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 endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onFebruary 20, 2020 (the "2019 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. , aFlorida 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 andPuerto Rico . The following discussion contains forward-looking statements. Please see the Company's 2019 Form 10-K, including Item 1A, Risk Factors, and Item 1A. Risk Factors below, 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. OverviewMEDNAX is a leading provider of physician services including newborn, maternal-fetal, radiology and teleradiology, pediatric cardiology and other pediatric subspecialty care. Our national network is comprised of affiliated physicians who provide clinical care in all 50 states, theDistrict of Columbia andPuerto Rico . Our affiliated physicians provide neonatal clinical care, primarily within hospital-based neonatal intensive care units, to babies born prematurely or with medical complications; radiology services including diagnostic imaging and interventional radiology; 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 and pediatric urology services.MEDNAX also provides radiology services including diagnostic imaging and interventional radiology, through a network of affiliated physicians, as well as teleradiology services through a network of affiliated radiologists. In addition to our national physician network, we provide services nationwide to healthcare facilities and physicians, including ours, through a consulting services company.MEDNAX divested its anesthesiology medical group onMay 6, 2020 . Coronavirus Pandemic (COVID-19) COVID-19 and related "stay at home" and social distancing measures implemented across the country have significantly impacted demand for medical services provided by our affiliated clinicians. Beginning inmid-March 2020 , we experienced a significant decline in the number of elective surgeries at the facilities where our affiliated clinicians provided anesthesia services. Much of this decline was due to the closure of operating suites or facilities following federal advisories to cancel non-urgent procedures and the prohibition of such procedures by several states. Within our radiology service line, orders for radiological studies have declined by a meaningful amount from historically normal levels, with much of this reduction focused in non-urgent studies. Our affiliated office-based practices, which specialize in maternal-fetal medicine, pediatric cardiology, and numerous pediatric subspecialties, have seen a significant elevation of appointment cancellations compared to historical normal levels. At this time, we have not experienced, nor do we currently anticipate, any significant impact to neonatal intensive care unit (NICU) patient volumes as a result of COVID-19. Overall, our operating results sincemid-March 2020 have been significantly impacted by the COVID-19 pandemic, but volumes did begin to normalize inMay 2020 and substantially recovered during the month ofJune 2020 . We also divested our anesthesiology medical group inMay 2020 , where operating results were significantly impacted by COVID-19. We implemented a number of actions to preserve financial flexibility and partially mitigate the significant impact of COVID-19. These steps included a suspension of most activities related to our transformational and restructuring programs, limiting these expenditures to those that provide essential support for our response to COVID-19. In addition, (i) we temporarily reduced executive and key management base salaries, including 50% reductions in salaries for our named executive officers throughJune 30, 2020 ; (ii) our Board of Directors agreed to forego their annual cash retainer and cash meeting payments, also throughJune 30, 2020 ; (iii) we enacted a combination of salary reductions and furloughs for non-clinical employees; and (iv) we enacted significant operational and practice-specific expense reduction plans across our clinical operations. We also implemented a variety of solutions across specialties to support clinicians and patients during this pandemic, including
• Clinician Shortage Support
Pediatric clinicians are lending their expertise to help fulfill the need for added adult care.
• Strengthening of Supply Chain
• Expanded Virtual Care Offerings
Utilizing VSee, an internationally recognized telehealth platform,MEDNAX has deployed a national multi-specialty virtual clinic to expand its telehealth offerings and make virtual care available to its clinical workforce, enabling continued patient consults and clinician collaboration while minimizing COVID-19 exposure. 14
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• Early Virus Detection Using Cutting-Edge Imaging Diagnostic Tools
MEDNAX Radiology Solutions is leading early detection efforts through chest imaging. vRad, aMEDNAX company, diagnosed one of the first COVID-19 patients inthe United States via chest computed tomography ("CT"), which showed findings consistent with a severe acute respiratory viral infection. In the absence of laboratory testing kits, chest CT can serve as a diagnostic tool. In addition, MEDNAX Radiology Solutions is refining natural language processing ("NLP") to identify the incidence of viral pneumonia and typical findings of the COVID-19 virus in the lungs via chest CT across the proprietary MEDNAX Imaging Platform and inference engine, which is connected to more than 2,000 partner facilities across the country. The NLP is run retrospectively to monitor the amount and rate of increase of suspected chest CT findings for COVID-19 and viral pneumonia, supporting faster treatment. If successful, this cutting-edge diagnostic tool could serve as an effective tracker of the disease's progression throughout the country and provide new insights for imaging findings for COVID-19 patients.
