discontinued Operations – Anesthesiology Services Medical Group
The Company divested its anesthesiology services medical group in May 2020. During the three months ended March 31, 2022, the Company recorded nominal changes to the loss on sale, primarily for certain transaction related true ups. During the three months ended March 31, 2021, the Company recorded a net decrease to the loss on sale of $
Discontinued Operations – Radiology Services Medical Group
9
The Company divested its radiology services medical group in December 2020. During the three months ended March 31, 2022 and 2021, the Company recorded nominal changes to the loss on sale, primarily for certain transaction related true ups.
7. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following (in thousands):
|
|
March 31, 2022 |
|
December 31, 2021 |
Accounts payable |
|
$ |
|
$ |
Accrued salaries and incentive compensation |
|
|
|
|
Accrued payroll taxes and benefits |
|
|
|
|
Accrued professional liabilities |
|
|
|
|
Accrued interest |
|
|
|
|
Other accrued expenses |
|
|
|
|
|
|
$ |
|
$ |
The net decrease in accrued salaries and incentive compensation of $
8. Line of Credit and Long Term Debt:
On February 11, 2022, the Company issued $
Interest on the 2030 Notes accrues at the rate of
Also in connection with the Redemption, the Company amended and restated the Credit Agreement (the “Credit Agreement Amendment”) concurrently with the issuance of the 2030 Notes. The Credit Agreement, as amended by the Credit Agreement Amendment (the “Amended Credit Agreement”), among other things, (i) refinanced the prior unsecured revolving credit facility with a $
The Amended Credit Agreement matures on
10
The Amended Credit Agreement contains customary covenants and restrictions, including covenants that require the Company to maintain a minimum interest coverage ratio, a maximum consolidated total consolidated net leverage ratio and to comply with laws, and restrictions on the ability to pay dividends, incur indebtedness or liens and make certain other distributions subject to baskets and exceptions, in each case, as specified therein. Failure to comply with these covenants would constitute an event of default under the Amended Credit Agreement, notwithstanding the ability of the Company to meet its debt service obligations. The Amended Credit Agreement includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Amended Credit Agreement. In addition, the Company may increase the principal amount of the Revolving Credit Line or incur additional term loans under the Amended Credit Agreement in an aggregate principal amount such that on a pro forma basis after giving effect to such increase or additional term loans, the Company would be in compliance with the financial covenants, subject to the satisfaction of specified conditions and additional caps in the event that the Amended Credit Agreement is secured.
At March 31, 2022, the Company had an outstanding principal balance on the Amended Credit Agreement of $
At March 31, 2022, the Company had an outstanding principal balance of $
9. Common and Common Equivalent Shares:
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income by the weighted average number of common and potential common shares outstanding during the period. Potential common shares consist of outstanding restricted stock and stock options and is calculated using the treasury stock method.
The calculation of shares used in the basic and diluted net income per common share calculation for the three months ended March 31, 2022 and 2021 is as follows (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Weighted average number of common shares outstanding |
|
|
|
|
|
|
||
Weighted average number of dilutive common share |
|
|
|
|
|
|
||
Weighted average number of common and common |
|
|
|
|
|
|
||
Antidilutive securities not included in the diluted |
|
|
|
|
|
|
||
10. Stock Incentive Plans and Stock Purchase Plans:
The Company’s Amended and Restated 2008 Incentive Compensation Plan (the “Amended and Restated 2008 Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted stock, deferred stock, and other stock-related awards and performance awards that may be settled in cash, stock or other property.
Under the Amended and Restated 2008 Incentive Plan, options to purchase shares of common stock may be granted at a price not less than the fair market value of the shares on the date of grant. The options must be exercised within
Under the Company’s Amended and Restated 1996 Non-Qualified Employee Stock Purchase Plan, as amended (the “ESPP”), employees are permitted to purchase the Company's common stock at
The Company recognizes stock-based compensation expense for the discount received by participating employees and non-employee service providers. During the three months ended March 31, 2022, approximately
11
ESPP. At March 31, 2022, the Company had approximately
During the three months ended March 31, 2022 and 2021, the Company recognized stock-based compensation expense of $
11. Common Stock Repurchase Programs:
In July 2013, the Company’s Board of Directors authorized the repurchase of shares of the Company’s common stock up to an amount sufficient to offset the dilutive impact from the issuance of shares under the Company’s equity compensation programs. The share repurchase program allows the Company to make open market purchases from time-to-time based on general economic and market conditions and trading restrictions. The repurchase program also allows for the repurchase of shares of the Company’s common stock to offset the dilutive impact from the issuance of shares, if any, related to the Company’s acquisition program.
In August 2018, the Company announced that its Board of Directors had authorized the repurchase of up to $
The Company intends to utilize various methods to effect any future share repurchases, including, among others, open market purchases and accelerated share repurchase programs. The amount and timing of repurchases will depend upon several factors, including general economic and market conditions and trading restrictions.
