Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
☒
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2020
OR
☐
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______
to ______
Commission File Number:
001-12111
 
MEDNAX, INC.
(Exact name of registrant as specified in its charter)
 
Florida
 
26-3667538
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1301 Concord Terrace
Sunrise, Florida
 
33323
(Address of principal executive offices)
 
(Zip Code)
(954)
384-0175
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading
Symbol
 
Name of each exchange
on which registered
Common Stock, par value $.01 per share
 
MD
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes
☑
  ☒    No  
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes
☑
  ☒    No  
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-accelerated
filer		☐Smaller reporting company☐
   
Accelerated filer
Emerging growth company		 
☐
Large accelerated filer
☑
Non-accelerated
 filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  
☐
    No  
☑
☒
On
May
1
, November 2, 2020, the registrant had outstanding 85,409,24885,598,299 shares of Common Stock, par value $.01 per share.
 
 
Table of Contents
MEDNAX, INC.
INDEX
Page
PART
I - FINANCIAL
INFORMATION
   
   
Item 1.
Financial Statements
3
   
Item 1.
 
Financial Statements
3
Consolidated Balance Sheets as of March 31,September 30, 2020 and December 31, 2019 (Unaudited)
3
   
 
Consolidated Statements of Income for the Three and Nine Months Ended March 31,September 30, 2020 and 2019 (Unaudited)
4
   
 
Consolidated Statements of Equity for the Three and Nine Months Ended March 31,September 30, 2020 and 2019 (Unaudited)
5
   
 
Consolidated Statements of Cash Flows for the ThreeNine Months Ended March 31,September 30, 2020 and 2019 (Unaudited)
6
7
   
 
Notes to Consolidated Financial Statements (Unaudited)
7
8
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
16
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26
  
22
Item 4.
Controls and Procedures
26
PART II - OTHER INFORMATION
 
   
Item 4.1.
Controls and ProceduresLegal Proceedings
22
27
   
PART II - OTHER INFORMATION
Item 1A.
Risk Factors
27
   
Item 1.
Legal Proceedings
23
Item 1A.
Risk Factors
23
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
24
Item 6.28
Exhibits
25
   
Item 6.
Exhibits
29
SIGNATURES
26
30
2
Table of Contents
MEDNAX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
         
 
 
March 31, 2020
  
December 31, 2019
 
ASSETS
      
Current assets:
      
Cash and cash equivalents
 $
312,155
  $
112,767
 
Short-term investments
  
85,041
   
74,510
 
Accounts receivable, net
  
476,991
   
498,869
 
Prepaid expenses
  
19,409
   
21,919
 
Income taxes receivable
  26,449   —   
Other current assets
  
20,851
   
23,442
 
         
Total current assets
  
940,896
   
731,507
 
Property and equipment, net
  
100,227
   
94,492
 
Goodwill
  
2,710,292
   
2,710,292
 
Intangible assets, net
  
263,308
   
274,407
 
Operating lease
right-of-use
assets
  
79,810
   
82,824
 
Deferred income tax assets
  
132,783
   
162,385
 
Other assets
  
92,346
   
89,994
 
         
Total assets
 $
4,319,662
  $
4,145,901
 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY
        
Current liabilities:
      
Accounts payable and accrued expenses
 $
323,363
  $
511,866
 
Current portion of finance lease liabilities
  
697
   
130
 
Current portion of operating lease liabilities
  
22,340
   
23,317
 
Income taxes payable
  
—
   
6,505
 
         
Total current liabilities
  
346,400
   
541,818
 
Line of credit
  
368,500
   
—
 
Long-term debt and finance lease liabilities, net
  
1,733,469
   
1,730,295
 
Long-term operating lease liabilities
  
62,238
   
67,005
 
Long-term professional liabilities
  
238,347
   
226,892
 
Deferred income tax liabilities
  
61,975
   
57,995
 
Other liabilities
  
21,337
   
22,900
 
         
Total liabilities
  
2,832,266
   
2,646,905
 
         
Commitments and contingencies
      
Shareholders’ equity:
      
Preferred stock; $.01 par value; 1,000 shares authorized; NaN issued
  
—
   
—
 
Common stock; $.01 par value; 200,000 shares authorized; 85,150 and 84,248 shares issued and outstanding, respectively
  
852
   
842
 
Additional
paid-in
capital
  
995,257
   
987,942
 
Retained earnings
  
491,287
   
510,212
 
         
Total shareholders’ equity
  
1,487,396
   
1,498,996
 
         
Total liabilities and shareholders’ equity
 $
4,319,662
  $
4,145,901
 
         
 
   
September 30, 2020
  
December 31, 2019
 
ASSETS
   
Current assets:
   