•
To support frontline clinicians while abiding by social distancing recommendations,MEDNAX has created a virtual doctors' lounge for clinicians across specialties to connect and socialize in the absence of typical in-person lounges, helping to boost morale and preserve a sense of normalcy. We currently expect that COVID-19 will materially impact our financial results, but due to the rapidly evolving environment and continued uncertainties surrounding the timeline of and impacts from COVID-19, 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 OnMarch 27, 2020 ,President Trump signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") into law. The CARES Act is a relief package intended to assist many aspects of the American economy, including providing up to$100 billion in aid to the healthcare industry to reimburse healthcare providers for lost revenue and expenses attributable to COVID-19. The remaining$70 billion in aid is intended to focus on providers in areas particularly impacted by COVID-19, rural providers, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for the treatment of uninsured Americans. It is unknown what, if any, portion of the remaining healthcare industry funding on the CARES Act our affiliated physician practices will qualify for and receive. TheDepartment of Health and Human Services ("HHS") is administering this program and began disbursing funds inApril 2020 , of which our affiliated physician practices received an aggregate of approximately$12 million during the second quarter of 2020. We have applications pending for certain affiliated physician practices for incremental relief beyond what has been received. In addition, the CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount dueDecember 31, 2021 and the remaining 50% dueDecember 31, 2022 . We intend to utilize this deferral option throughout 2020. Divestiture of theAnesthesiology Medical Group OnMay 6, 2020 , we entered into a securities purchase agreement with an affiliate ofNorth American Partners in Anesthesia ("NAPA") to divest our anesthesiology medical group, and the transaction closed onMay 6, 2020 . Pursuant to the terms and conditions of the agreement, at the closing of the transaction, we received a cash payment of$50.0 million , subject to certain customary adjustments, as well as a contingent economic interest in NAPA with a value ranging from$0 to$250 million based upon the multiple of invested capital returned to NAPA's owners upon exit of the investment. The operating results of the anesthesiology medical group were reported as discontinued operations in our consolidated statements of income for the three and six months endedJune 30, 2020 and 2019, and the net assets sold were presented as assets and liabilities held for sale in our consolidated balance sheet for the year endedDecember 31, 2019 . Planned Divestiture of MEDNAX Radiology Solutions InJune 2020 , we announced our initiation of a process to divest our radiology services medical group when market conditions are appropriate in order to refocus the business as a dedicated pediatrics and obstetrics organization. However, there can be no assurance that this process will result in a transaction. Reclassifications Reclassifications have been made to certain prior period financial statements and footnote disclosures to conform to the current period presentation, specifically to reflect the impact of the anesthesiology medical group being classified as assets held for sale and discontinued operations. General Economic Conditions and Other Factors Our operations and performance depend significantly on economic conditions. During the three months endedJune 30, 2020 , the percentage of our patient service revenue being reimbursed under government-sponsored healthcare programs ("GHC Programs") decreased slightly as compared to the three months endedJune 30, 2019 . Economic conditions inthe United States ("U.S.") have deteriorated, primarily as a result of COVID-19, and patient volumes have declined. We could experience shifts toward GHC Programs if changes occur in 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. Payments received from GHC Programs are substantially less for equivalent services than payments received from commercial insurance payors. In addition, due to the rising costs of managed care premiums and patient responsibility amounts, we may experience lower net revenue resulting from increased bad debt due to patients' inability to pay for certain services. 15 -------------------------------------------------------------------------------- Table of Contents Transformation and Restructuring Initiatives We have developed a number of strategic initiatives across our organization, in both our shared services functions and our operational infrastructure, with a goal of generating improvements in our general and administrative expenses and our operational infrastructure. We have broadly classified these workstreams in four broad categories including practice operations, revenue cycle management, information technology and human resources. We have included the expenses, which in certain cases represent estimates, related to such activity on a separate line item in our consolidated statements. In our shared services departments, we were focused on improving processes, using our resources more efficiently and utilizing our scale more effectively to improve cost and service performance across our operations. Within our operational infrastructure, we developed specific operational plans within each of our service lines and affiliated physician practices, with specific milestones and regular reporting, with the goal of generating long-term operational improvements and fostering even greater collaboration across our national medical group. We intended to make a series of information-technology and other investments to improve processes and performance across our enterprise, using both internal and external resources. A significant amount of transformational and restructuring activities were related to our anesthesiology medical group, which was divested inMay 2020 . We believed these strategic initiatives, together with our continued plans to invest in focused, targeted and strategic organic and acquisitive growth, positioned us well to deliver a differentiated value proposition to our stakeholders while continuing to provide the highest quality care for our patients. We originally expected these activities to continue through at least 2020. However, as discussed above, beginning inApril 2020 , we reduced the scope of our transformation and restructuring related initiatives unless they are initiatives that provide essential support for our response to COVID-19. 