12. Commitments and Contingencies:
The Company expects that audits, inquiries and investigations from government authorities and agencies will occur in the ordinary course of business. Such audits, inquiries and investigations and their ultimate resolutions, individually or in the aggregate, could have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and the trading price of its securities. The Company has not included an accrual for these matters as of March 31, 2022 in its Consolidated Financial Statements, as the variables affecting any potential eventual liability depend on the currently unknown facts and circumstances that arise out of, and are specific to, any particular future audit, inquiry and investigation and cannot be reasonably estimated at this time.
In the ordinary course of business, the Company becomes involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by the Company's affiliated physicians. The Company's contracts with hospitals generally require the Company to indemnify them and their affiliates for losses resulting from the negligence of the Company's affiliated physicians. The Company may also become subject to other lawsuits which could involve large claims and significant costs. The Company believes, based upon a review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on its business, financial condition, results of operations, cash flows and the trading price of its securities. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on the Company's business, financial condition, results of operations, cash flows and the trading price of its securities.
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission on February 17, 2022 (the “2021 Form 10-K”). As used in this Quarterly Report, the terms “Mednax”, the “Company”, “we”, “us” and “our” refer to the parent company, Mednax, Inc., a Florida corporation, and the consolidated subsidiaries through which its businesses are actually conducted (collectively, “MDX”), together with MDX’s affiliated business corporations or professional associations, professional corporations, limited liability companies 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. The following discussion contains forward-looking statements. Please see the Company’s 2021 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.
Overview
Mednax is a leading provider of physician services including newborn, maternal-fetal, pediatric cardiology and other pediatric subspecialty care. Our national network is comprised of affiliated physicians who provide clinical care in 38 states and Puerto Rico. Our affiliated physicians provide neonatal clinical care, primarily within hospital-based neonatal intensive care units (“NICUs”), to babies born prematurely or with medical complications; and maternal-fetal and obstetrical medical care to expectant mothers experiencing complicated pregnancies primarily in areas where our affiliated neonatal physicians practice. Our network also includes other pediatric subspecialists, including those who provide pediatric intensive care, pediatric cardiology care, hospital-based pediatric care, pediatric surgical care, pediatric ear, nose and throat, pediatric ophthalmology, pediatric urology services and pediatric primary and urgent care.
Coronavirus Pandemic (COVID-19)
COVID-19 has had an impact on the demand for medical services provided by our affiliated clinicians. Beginning in mid-March 2020, our affiliated office-based practices, which specialize in maternal-fetal medicine, pediatric cardiology, and numerous pediatric subspecialties, experienced a significant elevation of appointment cancellations compared to historical normal levels. We believe COVID-19, either directly or indirectly, also had an impact on our NICU patient volumes. Overall, our operating results were significantly impacted by COVID-19 beginning in mid-March 2020, but volumes began to normalize in mid-2020 and substantially recovered throughout 2020 with no material impacts from COVID-19 or its variants in 2021 or thus far in 2022. However, due to the continued uncertainties surrounding the timeline of and impacts from COVID-19 and with multiple variant strains still circulating, we are unable to predict the ultimate impact on our business, financial condition, results of operations, cash flows and the trading price of our securities at this time.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act is a relief package intended to assist many aspects of the American economy, including providing financial aid to the healthcare industry to reimburse healthcare providers for lost revenue and expenses attributable to COVID-19. The Department of Health and Human Services (“HHS”) is administering this program, and our affiliated physician practices within continuing operations received an aggregate of $26.1 million in relief payments during the year ended December 31, 2021 and $10.4 million during the three months ended March 31, 2022.
General Economic Conditions and Other Factors
Our operations and performance depend significantly on economic conditions. During the three months ended March 31, 2022, the percentage of our patient service revenue being reimbursed under government-sponsored healthcare programs (“GHC Programs”) decreased slightly as compared to the three months ended March 31, 2021. We could, however, experience shifts toward GHC Programs if changes occur in economic behaviors or population demographics within geographic locations in which we provide services, including an increase in unemployment and underemployment as well as losses of commercial health insurance or if there are additional impacts from COVID-19 or its variants. Payments received from GHC Programs are substantially less for equivalent services than payments received from commercial insurance payors. In addition, costs of managed care premiums and patient responsibility amounts continue to rise, and accordingly, we may experience lower net revenue resulting from increased bad debt due to patients’ inability to pay for certain services.
Healthcare Reform
The Patient Protection and Affordable Care Act (the “ACA”) contains a number of provisions that have affected us and, absent amendment or repeal, may continue to affect us over the next several years. These provisions include the establishment of health insurance exchanges to facilitate the purchase of qualified health plans, expanded Medicaid eligibility, subsidized insurance premiums and additional requirements and incentives for businesses to provide healthcare benefits. Other provisions have expanded the scope and reach of the Federal Civil False Claims Act and other healthcare fraud and abuse laws. Moreover, we could be affected by potential changes to various aspects of the ACA, including changes to subsidies, healthcare insurance marketplaces and Medicaid expansion.