Cash and cash equivalents  $294,512  $107,870 
Short-term investments   81,574   74,510 
Accounts receivable, net   267,125   434,266 
Prepaid expenses   13,317   17,108 
Income taxes receivable   22,797   0   
Other current assets   20,287   11,837 
Assets held for sale   951,548   85,916 
  
 
 
  
 
 
 
Total current assets   1,651,160   731,507 
Property and equipment, net
   78,570   72,677 
Goodwill
   1,480,668   1,479,850 
Intangible assets, net
   27,665   28,587 
Operating lease
right-of-use
assets
   58,993   56,413 
Deferred income tax assets
   62,950   86,644 
Other assets
   64,820   48,643 
Assets held for sale
   0     1,641,580 
  
 
 
  
 
 
 
Total assets  $3,424,826  $4,145,901 
  
 
 
  
 
 
 
LIABILITIES AND EQUITY
   
Current liabilities:
   
Accounts payable and accrued expenses  $388,517  $410,637 
Current portion of finance lease liabilities   2,440   0   
Current portion of operating lease liabilities   18,695   18,254 
Income taxes payable   0     6,039 
Liabilities held for sale   78,712   106,888 
  
 
 
  
 
 
 
Total current liabilities   488,364   541,818 
Long-term debt and finance lease liabilities, net   1,742,263   1,730,238 
Long-term operating lease liabilities   40,220   44,643 
Long-term professional liabilities   242,366   204,914 
Deferred income tax liabilities   63,630   56,468 
Other liabilities   42,977   22,819 
Liabilities held for sale   0     46,005 
  
 
 
  
 
 
 
Total liabilities   2,619,820   2,646,905 
  
 
 
  
 
 
 
Commitments and contingencies
   
Shareholders’ equity:   
Preferred stock; $.01 par value; 1,000 shares authorized; NaN issued
   0     0   
Common stock; $.01 par value; 200,000 shares authorized; 85,504 and 84,248 shares issued and outstanding, respectively
   855   842 
Additional
paid-in
capital
   1,023,974   987,942 
Accumulated other comprehensive income   1,990   78 
Retained (deficit) earnings   (222,058)   510,134 
  
 
 
  
 
 
 
Total MEDNAX, Inc. shareholders’ equity   804,761   1,498,996 
Noncontrolling
 
i
nterest
   245   0   
  
 
 
  
 
 
 
Total equity   805,006   1,498,996 
  
 
 
  
 
 
 
Total liabilities and equity
  $3,424,826  $4,145,901 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
Table of Contents
MEDNAX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
         
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
Net revenue
 $
845,918
  $
851,183
 
         
Operating expenses:
      
Practice salaries and benefits
  
652,721
   
621,539
 
Practice supplies and other operating expenses
  
25,264
   
25,791
 
General and administrative expenses
  
105,235
   
101,821
 
Depreciation and amortization
  
18,673
   
20,033
 
Transformational and restructuring related expenses
  
30,907
   
3,544
 
         
Total operating expenses
  
832,800
   
772,728
 
         
Income from operations
  
13,118
   
78,455
 
Investment and other (expense) income
  
(679
)   
1,647
 
Interest expense
  
(27,608
)  
(30,723
)
Equity in earnings of unconsolidated affiliates
  
1,345
   
1,236
 
         
Total
non-operating
expenses
  
(26,942
)  
(27,840
)
         
(Loss) income from continuing operations before income taxes
  
(13,824
)   
50,615
 
Income tax provision
  
(2,286
)  
(8,962
)
         
(Loss) income from continuing operations
  
(16,110
)   
41,653
 
Loss from discontinued operations, net of tax
  
(2,602
)   
(284,525
)
         
Net loss
 $
(18,712
) $
(242,872
)
         
Per common and common equivalent share data:
      
(Loss) income from continuing operations:
      
Basic
 $
(0.20
)  $
0.48
 
         
Diluted
 $
(0.20
)  $
0.48
 
         
Loss from discontinued operations:
      
Basic
 $
(0.03
)  $
(3.31
)
         
Diluted
 $
(0.03
)  $
(3.29
)
         
Net loss:
      
Basic
 $
(0.23
) $
(2.82
)
         
Diluted
 $
(0.23
) $
(2.81
)
         
Weighted average common shares:
      
Basic
  
82,799
   
86,073
 
Diluted
  
82,799
   
86,545
 
 
   
Three Months Ended

September 30,
  
Nine Months Ended

September 30,
 
   
2020
  
2019
  
2020
  
2019
 
Net revenue
  $460,635  $454,913  $1,317,321  $1,321,159 
  
 
 