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. The ACA remains subject to continuing legislative and administrative flux and uncertainty. 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, inDecember 2018 , a federal district court inTexas declared that key portions of the ACA were inconsistent with theU.S. Constitution and that the entire ACA is invalid as a result. Several states appealed this decision, and inDecember 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. These legal proceedings are likely to continue for several years, and the fate of the ACA will be unresolved and uncertain during this period. Actions by the court of appeals or eventually theSupreme Court of the United States could invalidate portions or all of the ACA. Changes resulting from these proceedings could have a material impact on our business. In the meantime, it also is possible that as a result of these actions, enrollment in healthcare exchanges could decline. In 2020, there will be federal and state elections that could affect which persons and parties occupy the Office of the President of the United States, control one or both chambers ofCongress and many states' governors and legislatures. Some candidates running for President ofthe United States are proposing sweeping changes to theU.S. healthcare system, including expanding government-funded healthcare insurance options. 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. If the ACA is repealed or further substantially modified by judicial, legislative or administrative action, or if implementation of certain aspects of the ACA are diluted, delayed or replaced with a "Medicare for All" or single payor system, such repeal, modification or delay may impact our business, financial condition, results of operations, cash flows and the trading price of our securities. We are unable to predict the impact of any repeal, modification or delay in the implementation of the ACA, including the repeal of the individual mandate or implementation of a single payor system, on us at this time. 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.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. 16 -------------------------------------------------------------------------------- Table of Contents As a result, 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. The Medicare Access and CHIP Reauthorization Act The Medicare Access and CHIP Reauthorization Act ("MACRA") requires physicians to choose to participate in one of two payment formulas, Merit-Based Incentive Payment System ("MIPS") or Alternative Payment Models ("APMs"). Beginning in 2020, MIPS allows eligible physicians to receive incentive payments based on the achievement of certain quality and cost metrics, among other measures, and be reduced for those who are underperforming against those same metrics and measures. As an alternative, physicians can choose to participate in an advanced APM, and physicians who are meaningful participants in APMs will receive bonus payments from Medicare pursuant to the law. MACRA also remains subject to review and potential modification byCongress , as well as shifting regulatory requirements established by CMS. We currently anticipate that our affiliated physicians will continue to be eligible to receive bonus payments in 2020 through participation in the MIPS, although the amounts of such bonus payments are not expected to be material. We will continue to operationalize the provisions of MACRA and assess any further changes to the law or additional regulations enacted pursuant to the law. We cannot predict the ultimate effect that these changes will have on us, nor can we provide any assurance that its provisions will not have a material adverse effect on our business, 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, 37 states and theDistrict 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. "Surprise" Billing Legislation "Surprise" medical bills arise when an insured patient receives care from an out-of-network provider resulting in costs that were not expected by the patient. The bill is a "surprise" either because the patient did not expect to receive care from an out-of-network provider, or because their cost-sharing responsibility is higher than the patient expected. For the past several years, state legislatures have been enacting laws that are intended to address the problems associated with surprise billing or balance billing. More recently,Congress andPresident Trump have proposed bipartisan solutions to address this circumstance, either by working in tandem with, or in the absence of, applicable state laws. Several committees of jurisdiction in theU.S. House of Representatives and in theU.S. Senate have proposed solutions to address surprise medical bills, but it is unclear whether any of the proposed solutions will become law. In addition, state legislatures and regulatory bodies continue to address and modify existing laws on the same issue. Any state or federal legislation on the topic of surprise billing may have an unfavorable impact on out-of-network reimbursement that we receive. In addition, actual or prospective legislative changes in