13
Despite the ACA going into effect over a decade ago, continuous legal and Congressional challenges to the law’s provisions and persisting uncertainty with respect to the scope and effect of certain provisions have made compliance costly. In 2017, Congress unsuccessfully sought to replace substantial parts of the ACA with different mechanisms for facilitating insurance coverage in the commercial and Medicaid markets. Congress may again attempt to enact substantial or target changes to the ACA in the future. Additionally, Centers for Medicare & Medicaid Services (“CMS”) has administratively revised a number of provisions and may seek to advance additional significant changes through regulation, guidance and enforcement in the future.
At the end of 2017, Congress repealed the part of the ACA that required most individuals to purchase and maintain health insurance or face a tax penalty, known as the individual mandate. In light of these changes, in December 2018, a federal district court in Texas declared that key portions of the ACA were inconsistent with the U.S. Constitution and that the entire ACA is invalid as a result. Several states appealed this decision, and in December 2019, a federal court of appeals upheld the district court’s conclusion that part of the ACA is unconstitutional but remanded for further evaluation whether in light of this defect the entire ACA must be invalidated. Democratic attorneys general and the House appealed the Fifth Circuit’s decision to the Supreme Court. On March 2, 2020, the Supreme Court agreed to hear the case, styled California v. Texas, during the 2020-21 term. Oral arguments took place on November 2, 2020 and on June 17, 2021, the Court held that the plaintiffs lacked standing to challenge the ACA. Notwithstanding the Supreme Court's ruling, we cannot say for certain whether there will be future challenges to the ACA or what impact, if any, such challenges may have on our business. Changes resulting from these proceedings could have a material impact on our business.
In late 2020 and early 2021, the results of the federal and state elections changed which persons and parties occupy the Office of the President of the United States and the U.S. Senate and many states’ governors and legislatures. The current Administration may propose sweeping changes to the U.S. healthcare system, including expanding government-funded health insurance options, additional Medicaid expansion or replacing current healthcare financing mechanisms with systems that would be entirely administered by the federal government. Any legislative or administrative change to the current healthcare financing system could have a material adverse effect on our financial condition, results of operations, cash flows and the trading price of our securities.
In addition to the potential impacts to the ACA, there could be changes to other GHC Programs, such as a change to the structure of Medicaid or Medicaid payment rates set forth under state law. Historically, Congress and the Administration have sought to convert Medicaid into a block grant or to institute per capita spending caps, among other things. These changes, if implemented, could eliminate the guarantee that everyone who is eligible and applies for benefits would receive them and could potentially give states new authority to restrict eligibility, cut benefits and make it more difficult for people to enroll. Additionally, several states are considering and pursuing changes to their Medicaid programs, such as requiring recipients to engage in employment or education activities as a condition of eligibility for most adults, disenrolling recipients for failure to pay a premium, or adjusting premium amounts based on income. Many states have recently shifted a majority or all of their Medicaid program beneficiaries into Managed Medicaid Plans. Managed Medicaid Plans have some flexibility to set rates for providers, but many states require minimum provider rates in their contracts with such plans. In July of each year, CMS releases the annual Medicaid Managed Care Rate Development Guide which provides federal baseline rules for setting reimbursement rates in managed care plans. We could be affected by lower reimbursement rates in some of all of the Managed Medicaid Plans with which we participate. We could also be materially impacted if we are dropped from the provider network in one or more of the Managed Medicaid Plans with which we currently participate.
We cannot predict with any assurance the ultimate effect of these laws and resulting changes to payments under GHC Programs, nor can we provide any assurance that they will not have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Further, any fiscal tightening impacting GHC Programs or changes to the structure of any GHC Programs could have a material adverse effect on our financial condition, results of operations, cash flows and the trading price of our securities.
Medicaid Expansion
The ACA also allows states to expand their Medicaid programs through federal payments that fund most of the cost of increasing the Medicaid eligibility income limit from a state’s historic eligibility levels to 133% of the federal poverty level. To date, 38 states and the District of Columbia have expanded Medicaid eligibility to cover this additional low-income patient population, and other states are considering expansion. All of the states in which we operate, however, already cover children in the first year of life and pregnant women if their household income is at or below 133% of the federal poverty level. Recently, Democrats in Congress have sought to expand Medicaid or Medicaid-like coverage in states that have not yet expanded Medicaid. They also have sought to reduce payments to certain hospitals in some of these states. Additionally, as noted above, Congress is currently considering altering the terms and state remuneration for Medicaid expansion pursuant to the ACA. Should any of these changes take effect, we cannot predict with any assurance the ultimate effect to reimbursements for our services.
