MEDNAX, INC.

MD
Delayed Quote. Delayed  - 09/23 04:10:00 pm
15.41USD -8.16%

MEDNAX : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/30/2020 | 07:02am


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, 2019, filed with the Securities and
Exchange Commission
on February 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., 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 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.
Overview
MEDNAX 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, the District of Columbia
and Puerto 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 on May 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 in
mid-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 since
mid-March
2020
have been significantly impacted by the
COVID-19
pandemic, but volumes did begin to normalize in May 2020 and substantially
recovered during the month of June 2020. We also divested our anesthesiology
medical group in May 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
through June 30, 2020; (ii) our Board of Directors agreed to forego their annual
cash retainer and cash meeting payments, also through June 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



MEDNAX is helping to address the shortage of personal protective equipment (PPE)
by partnering with vendors across industries to source high filtration
respirators, surgical masks and other forms of PPE for protective use.



• 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



--------------------------------------------------------------------------------



Table of Contents



• Early Virus Detection Using Cutting-Edge Imaging Diagnostic Tools





MEDNAX Radiology Solutions is leading early detection efforts through chest
imaging. vRad, a MEDNAX company, diagnosed one of the first
COVID-19
patients in the 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.


Virtual Forum to Provide Clinician Support





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
On March 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. The
Department of Health and Human Services ("HHS") is administering this program
and began disbursing funds in April 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 due December 31, 2021 and the remaining 50% due December 31,
2022
. We intend to utilize this deferral option throughout 2020.
Divestiture of the Anesthesiology Medical Group
On May 6, 2020, we entered into a securities purchase agreement with an
affiliate of North American Partners in Anesthesia ("NAPA") to divest our
anesthesiology medical group, and the transaction closed on May 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
ended June 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
ended December 31, 2019.
Planned Divestiture of MEDNAX Radiology Solutions
In June 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 ended June 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 ended
June 30, 2019. Economic conditions in the 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 in May 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 in April 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, 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. 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 the
Supreme 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 of Congress and many states' governors and
legislatures. Some candidates running for President of the United States are
proposing sweeping changes to the U.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 by Congress, 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 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.
"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 and President 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 the
U.S. House of Representatives and in the U.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.
Unless Congress 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 on May 1,
2020
and are expected to remain suspended through December 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 ended June 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 $ 7,600 $ 20,047



$ (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 $ 65,168 $ 94,241



$ 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 ended June 30, 2020 and 2019.



Six Months Ended

June 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 ended June 30, 2020 and 2019.



18



--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Three Months Ended June 30, 2020 as Compared to Three Months Ended June 30, 2019
Our net revenue attributable to continuing operations was $509.2 million for the
three months ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 in April 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 ended June 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 ended June 30,
2020
, as compared to $59.4 million for the same period in 2019. Our operating
margin was 6.9% for the three months ended June 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 ended June 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 ended June 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 ended June 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 ended
June 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 ended
June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 30, 2020, as compared
to $0.34 for the same period in 2019.
Net loss was $672.4 million for the three months ended June 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 ended June 30,
2020
, as compared to $0.10 for the same period in 2019.
Six Months Ended June 30, 2020 as Compared to Six Months Ended June 30, 2019
Our net revenue attributable to continuing operations was $1.07 billion for the
six months ended June 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 ended June 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
ended June 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 ended June 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 ended June 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 ended June 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 in April 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 ended June 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 ended June 30,
2020
, as compared to $111.9 million for the same period in 2019. Our operating
margin was 4.8% for the six months ended June 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
ended June 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 ended June 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 ended June 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 ended June 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 ended June 30, 2019. After excluding discrete tax impacts,
during the six months ended June 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 ended
June 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 ended June 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 ended June 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 ended June 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 ended June 30, 2020 as the effect would have been antidilutive.
Loss from discontinued operations, net of tax, was $685.0 million for the six
months ended June 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 ended June 30, 2020, as compared
to $3.45 for the same period in 2019.
Net loss was $691.1 million for the six months ended June 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 ended June 30, 2020, as
compared $2.95 for the same period in 2019.
Liquidity and Capital Resources
As of June 30, 2020, we had $132.2 million of cash and cash equivalents
attributable to our continuing operations as compared to $107.9 million at
December 31, 2019. Additionally, we had working capital attributable to our
continuing operations of $304.4 million at June 30, 2020, an increase of
64.2 million from working capital of $240.2 million at December 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 ended June 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 ended June 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 ended June 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 at June 30, 2020 as
compared to 49.9 days at December 31, 2019.
Investing Activities from Continuing Operations
During the six months ended June 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 ended June 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
On March 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 on March 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.
At June 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 at June 30, 2020,
after giving effect to the temporary reduction of the capacity of our Credit
Agreement described above through September 30, 2021.
At June 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 on June 1 and December 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 on January 15 and July 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 of MEDNAX, 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.
At June 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 at June 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



--------------------------------------------------------------------------------



Table of Contents

© Edgar Online, source Glimpses

© Acquiremedia 2020
Copier lien
All news about MEDNAX, INC.
09/15
09/10
09/10
09/10
08/25