this area may impact, and may have impacted, our ability to contract with private payors at favorable reimbursement rates or remain in contract with such payors. Although our out-of-network revenue is currently not material, we cannot predict the ultimate effect that these changes will have on us, nor can we provide any assurance that future legislation or regulations will not have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Medicare Sequestration The Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012, required across-the-board cuts ("sequestrations") to Medicare reimbursement rates. These annual reductions of 2%, on average, apply to mandatory and discretionary spending through 2025. UnlessCongress acts in the future to modify these sequestrations, Medicare reimbursements will be reduced by 2%, on average, annually. In connection with the CARES Act, the Medicare sequestrations were suspended beginning onMay 1, 2020 and are expected to remain suspended throughDecember 31, 2020 . Aside from the suspension, the reduction in Medicare reimbursement rates is not expected to have a material adverse effect on our business, financial condition, results of operations, cash flows or 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 have incurred and anticipate we will continue to incur certain expenses related to transformational and restructuring related expenses that are expected to be project-based and periodic in nature. Accordingly, beginning with the first quarter of 2019, we began reporting Adjusted earnings before interest, taxes and depreciation and amortization ("EBITDA") from continuing operations, defined as income (loss) from continuing operations before interest, taxes, depreciation and amortization, and transformational and restructuring related expenses. Adjusted earnings per share ("Adjusted EPS") from continuing operations has also been further adjusted for these items and beginning with the first quarter of 2019 consists of diluted income (loss) from continuing operations per common and common equivalent share adjusted for amortization expense, stock-based compensation expense and transformational and restructuring related expenses. Adjusted EPS from continuing operations is being further adjusted to reflect the impacts from discrete tax events. 17 -------------------------------------------------------------------------------- Table of Contents 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 and six months endedJune 30, 2020 and 2019, refer to the tables below (in thousands, except per share data). Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019
Income (loss) from continuing operations
$ (6,149 ) $ 42,593 Interest expense 28,265 31,063 55,931 61,764 Income tax provision 3,373 11,486 6,109 13,588 Depreciation and amortization 14,393 13,779 28,792 27,584 Transformational and restructuring related expenses 11,537 17,866
30,581 20,305
Adjusted EBITDA from continuing operations
$ 115,264 $ 165,834 Three Months Ended June 30, 2020 2019 Weighted average diluted shares outstanding 83,745 83,689 Income from continuing operations and diluted income from continuing operations per share$ 7,600 $ 0.09 $ 20,047 $ 0.24 Adjustments (1) : Amortization (net of tax of$1,731 and$1,655 ) 5,193 0.06 4,964 0.06 Stock-based compensation (net of tax of$1,658 and$2,477 ) 4,973 0.06 7,430 0.09 Transformational and restructuring related expenses (net of tax of$2,884 and$4,467 ) 8,653 0.11 13,400 0.16 Net impact from discrete tax events 171 -
2,987 0.03
Adjusted income and diluted EPS from continuing operations$ 26,590 $ 0.32 $ 48,828 $ 0.58
(1) Our blended statutory tax rate of 25% was used to calculate the tax effects
of the adjustments for the three months endedJune 30, 2020 and 2019. Six Months EndedJune 30, 2020 2019 Weighted average diluted shares outstanding 83,061
85,087
(Loss) income from continuing operations and diluted income from continuing operations per share$ (6,149 ) $ (0.07 ) $ 42,593 $ 0.50 Adjustments (1) : Amortization (net of tax of$3,454 and$3,328 ) 10,363 0.12 9,984 0.12 Stock-based compensation (net of tax of$3,579 and$5,214 ) 10,738 0.13 15,639 0.18 Transformational and restructuring related expenses (net of tax of$7,645 and$5,076 ) 22,936 0.28 15,229 0.18 Net impact from discrete tax events 5,028 0.06
(1,601 ) (0.02 )
Adjusted income and diluted EPS from continuing operations$ 42,916 $ 0.52 $ 81,844 $ 0.96
(2) Our blended statutory tax rate of 25% was used to calculate the tax effects
of the adjustments for the six months endedJune 30, 2020 and 2019. 18
-------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedJune 30, 2020 as Compared to Three Months EndedJune 30, 2019 Our net revenue attributable to continuing operations was$509.2 million for the three months endedJune 30, 2020 , as compared to$561.2 million for the same period in 2019. The decrease in revenue of$52.0 million , or 9.3%, was primarily attributable to the unfavorable impacts from COVID-19 on same-unit revenue, driven by declines in volume. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue declined by$65.3 million , or 11.7%. The decline in same-unit net revenue was comprised of a decrease of$66.2 million , or 11.9%, related to patient service volumes, partially offset by a net increase of$0.9 million , or 0.2%, from net reimbursement-related factors. The decrease in revenue from patient service volumes was related to a decline across all our services, primarily as a result of COVID-19. The net increase in revenue related to net reimbursement-related factors was primarily due to CARES Act relief, modest improvements in managed care contracting and an increase in revenue caused by a decrease in the percentage of our patients enrolled in GHC programs, partially offset by unfavorable net rate impacts from radiology services. Practice salaries and benefits attributable to continuing operations decreased$11.9 million , or 3.3%, to$349.3 million for the three