  
 
 
  
 
 
  
 
 
 
Operating expenses:
     
Practice salaries and benefits
   309,904   301,306   909,168   880,686 
Practice supplies and other operating expenses
   22,440   22,581   66,455   72,688 
General and administrative expenses
   66,346   63,284   194,276   185,318 
Depreciation and amortization
   7,195   6,408   20,749   18,830 
Transformational and restructuring related expenses
   34,291   12,766   60,846   32,025 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses   440,176   406,345   1,251,494   1,189,547 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income from operations   20,459   48,568   65,827   131,612 
Investment and other income
   10,534   802   13,064   2,777 
Interest expense
   (27,250)   (29,909)   (83,180)   (91,271) 
Equity in earnings of unconsolidated affiliates
   282   786   1,081   1,753 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
non-operating
expenses
   (16,434)   (28,321)   (69,035)   (86,741) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income (loss) from continuing operations before income taxes   4,025   20,247   (3,208)   44,871 
Income tax provision
   (6,677)   (7,360)   (10,859)   (12,590) 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Loss) income from continuing operations   (2,652)   12,887   (14,067)   32,281 
Loss from discontinued operations, net of tax   (38,392)   (1,268,803)   (718,125)   (1,539,314) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net loss  $(41,044)  $(1,255,916)  $(732,192)  $(1,507,033) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Per common and common equivalent share data:
     
(Loss) income from continuing operations:
     
Basic  $(0.03)  $0.16  $(0.17)  $0.39 
  
 
 
  
 
 
  
 
 
  
 
 
 
Diluted  $(0.03)  $0.16  $(0.17)  $0.38 
  
 
 
  
 
 
  
 
 
  
 
 
 
Loss from discontinued operations:
     
Basic  $(0.46)  $(15.39)  $(8.62)  $(18.36) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Diluted  $(0.46)  $(15.31)  $(8.62)  $(18.26) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net loss:
     
Basic  $(0.49)  $(15.23)  $(8.79)  $(17.97) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Diluted  $(0.49)  $(15.15)  $(8.79)  $(17.88) 
                 
Weighted average common shares:
     
Basic   83,862   82,441   83,260   83,846 
Diluted   83,862   82,883   83,260   84,302 
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
Table of Contents
MEDNAX, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
 
Common Stock
       
 
Number of
Shares
  
Amount
  
Additional
Paid-in

Capital
  
Retained
Earnings
  
Total
Equity
 
2020
               
Balance at January 1, 2020
  
84,248
  $
842
  $
987,942
  $
510,212
  $
1,498,996
 
                     
Net loss
  
—  
   
—  
   
—  
   
(18,712
)  
(18,712
)
Unrealized holding loss on investments, net of tax
(1)
  
—  
   
—  
   
—  
   
(213
)  
(213
)
Common stock issued under employee stock option, employee stock purchase plan and stock purchase plan
  
78
   
1
   
1,831
   
—  
   
1,832
 
Issuance of restricted stock
  
968
   
10
   
(10
)  
—  
   
—  
 
Forfeitures of restricted stock
  
(19
)  
—  
   
—  
   
—  
   
—  
 
Stock-based compensation expense
  
—  
   
—  
   
8,035
   
—  
   
8,035
 
Repurchased common stock
  
(125
)  
(1
)  
(2,541
)  
—
   
(2,542
)
                     
Balance at March 31, 2020
  
85,150
  $
852
  $
995,257
  $
491,287
  $
1,487,396
 
                     
2019
               
Balance at January 1, 2019
  
87,820
  $
878
  $
992,647
  $
2,094,359
  $
3,087,884
 
                     
Net loss
  
—  
   
—  
   
—  
   
(242,872
)  
(242,872
)
Unrealized holding loss on investments, net of tax
(1)
  
—  
   
—  
   
—  
   
(194
)  
(194
)
Common stock issued under employee stock option, employee stock purchase plan and stock purchase plan
  
140
   
1
   
3,541
   
—  
   
3,542
 
Issuance of restricted stock
  
978
   
10
   
(10
)  
—  
   
—  
 
Forfeitures of restricted stock
  
(6
)  
—  
   
—
 
 
   
—  
   
—  
 
Stock swaps
  
(20
)  
—  
   
(666
)  
—  
   
(666
)
Stock-based compensation expense
  
—  
   
—  
   
11,100
   
—  
   
11,100
 
Repurchased common stock
  
(2,525
)  
(25
)  
(28,740
)  
(50,217
)  
(78,982
)
                     
Balance at March 31, 2019
  
86,387
  $
864
  $
977,872
  $
1,801,076
  $
2,779,812
 
                     
   