“Surprise” Billing Legislation
In late 2020, Congress enacted legislation intended to protect patients from “surprise” medical bills when services are furnished by providers who are not subject to contractual arrangements and payment limitations with the patient’s insurer. Effective January 1, 2022, patients will be protected from unexpected or “surprise” medical bills that could arise from out-of-network emergency care provided at an out-of-network facility or at in-network facilities by out-of-network providers and out-of-network nonemergency care provided at in-network facilities without the patient’s informed consent. Many states have passed similar legislation, but the federal government has been working to enact a ban on surprise billing for quite some time that pertains to ERISA health insurance plans that are not addressed under state legislation.
Under the “No Surprises Act" ("NSA"), patients are only required to pay the in-network cost-sharing amount, which has been determined through an established regulatory formula and will count toward the patient’s health plan deductible and out-of-pocket cost-sharing limits. Providers will generally not be permitted to balance bill patients beyond this cost-sharing amount. An out-of-network provider will only
14
be permitted to bill a patient more than the in-network cost-sharing amount for care if the provider gives the patient notice of the provider’s network status and delivers to the patient or their health plan an estimate of charges within certain specified timeframes, and obtains the patient’s written consent prior to the delivery of care. Providers that violate these surprise billing prohibitions may be subject to state enforcement action or federal civil monetary penalties. Out of network providers can pursue recourse through an independent dispute resolution ("IDR") process to determine payment amounts for out of network services. These IDR results will bind both the provider and payor for a 90-day period. The final rules implementing the NSA are currently being reviewed by the Department of Health and Human Services, Department of Labor and Department of Treasury. In addition, certain IDR-related provisions of the NSA Interim Final Rules are being challenged in courts by many provider groups, and the result of this litigation may alter the NSA Interim Final Rules and the final rules that are expected to be published later in 2022. Accordingly, we cannot predict how these IDR results will compare to the rates that our affiliated physicians customarily receive for their services.
These measures could limit the amount we can charge and recover for services we furnish where we have not contracted with the patient’s insurer, and therefore could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Moreover, these measures could affect our ability to contract with certain payors and under historically similar terms and may cause, and the prospect of these changes may have caused, payors to terminate their contracts with us and our affiliated practices, further affecting our business, financial condition, results of operations, cash flows and the trading price of our securities.
Non-GAAP Measures
In our analysis of our results of operations, we use certain non-GAAP financial measures. We report adjusted earnings before interest, taxes and depreciation and amortization from continuing operations, which is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, and transformational and restructuring related expenses. We also report adjusted earnings per share (“Adjusted EPS”) from continuing operations which consists of diluted income (loss) from continuing operations per common and common equivalent share adjusted for amortization expense, stock-based compensation expense, transformational and restructuring related expenses and any impacts from discrete tax events. For the three months ended March 31, 2022 and 2021, both Adjusted EBITDA and Adjusted EPS are being further adjusted to exclude the impacts from the loss on the early extinguishment of debt.
We believe these measures, in addition to income (loss) from continuing operations, net income (loss) and diluted net income (loss) from continuing operations per common and common equivalent share, provide investors with useful supplemental information to compare and understand our underlying business trends and performance across reporting periods on a consistent basis. These measures should be considered a supplement to, and not a substitute for, financial performance measures determined in accordance with GAAP. In addition, since these non-GAAP measures are not determined in accordance with GAAP, they are susceptible to varying calculations and may not be comparable to other similarly titled measures of other companies.
For a reconciliation of each of Adjusted EBITDA from continuing operations and Adjusted EPS from continuing operations to the most directly comparable GAAP measures for the three months ended March 31, 2022 and 2021, refer to the tables below (in thousands, except per share data).