months endedJune 30, 2020 , as compared to$361.2 million for the same period in 2019. This decrease was primarily attributable to decreases in salary expense, including salary reductions and cessation of contract labor, related to the COVID-19 mitigation initiatives. Of the$11.9 million decrease,$24.4 million was related to salaries, partially offset by an increase of$12.5 million for benefits and incentive compensation. Notwithstanding the salary expense decreases related to the COVID-19 mitigation initiatives, we anticipate that we will experience a higher rate of growth in clinician compensation expense and malpractice expense at our existing units over historic averages, which could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our securities. Practice supplies and other operating expenses attributable to continuing operations decreased$3.4 million , or 13.5%, to$21.4 million for the three months endedJune 30, 2020 , as compared to$24.8 million for the same period in 2019. The decrease was primarily attributable to decreases in other practice operating expenses as compared to the prior year, primarily related to decreased activity across many expense categories such as travel, office expenses and professional services resulting from impacts of COVID-19. 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 identifiable to the day-to-day operations of our physician practices and services. General and administrative expenses were$77.7 million for the three months endedJune 30, 2020 , as compared to$84.2 million for the same period in 2019. The decrease of$6.5 million was primarily related to salary reductions and furloughs resulting from our COVID-19 mitigation initiatives, partially offset by increases in other expense categories, primarily legal expenses. General and administrative expenses as a percentage of net revenue was 15.3% for the three months endedJune 30, 2020 , as compared to 15.0% for the same period in 2019. Certain general and administrative expenses related to corporate overhead represent various support services provided across the company, including costs that are continuing to support the recently divested anesthesiology medical group through a transition services agreement. Because a portion of such expenses were previously allocated to but not specifically identifiable to, the anesthesiology medical group, they are required to be presented as continuing operations. Therefore, general and administrative expenses do not reflect potential general and administrative cost savings that may be achieved in future periods. Transformational and restructuring related expenses attributable to continuing operations were$11.5 million for the three months endedJune 30, 2020 , as compared to$17.9 million for the same period in 2019. The expenses were primarily for external consulting costs for various process improvement and restructuring initiatives. Beginning inApril 2020 , we reduced the scope of our transformation and restructuring related initiatives unless they were initiatives critical to our business operations or those that provide essential support for our response to COVID-19. Depreciation and amortization expense attributable to continuing operations was$14.4 million for the three months endedJune 30, 2020 , as compared to$13.8 million for the same period in 2019. Income from operations attributable to continuing operations decreased$24.5 million , or 41.2%, to$34.9 million for the three months endedJune 30, 2020 , as compared to$59.4 million for the same period in 2019. Our operating margin was 6.9% for the three months endedJune 30, 2020 , as compared to 10.6% for the same period in 2019. The decrease in our operating margin was primarily due to the decrease in revenue related to COVID-19, partially offset by lower operating expense growth, including lower transformation and restructuring related expenses, primarily related to COVID-19 mitigation initiatives. Excluding transformation and restructuring expenses, our income from operations attributable to continuing operations for the three months endedJune 30, 2020 and 2019 was$46.4 million and$77.3 million , respectively, and our operating margin was 9.1% and 13.8%, 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; however, this comparison is affected by the impacts from COVID-19 during 2020. Total non-operating expenses attributable to continuing operations were$23.9 million for the three months endedJune 30, 2020 , as compared to$27.9 million for the same period in 2019. The decrease in non-operating expenses was primarily related to a decrease in interest expense, primarily due to lower average borrowings under our credit agreement (the "Credit Agreement") and other income related to the transition services being provided to the buyer of the anesthesiology medical group, partially offset by a decrease in equity earnings resulting from the impacts to the underlying joint venture from COVID-19. 19 -------------------------------------------------------------------------------- Table of Contents Our effective income tax rate attributable to continuing operations was 30.7% and 36.4% for the three months endedJune 30, 2020 and 2019, respectively. Income taxes for the second quarter of 2020 were calculated by applying the actual year-to-date effective rate to our pre-tax income. After excluding discrete tax impacts, during the three months endedJune 30, 2020 and 2019, our effective income tax rate was 29.2% and 27.0%, respectively. We believe excluding discrete tax impacts on our effective income tax rate provides a more comparable view of our effective income tax rate. Income from continuing operations was$7.6 million for the three months endedJune 30, 2020 , as compared to$20.0 million for the same period in 2019. Adjusted EBITDA from continuing operations was$65.2 million for the three months endedJune 30, 2020 , as compared to$94.2 million for the same period in 2019. Diluted