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
(Loss) income from continuing operations attributable to Mednax, Inc. |
|
$ |
(20,941 |
) |
|
$ |
5,352 |
|
Interest expense |
|
|
11,818 |
|
|
|
17,645 |
|
Loss on early extinguishment of debt |
|
|
57,016 |
|
|
|
14,532 |
|
Income tax benefit |
|
|
(7,401 |
) |
|
|
(4,955 |
) |
Depreciation and amortization expense |
|
|
8,769 |
|
|
|
8,031 |
|
Transformational and restructuring related expenses |
|
|
1,421 |
|
|
|
4,878 |
|
Adjusted EBITDA from continuing operations attributable to |
|
$ |
50,682 |
|
|
$ |
45,483 |
|
|
|
Three Months Ended |
|
|||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||
Weighted average diluted shares outstanding |
|
85,405 |
|
|
85,491 |
|
||||||||||
(Loss) income from continuing operations and diluted income from |
|
$ |
(20,941 |
) |
|
$ |
(0.25 |
) |
|
$ |
5,352 |
|
|
$ |
0.06 |
|
Adjustments (1): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization (net of tax of $541 and $890) |
|
|
1,621 |
|
|
|
0.02 |
|
|
|
2,672 |
|
|
|
0.03 |
|
Stock-based compensation (net of tax of $1,109 and $929) |
|
|
3,326 |
|
|
|
0.04 |
|
|
|
2,788 |
|
|
|
0.03 |
|
Transformational and restructuring expenses (net of tax of |
|
|
1,066 |
|
|
|
0.01 |
|
|
|
3,659 |
|
|
|
0.04 |
|
Loss on early extinguishment of debt (net of tax of $14,254 and $3,633) |
|
|
42,762 |
|
|
|
0.50 |
|
|
|
10,899 |
|
|
|
0.13 |
|
Net impact from discrete tax events |
|
|
492 |
|
|
|
0.01 |
|
|
|
(5,067 |
) |
|
|
(0.05 |
) |
Adjusted income and diluted EPS from continuing operations |
|
$ |
28,326 |
|
|
$ |
0.33 |
|
|
$ |
20,303 |
|
|
$ |
0.24 |
|
15
Results of Operations
Three Months Ended March 31, 2022 as Compared to Three Months Ended March 31, 2021
Our net revenue attributable to continuing operations was $482.2 million for the three months ended March 31, 2022, as compared to $446.8 million for the same period in 2021. The increase in revenue of $35.4 million, or 7.9%, was primarily attributable to increases in revenue from net acquisitions and to a lesser extent growth in same-unit revenue. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue increased by $5.6 million, or 1.3%. The increase in same-unit net revenue was comprised of an increase of $14.2 million, or 3.2%, related to patient service volumes, partially offset by a decrease of $8.6 million, or 1.9%, from net reimbursement-related factors. The increase in revenue from patient service volumes was related to increases across all of our hospital-based and office-based women's and children's services. The net decrease in revenue related to net reimbursement-related factors was primarily due to a decrease in revenue resulting from certain revenue cycle management transition activities, partially offset by increases in revenue from CARES Act relief and contract and administrative fees received from our hospital partners.
Practice salaries and benefits attributable to continuing operations increased $24.2 million, or 7.6%, to $343.2 million for the three months ended March 31, 2022, as compared to $319.0 million for the same period in 2021. Of the $24.2 million increase, $19.3 million was related to salaries which primarily reflected increases in clinician compensation expense and $4.9 million was related to benefits and incentive compensation.
Practice supplies and other operating expenses attributable to continuing operations increased $6.3 million, or 28.3%, to $28.5 million for the three months ended March 31, 2022, as compared to $22.2 million for the same period in 2021. The increase was primarily attributable to practice supply, rent and other costs related to our acquisitions and to a lesser extent net increases at our existing units.
General and administrative expenses attributable to continuing operations primarily 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 affiliated physician practices and services. General and administrative expenses were $61.3 million for the three months ended March 31, 2022, as compared to $66.5 million for the same period in 2021. The net decrease of $5.2 million is primarily related to lower professional fees, including legal fees, as well as a net savings in revenue cycle management expenses. General and administrative expenses as a percentage of net revenue was 12.7% for the three months ended March 31, 2022, as compared to 14.9% for the same period in 2021.
Transformational and restructuring related expenses attributable to continuing operations were $1.4 million for the three months ended March 31, 2022, as compared to $4.9 million for the same period in 2021. The decrease of $3.5 million reflects the continued reduction in the scope of activities with the expenses during the first quarter of 2022 primarily for position eliminations.
Depreciation and amortization expense attributable to continuing operations was $8.8 million for the three months ended March 31, 2022, as compared to $8.0 million for the same period in 2021. The net increase of $0.8 million was primarily related to an increase in depreciation expense for new information technology equipment, partially offset by lower amortization expense related to intangible assets.
Income from operations attributable to continuing operations increased $13.0 million, or 49.8%, to $39.1 million for the three months ended March 31, 2022, as compared to $26.1 million for the same period in 2021. Our operating margin was 8.1% for the three months ended March 31, 2022, as compared to 5.8% for the same period in 2021. The increase in our operating margin was primarily due to higher acquisition and organic related revenue growth, CARES Act relief and net decreases in overall operating expenses. Excluding transformation and restructuring related expenses, our income from operations attributable to continuing operations was $40.5 million and $31.0 million, and our operating margin was 8.4% and 6.9% for the three months ended March 31, 2022 and 2021, respectively. We believe excluding the impacts from the transformational and restructuring related activity provides a more comparable view of our operating income and operating margin from continuing operations.
Total non-operating expenses attributable to continuing operations were $67.5 million for the three months ended March 31, 2022, as compared to $25.7 million for the same period in 2021. The net increase in non-operating expenses was primarily related to the $57.0 million loss on early extinguishment of debt resulting from the redemption of our 6.25% senior unsecured notes due 2027 (the “2027 Notes”) in February 2022 and interest expense related to a new issuance of 5.375% senior unsecured notes due 2030 (the "2030 Notes"), partially offset by a decrease in interest expense related to the 2027 Notes.