income from continuing operations per common and common equivalent share was$0.09 on weighted average shares outstanding of 83.7 million for the three months endedJune 30, 2020 , as compared to$0.24 on weighted average shares outstanding of 83.7 million for the same period in 2019. Adjusted EPS from continuing operations was$0.32 for the three months endedJune 30, 2020 , as compared to$0.58 for the same period in 2019. Loss from discontinued operations, net of tax, was$680.0 million for the three months endedJune 30, 2020 , as compared to loss of$28.3 million for the same period in 2019. Diluted loss from discontinued operations per common and common equivalent share was$8.12 for the three months endedJune 30, 2020 , as compared to$0.34 for the same period in 2019. Net loss was$672.4 million for the three months endedJune 30, 2020 , as compared to$8.2 million for the same period in 2019. Diluted net loss per common and common equivalent share was$8.03 for the three months endedJune 30, 2020 , as compared to$0.10 for the same period in 2019. Six Months EndedJune 30, 2020 as Compared to Six Months EndedJune 30, 2019 Our net revenue attributable to continuing operations was$1.07 billion for the six months endedJune 30, 2020 , as compared to$1.10 billion for the same period in 2019. The decrease in revenue of$33.2 million , or 3.0%, was primarily attributable to the unfavorable impacts from COVID-19 on same-unit revenue, driven by declines in volume. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue declined by$60.5 million , or 5.5%. The decline in same-unit net revenue was comprised of a decrease of$72.3 million , or 6.6%, related to patient service volumes, partially offset by a net increase of$11.8 million , or 1.1%, from net reimbursement-related factors. The decrease in revenue from patient service volumes was primarily related to a decline across all our services, primarily as a result of COVID-19. The net increase in revenue related to net reimbursement-related factors was primarily due to CARES Act relief, modest improvements in managed care contracting and an increase in revenue caused by a decrease in the percentage of our patients enrolled in GHC programs, partially offset by unfavorable net rate impacts from radiology services. Practice salaries and benefits attributable to continuing operations increased$17.1 million , or 2.3%, to$748.7 million for the six months endedJune 30, 2020 , as compared to$731.6 million for the same period in 2019. This increase was primarily attributable to growth in benefits related costs at our existing units, partially offset by the decrease in salary expense from salary reductions and cessation of contract labor resulting from COVID-19 mitigation initiatives that took place during the second quarter of 2020. The increase of$17.1 million was comprised of$25.3 million from benefits and incentive compensation, primarily malpractice expense, partially offset by a decrease of$8.2 million from salaries. Notwithstanding the salary expense decreases related to the COVID-19 mitigation initiatives, we anticipate that we will experience a higher rate of growth in clinician compensation expense and malpractice expense at our existing units over historic averages, which could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our securities. Practice supplies and other operating expenses attributable to continuing operations decreased$0.3 million , or 0.6%, to$46.8 million for the six months endedJune 30, 2020 , as compared to$47.1 million for the same period in 2019. The decrease was primarily attributable to decreases in other practice operating expenses as compared to the prior year, primarily related to decreased activity across many expense categories such as travel, office expenses and professional services resulting from impacts of COVID-19, primarily during the second quarter of 2020. 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 identifiable to the day-to-day operations of our physician practices and services. General and administrative expenses were$165.2 million for the six months endedJune 30, 2020 , as compared to$165.8 million for the same period in 2019. The decrease of$0.6 million is primarily related to salary reductions and furloughs resulting from the COVID-19 mitigation initiatives, almost entirely offset by increases in other expense categories, primarily legal expenses. General and administrative expenses as a percentage of net revenue was 15.4% for the three months endedJune 30, 2020 , as compared to 15.0% for the same period in 2019. Certain general and administrative expenses related to corporate overhead represent various support services provided across the company, including costs supporting the recently divested anesthesiology medical group through a transition services agreement. Because a portion of such expenses were previously allocated to but not specifically identifiable to the anesthesiology medical group, they are required to be presented as continuing operations. Therefore, general and administrative expenses do not reflect potential general and administrative cost savings that may be achieved in future periods. Transformational and restructuring related expenses attributable to continuing operations were$30.6 million for the six months endedJune 30, 2020 , as compared to$20.3 million for the same period in 2019. The expenses were primarily for external consulting costs for various process improvement and restructuring initiatives. Beginning inApril 2020 , we reduced the scope of our transformation and restructuring related initiatives unless they were initiatives critical to our business operations or those that provide essential support for our response to COVID-19. 20