Our effective income tax rate attributable to continuing operations (“tax rate”) was 26.1% for the three months ended March 31, 2022 and was not meaningful for three months ended March 31, 2021. The first quarter 2021 tax rate was impacted primarily by a discrete tax benefit of $7.1 million related to a change in estimate for the 2020 net operating loss carryback as allowed under the CARES Act for refund at the 35% federal rate. After excluding discrete tax impacts, during the three months ended March 31, 2022 and 2021, our effective income tax rate was 27.9% and 28.2%, respectively. We believe excluding discrete tax impacts provides a more comparable view of our tax rate.
Loss from continuing operations attributable to Mednax, Inc. was $20.9 million for the three months ended March 31, 2022, driven by the loss on early extinguishment of debt, as compared to income of $5.4 million for the same period in 2021. Adjusted EBITDA from continuing operations attributable to Mednax, Inc. was $50.7 million for the three months ended March 31, 2022, as compared to $45.5 million for the same period in 2021.
16
Diluted loss from continuing operations per common and common equivalent share attributable to Mednax, Inc. was $0.25 on weighted average shares outstanding of 85.4 million for the three months ended March 31, 2022, as compared to diluted net income of $0.06 on weighted average shares outstanding of 85.5 million for the same period in 2021. Adjusted EPS from continuing operations was $0.33 for the three months ended March 31, 2022, as compared to $0.24 for the same period in 2021.
Loss from discontinued operations, net of tax, was $0.2 million for the three months ended March 31, 2022, as compared to income of $12.3 million for the same period in 2021. Diluted loss from discontinued operations per common and common equivalent share was nominal for the three months ended March 31, 2022, as compared to diluted net income of $0.15 for the three months ended March 31, 2021.
Net loss attributable to Mednax, Inc. was $21.2 million for the three months ended March 31, 2022, as compared to income of $17.6 million for the same period in 2021. Diluted net loss per common and common equivalent share attributable to Mednax, Inc. was $0.25 for the three months ended March 31, 2022, as compared to diluted net income of $0.21 for the same period in 2021.
Liquidity and Capital Resources
As of March 31, 2022, we had $7.2 million of cash and cash equivalents attributable to continuing operations as compared to $387.4 billion at December 31, 2021. Additionally, we had working capital attributable to continuing operations of $170.1 million at March 31, 2022, a decrease of $243.1 million from working capital of $413.2 billion at December 31, 2021. The net decrease in working capital is primarily due to the redemption of the 2027 Notes in February 2022.
Cash Flows from Continuing Operations
Cash used in operating, investing and financing activities from continuing operations is summarized as follows (in thousands):
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Operating activities |
|
$ |
(89,931 |
) |
|
$ |
(98,926 |
) |
Investing activities |
|
|
(26,273 |
) |
|
|
(12,714 |
) |
Financing activities |
|
|
(256,457 |
) |
|
|
(761,661 |
) |
Operating Activities from Continuing Operations
During the three months ended March 31, 2022, our net cash used in operating activities for continuing operations was $89.9 million, compared to $98.9 million for the same period in 2021. The net decrease in cash used of $9.0 million was primarily due to a decrease in cash flow due to lower earnings, changes in accounts payable and accrued expenses, primarily related to higher incentive compensation payments, and increases in cash used for prepaid expenses, other assets and accounts receivable, partially offset by increases in cash flow from income taxes, deferred income taxes and other liabilities.
During the three months ended March 31, 2022, cash flow from accounts receivable for continuing operations decreased by $20.2 million, as compared to $11.6 million for the same period in 2021. The decrease in cash flow from accounts receivable for the three months ended March 31, 2022 was primarily due to increases in ending accounts receivable balances at existing units due to timing of revenue cycle management activities.
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 for continuing operations was 59.2 days at March 31, 2022 as compared to 55.2 days at December 31, 2021. The increase in our DSO primarily related to the timing of cash collections at our existing units.
Investing Activities from Continuing Operations
During the three months ended March 31, 2022, our net cash used in investing activities for continuing operations of $26.3 million consisted of acquisitions payments of $25.7 million and capital expenditures of $7.1 million, partially offset by net proceeds from maturities and sales of investments of $6.4 million.
Financing Activities from Continuing Operations
During the three months ended March 31, 2022, our net cash used in financing activities for continuing operations of $256.5 million primarily consisted of $1.05 billion related to the redemption of the 2027 Notes, including the call premium, payments for financing costs of $7.9 million and the repurchase of $1.2 million of our common stock, partially offset by $400.0 million in proceeds from the issuance of the 2030 Notes, $250.0 million from our new term loan and net borrowings on our revolving line of credit of $149.0 million.
Liquidity
On February 11, 2022, we issued $400.0 million of 5.375% unsecured senior notes due 2030 (the “2030 Notes”). We used the net proceeds from the issuance of the 2030 Notes, together with $100.0 million drawn under our Revolving Credit Line (as defined below), $250.0 million of Term A Loan (as defined below) and approximately $308.0 million of cash on hand, to redeem (the “Redemption”) the 2027 Notes,
17
which had an outstanding principal balance of $1.0 billion, and to pay costs, fees and expenses associated with the Redemption and the Credit Agreement Amendment (as defined below).
Also in connection with the Redemption, we amended and restated the Credit Agreement (the “Credit Agreement Amendment”) concurrently with the issuance of the 2030 Notes. The Credit Agreement, as amended by the Credit Agreement Amendment (the “Amended Credit Agreement”), among other things, (i) refinanced the prior unsecured revolving credit facility with a $450.0 million unsecured revolving credit facility, including a $37.5 million sub-facility for the issuance of letters of credit (the “Revolving Credit Line”), and a new $250.0 million term A loan facility (“Term A Loan”) and (ii) removed JPMorgan Chase Bank, N.A., as the administrative agent under the Credit Agreement and appointed Bank of America, N.A. as the administrative agent for the lenders under the Amended Credit Agreement.
The Amended Credit Agreement matures on February 11, 2027 and is guaranteed on an unsecured basis by substantially all of our subsidiaries and affiliated professional contractors. At our option, borrowings under the Amended Credit Agreement bear interest at (i) the Alternate Base Rate (defined as the highest of (a) the prime rate as announced by Bank of America, N.A., (b) the Federal Funds Rate plus 0.50% and (c) Term Secured Overnight Financing Rate ("SOFR") for an interest period of one month plus 1.00% with a 1.00% floor) plus an applicable margin rate of 0.50% for the first two fiscal quarters after the date of the Credit Agreement Amendment, and thereafter at an applicable margin rate ranging from 0.125% to 0.750% based on our consolidated net leverage ratio or (ii) Term SOFR rate (calculated as the Secured Overnight Financing Rate published on the applicable Reuters screen page plus a spread adjustment of 0.10%, 0.15% or 0.25% depending on if we select a one-month, three-month or six-month interest period, respectively, for the applicable loan with a 0% floor), plus an applicable margin rate of 1.50% for the first two full fiscal quarters after the date of the Credit Agreement Amendment, and thereafter at an applicable margin rate ranging from 1.125% to 1.750% based on our consolidated net leverage ratio. The Amended Credit Agreement also provides for other customary fees and charges, including an unused commitment fee with respect to the Revolving Credit Line ranging from 0.150% to 0.200% of the unused lending commitments under the Revolving Credit Line, based on our consolidated net leverage ratio.
The Amended Credit Agreement contains customary covenants and restrictions, including covenants that require us to maintain a minimum interest coverage ratio, a maximum consolidated total consolidated net leverage ratio and to comply with laws, and restrictions on the ability to pay dividends, incur indebtedness or liens and make certain other distributions subject to baskets and exceptions, in each case, as specified therein. Failure to comply with these covenants would constitute an event of default under the Amended Credit Agreement, notwithstanding the ability of the company to meet its debt service obligations. The Amended Credit Agreement includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Amended Credit Agreement. In addition, we may increase the principal amount of the Revolving Credit Line or incur additional term loans under the Amended Credit Agreement in an aggregate principal amount such that on a pro forma basis after giving effect to such increase or additional term loans, we are in compliance with the financial covenants, subject to the satisfaction of specified conditions and additional caps in the event that the Amended Credit Agreement is secured.
During the three months ended March 31, 2022, in connection with the redemption of our 2027 Notes and the Credit Agreement Amendment, we recognized a loss on early extinguishment of debt of $57.0 million, which primarily included cash premiums on the 2027 Notes and accelerated amortization of deferred financing costs.
At March 31, 2022, we had an outstanding principal balance on the Amended Credit Agreement of $399.0 million, composed of $149.0 million under the Revolving Credit Line and $250.0 million under the Term A Loan. We had $301.0 million available on the Amended Credit Agreement at March 31, 2022.
At March 31, 2022, we had an outstanding principal balance of $400.0 million on the 2030 Notes. Our obligations under the 2030 Notes are guaranteed on an unsecured senior basis by the same subsidiaries and affiliated professional contractors that guarantee our Amended Credit Agreement. Interest on the 2030 Notes accrues at the rate of 5.375% per annum, or $21.5 million, and is payable semi-annually in arrears on February 15 and August 15, beginning on August 15, 2022.
The indenture under which the 2030 Notes are issued, among other things, limits our ability to (1) incur liens and (2) enter into sale and lease-back transactions, and also limits our ability to merge or dispose of all or substantially all of our assets, in all cases, subject to a number of customary exceptions. Although we are not required to make mandatory redemption or sinking fund payments with respect to the 2030 Notes, upon the occurrence of a change in control, we may be required to repurchase the 2030 Notes at a purchase price equal to 101% of the aggregate principal amount of the 2030 Notes repurchased plus accrued and unpaid interest.
At March 31, 2022, we believe we were in compliance, in all material respects, with the financial covenants and other restrictions applicable to us under the Amended Credit Agreement and the 2030 Notes. We believe we will be in compliance with these covenants throughout 2022.