-------------------------------------------------------------------------------- Table of Contents Depreciation and amortization expense attributable to continuing operations was$28.8 million for the six months endedJune 30, 2020 , as compared to$27.6 million for the same period in 2019. Income from operations attributable to continuing operations decreased$61.0 million , or 54.5%, to$50.9 million for the six months endedJune 30, 2020 , as compared to$111.9 million for the same period in 2019. Our operating margin was 4.8% for the six months endedJune 30, 2020 , as compared to 10.1% for the same period in 2019. The decrease in our operating margin was primarily due to the decrease in revenue related to COVID-19, partially offset by lower operating expense growth, including transformation and restructuring related expenses, primarily related to COVID-19 mitigation initiatives. Excluding transformation and restructuring expenses, our income from operations attributable to continuing operations for the six months endedJune 30, 2020 and 2019 was$81.5 million and$132.2 million , respectively, and our operating margin was 7.6% and 12.0%, 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; however, this comparison is affected by the impacts from COVID-19 during 2020. Total non-operating expenses attributable to continuing operations were$50.9 million for the six months endedJune 30, 2020 , as compared to$55.7 million for the same period in 2019. The decrease in non-operating expenses was primarily related to a decrease in interest expense, primarily due to lower average borrowings under our Credit Agreement, partially offset by a decrease in equity earnings resulting from the impacts to the underlying joint venture from COVID-19 and the settlement of a litigation matter. Our effective income tax rate attributable to continuing operations is not meaningful as calculated for the six months endedJune 30, 2020 due to the insignificant level of pre-tax income generated due to the impacts from COVID-19. Income taxes for the six months endedJune 30, 2020 were calculated by applying the actual year-to-date effective rate to our pre-tax loss. Our effective income tax attributable to continuing operations was 24.2% for the six months endedJune 30, 2019 . After excluding discrete tax impacts, during the six months endedJune 30, 2019 , our effective income tax rate was 27.0%. We believe excluding discrete tax impacts on our effective income tax rate provides a more comparable view of our effective income tax rate. Loss from continuing operations was$6.1 million for the six months endedJune 30, 2020 , as compared to income from continuing operations of$42.6 million for the same period in 2019. Adjusted EBITDA from continuing operations was$115.3 million for the six months endedJune 30, 2020 , as compared to$165.8 million for the same period in 2019. Diluted loss from continuing operations per common and common equivalent share was$0.07 on weighted average shares outstanding of 83.1 million for the six months endedJune 30, 2020 , as compared to diluted income of$0.50 on weighted average shares outstanding of 85.1 million for the same period in 2019. Adjusted EPS from continuing operations was$0.52 for the six months endedJune 30, 2020 , as compared to$0.96 for the same period in 2019. The decrease of 2.0 million in our weighted average shares outstanding is primarily due to the impact of shares repurchased in 2019 through open market repurchase activity and the exclusion of common stock equivalents from the weighted average shares calculation for the six months endedJune 30, 2020 as the effect would have been antidilutive. Loss from discontinued operations, net of tax, was$685.0 million for the six months endedJune 30, 2020 , as compared to loss of$293.7 million for the same period in 2019. Diluted loss from discontinued operations per common and common equivalent share was$8.25 for the six months endedJune 30, 2020 , as compared to$3.45 for the same period in 2019. Net loss was$691.1 million for the six months endedJune 30, 2020 , as compared to$251.1 million for the same period in 2019. Diluted net loss per common and common equivalent share was$8.32 for the six months endedJune 30, 2020 , as compared$2.95 for the same period in 2019. Liquidity and Capital Resources As ofJune 30, 2020 , we had$132.2 million of cash and cash equivalents attributable to our continuing operations as compared to$107.9 million atDecember 31, 2019 . Additionally, we had working capital attributable to our continuing operations of$304.4 million atJune 30, 2020 , an increase of 64.2 million from working capital of$240.2 million atDecember 31, 2019 . Cash Flows from Continuing Operations Cash (used in) provided by operating, investing and financing activities from continuing operations is summarized as follows (in thousands): Six Months Ended June 30, 2020 2019 Operating activities$ 19,893 $ 7,031 Investing activities (37,125 ) (19,196 ) Financing activities (611 ) (40,421 ) Operating Activities from Continuing Operations During the six months endedJune 30, 2020 , our net cash provided by operating activities for continuing operations was$19.9 million , compared to$7.0 million for the same period in 2019. The net increase in cash provided of$12.9 million was primarily due to an increase in cash flow from accounts receivable and increases in deferred taxes, partially offset by changes in accounts payable and accrued expenses and a decrease in cash flow from lower earnings. 21 -------------------------------------------------------------------------------- Table of Contents During the six months endedJune 30, 2020 , cash flow from accounts receivable for continuing operations was$44.3 million , as compared to$1.7 million for the same period in 2019. The increase in cash flow from accounts receivable for the six months endedJune 30, 2020 was primarily due to decreases in ending accounts receivable balances at existing units due to timing of cash collections. 