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 March 31, 2022 was $299.1 million, of which $34.0 million is classified as a current liability within accounts payable and accrued expenses in the Consolidated Balance Sheet. In addition, there is a corresponding insurance receivable of $54.9 million recorded as a component of other assets for certain professional liability claims that are covered by insurance policies.
We anticipate that funds generated from operations, together with our current cash on hand and funds available under our Amended Credit Agreement, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and capital expenditures, fund
18
expenses related to our transformational and restructuring activities, fund our share repurchase programs and meet our contractual obligations for at least the next 12 months from the date of issuance of this Quarterly Report on Form 10-Q.
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 (the “Exchange Act”). 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 2021 Form 10-K, including the section entitled “Risk Factors.”
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to market risk primarily from exposure to changes in interest rates based on our financing, investing and cash management activities. We intend to manage interest rate risk through the use of a combination of fixed rate and variable rate debt. We borrow under our Amended Credit Agreement at various interest rate options based on the Alternate Base Rate or SOFR rate depending on certain financial ratios. At March 31, 2022, the outstanding principal balance on our Amended Credit Agreement was $399.0 million, composed of $149.0 million under our Revolving Credit Line and a $250.0 million Term A Loan. Considering the total outstanding balance of $399.0 million, a 1% change in interest rates would result in an impact to income before taxes of approximately $4.0 million per year.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2022.
Changes in Internal Controls Over Financial Reporting
No changes in our internal control over financial reporting occurred during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We expect that audits, inquiries and investigations from government authorities and agencies will occur in the ordinary course of business. Such audits, inquiries and investigations and their ultimate resolutions, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.
In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated physicians. Our contracts with hospitals generally require us to indemnify them and their affiliates for losses resulting from the negligence of our affiliated physicians and other clinicians. We may also become subject to other lawsuits, including with payors or other counterparties that could involve large claims and significant defense costs. We believe, based upon a review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, cash flows or the trading price of our securities. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.
Although we currently maintain liability insurance coverage intended to cover professional liability and certain other claims, we cannot ensure that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us in the future where the outcomes of such claims are unfavorable to us. With respect to professional liability risk, we self-insure a significant portion of this risk through our wholly owned captive insurance subsidiary. Liabilities in excess of our insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2022, we repurchased 49,707 shares of our common stock that were withheld to satisfy minimum statutory withholding obligations in connection with the vesting of restricted stock and deferred stock.
Period |
|
Total Number |
|
|
Average Price |
|
|
Total Number of |
|
|
Approximate Dollar |
|||
January 1 – January 31, 2022 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
(a) |
February 1 – February 28, 2022 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
(a) |
March 1 – March 31, 2022 |
|
49,707 (b) |
|
|
|
23.47 |
|
|
|
— |
|
|
(a) |
|
Total |
|
|
49,707 |
|
|
$ |
23.47 |
|
|
|
— |
|
|
(a) |
The amount and timing of any future repurchases will depend upon several factors, including general economic and market conditions and trading restrictions.
21
Item 6. Exhibits
Exhibit No. Description
4.1 |
|
4.2 |
|
10.1 |
|
10.2† |
|
31.1+ |
|
31.2+ |
|
32.1* |
|
101.1+ |
Interactive Data File
|
101.INS+ |
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
|
101.SCH+ |
XBRL Schema Document.
|
101.CAL+ |
XBRL Calculation Linkbase Document.
|
101.DEF+ |
XBRL Definition Linkbase Document.
|
101.LAB+ |
XBRL Label Linkbase Document.
|
101.PRE+ |
XBRL Presentation Linkbase Document.
|
104+ |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
|
+ Filed herewith.
* Furnished herewith.
† Certain of the exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5).
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Mednax, Inc. |
|
|
|
|
Date: April 28, 2022 |
By: /s/ Mark S. Ordan |
|
Mark S. Ordan |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
|
|
Date: April 28, 2022 |
By: /s/ C. Marc Richards |
|
C. Marc Richards |
|
Chief Financial Officer |
|
(Principal Financial Officer and Principal Accounting Officer) |
|
|
|
|
|
|
|
|
|
|
23
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark S. Ordan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mednax, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 28, 2022
By: /s/ Mark S. Ordan
Mark S. Ordan
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, C. Marc Richards, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mednax, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 28, 2022
By: /s/ C. Marc Richards
C. Marc Richards
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Exhibit 32.1
Certification Pursuant to 18 U.S.C Section 1350
(Adopted by Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Quarterly Report of Mednax, Inc. on Form 10-Q for the quarter ended March 31, 2022 (the “Report”), each of the undersigned hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that (i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Mednax, Inc.
A signed original of this written statement required by Section 906 has been provided to Mednax, Inc. and will be retained by Mednax, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
April 28, 2022
By: /s/ Mark S. Ordan
Mark S. Ordan
Chief Executive Officer
(Principal Executive Officer)
By: s/ C. Marc Richards
C. Marc Richards
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)