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 52.4 days atJune 30, 2020 as compared to 49.9 days atDecember 31, 2019 . Investing Activities from Continuing Operations During the six months endedJune 30, 2020 , our net cash used in investing activities for continuing operations of$37.1 million consisted primarily of capital expenditures of$23.3 million and net purchases of investments of$14.2 million . Financing Activities from Continuing Operations During the six months endedJune 30, 2020 , our net cash used in financing activities for continuing operations of$0.6 million consisted of proceeds from the issuance of common stock of$4.4 million , partially offset by the repurchase of$3.0 million of our common stock and contingent consideration payments of$1.2 million . Liquidity OnMarch 25, 2020 , we amended and restated our Credit Agreement to, among other things, (i) establish a deemed Consolidated EBITDA of$139.2 million for the second and third quarters of 2020, reflecting average Adjusted EBITDA from continuing operations for the prior eight quarters (calculated for purposes of the Credit Agreement), which will be used in the calculation of rolling four consecutive quarter Consolidated EBITDA under the Credit Agreement, (ii) temporarily increase the maximum consolidated net leverage ratio required to be maintained by us from 4.50:1:00 to 5.00:1:00 for the second and third quarters of 2020 and 4.75:1:00 for the fourth quarter of 2020, before returning to 4.50:1:00 for the first quarter of 2021 and beyond, (iii) require that we maintain minimum availability under the Credit Agreement of$300.0 million through the third quarter of 2021, (iv) provide for a weekly repayment of borrowings under the Credit Agreement through the second quarter of 2021 using unrestricted cash on hand in excess of$300.0 million , plus a reserve for certain payables, and (v) temporarily restrict our ability to make restricted payments under the Credit Agreement for the remainder of 2020, subject to certain exceptions. The Credit Agreement provides for a$1.2 billion unsecured revolving credit facility, subject to the limitations discussed above, and includes a$37.5 million sub-facility for the issuance of letters of credit. The Credit Agreement matures onMarch 28, 2024 and is guaranteed by substantially all of our subsidiaries and affiliated professional associations and corporations. At our option, borrowings under the Credit Agreement will bear interest at (i) the alternate base rate (defined as the higher of (a) the prime rate, (b) the Federal Funds Rate plus 1/2 of 1.00% and (c) LIBOR for an interest period of one month plus 1.00%) plus an applicable margin rate ranging from 0.125% to 0.750% based on our consolidated leverage ratio or (ii) the LIBOR rate plus an applicable margin rate ranging from 1.125% to 1.750% based on our consolidated leverage ratio. The Credit Agreement also calls for other customary fees and charges, including an unused commitment fee ranging from 0.150% to 0.200% of the unused lending commitments, based on our consolidated leverage ratio. The Credit Agreement contains customary covenants and restrictions, including covenants that require us to maintain a minimum interest charge ratio, not to exceed a specified consolidated leverage ratio and to comply with laws, and restrictions on the ability to pay dividends and make certain other distributions, as specified therein. Failure to comply with these covenants would constitute an event of default under the Credit Agreement, notwithstanding the ability of the company to meet its debt service obligations. The Credit Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Credit Agreement. AtJune 30, 2020 , we had no outstanding principal balance on our Credit Agreement. We had outstanding letters of credit of$0.2 million which reduced the amount available on our Credit Agreement to$899.8 million atJune 30, 2020 , after giving effect to the temporary reduction of the capacity of our Credit Agreement described above throughSeptember 30, 2021 . AtJune 30, 2020 , we had an outstanding principal balance of$750.0 million on our 5.25% senior unsecured notes due 2023 (the "2023 Notes") and an outstanding principal balance of$1.0 billion on our 6.25% senior unsecured notes due 2027 (the "2027 Notes"). Our obligations under the 2023 Notes and the 2027 Notes are guaranteed on an unsecured senior basis by the same subsidiaries and affiliated professional contractors that guarantee our Credit Agreement. Interest on the 2023 Notes accrues at the rate of 5.25% per annum, or$39.4 million , and is payable semi-annually in arrears onJune 1 andDecember 1 . Interest on the 2027 Notes accrues at the rate of 6.25% per annum, or$62.5 million , and is payable semi-annually in arrears onJanuary 15 andJuly 15 . The indenture under which the 2023 Notes and the 2027 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 2023 Notes or the 2027 Notes, upon the occurrence of a change in control ofMEDNAX , we may be required to repurchase the 2023 Notes and the 2027 Notes at a purchase price equal to 101% of the aggregate principal amount of the 2023 Notes and the 2027 Notes repurchased plus accrued and unpaid interest. AtJune 30, 2020 , we believe we were in compliance, in all material respects, with the financial covenants and other restrictions applicable to us under the Credit Agreement and the 2023 Notes and the 2027 Notes. We believe we will be in compliance with these covenants throughout 2020. 22 -------------------------------------------------------------------------------- Table of Contents 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 atJune 30, 2020 was$318.4 million , of which$57.5 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$35.4 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 Credit Agreement, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and capital expenditures, fund 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 2019 Form 10-K, and this Quarterly Report, including the sections entitled "Risk Factors." 23
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