Common Stock
          
   Number of     
Additional
Paid-in
  
Retained
(Deficit)
  Total 
   Shares  Amount  Capital  Earnings  Equity 
2020
      
Balance at January 1, 2020
   84,248  $ 842  $987,942  $510,212  $ 1,498,996 
Net loss
   —     —     —     (18,712)   (18,712) 
Unrealized holding loss on investments, net of tax
(1)
   —     —     —     (213)   (213) 
Common stock issued under employee stock option, employee stock purchase plan and stock purchase plan
   78   1   1,831   —     1,832 
Issuance of restricted stock and conversion of deferred stock to common stock
   968   10   (10)   —     —   
Forfeitures of restricted stock
   (19)   —     —     —     —   
Stock-based compensation expense
   —     —     8,035   —     8,035 
Repurchased common stock
   (125)   (1)   (2,541)   —     (2,542) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at March 31, 2020
   85,150  $852  $995,257  $491,287  $1,487,396 
Net loss
   —     —     —     (672,436)   (672,436) 
Unrealized holding gain on investments, net of tax
(1)
   —     —     —     2,078   2,078 
Common stock issued under employee stock option, employee stock purchase plan and stock purchase plan
   277   3   2,541   —     2,544 
Issuance of restricted stock
   200   2   (2)   —     —   
Forfeitures of restricted stock
   (57)   (1)   1   —     —   
Stock-based compensation expense
   —     —     7,489   —     7,489 
Repurchased common stock
   (34)   (1)   (500)   —     (501) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at June 30, 2020
   85,536  $855  $ 1,004,786  $(179,071)  $826,570 
Net loss
   —     —     —     (41,044)   (41,044) 
Contribution from noncontrolling Interests
(1)
              245   245 
Unrealized holding gain on investments, net of tax
(1)
   —     —     —     47   47 
Common stock issued under employee stock option, employee stock purchase plan and stock purchase plan
   89   1   1,323   —     1,324 
Issuance of restricted stock and conversion of deferred stock to common stock
   282   3   (3)   —     —   
Forfeitures of restricted stock
   (92)   (1)   1   —     —   
Stock-based compensation expense
   —     —     23,316   —     23,316 
Repurchased common stock
   (311)   (3)   (5,449)   —     (5,452) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2020
   85,504  $855  $1,023,974  $(219,823)  $805,006 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(1) 
(1)
Presented within retained (deficit) earnings on the consolidated balance sheet as the balance is immaterial.
The accompanying notes are an integral part of these Consolidated Financial Statements.
5
Table of Contents
MEDNAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSEQUITY (continued)
(in thousands)
(Unaudited)
 
         
 
Three Months Ended March 31,
 
 
2020
  
2019
 
Cash flows from operating activities:
      
Net income (loss)
 
$
(18,712
)
 
$
(242,872
)
Loss from discontinued operations
  
2,602
   
284,525
 
Adjustments to reconcile net income to net cash from operating activities:
      
Depreciation and amortization
  
18,673
   
20,033
 
Amortization of premiums, discounts and issuance costs
  
1,458
   
1,520
 
Stock-based compensation expense
  
8,035
   
10,989
 
Deferred income taxes
  
33,582
   
(5,108
)
Other
  
(1,883
)   
2,767
 
Changes in assets and liabilities:
      
Accounts receivable
  
25,904
   
(15,915
)
Prepaid expenses and other current assets
  
5,101
   
4,790
 
Other long-term assets
  
11,189
   
9,580
 
Accounts payable and accrued expenses
  
(198,452
)  
(132,559
)
Income taxes payable
  
(32,883
)   
14,373
 
Payments of contingent consideration liabilities
  
(102
)  
(42
)
Long-term professional liabilities
  
6,969
   
(496
)
Other liabilities
  
(7,912
)  
(11,993
)
         
Net cash used in operating activities – continuing operations
  
(146,431
)  
(60,408
)
Net cash provided by operating activities
-
 discontinued operations
  
—   
   
3,591
 
         
Net cash used in operating activities
  
(146,431
)  
(56,817
)
         
Cash flows from investing activities:
      
Acquisition payments, net of cash acquired
  
(75
)  
(4,250
)
Purchases of investments
  
(21,042
)   
—  
 
Proceeds from maturities or sales of investments
  
9,860
   
4,800
 
Purchases of property and equipment
  
(13,713
)  
(5,821
)
Proceeds from sale of business
  
4,750
   
—  
 
         
Net cash used in investing activities – continuing operations
  
(20,220
)  
(5,271
)
Net cash used in investing activities
-
 discontinued operations
  
—   
   
(3,420
)
         
Net cash used in investing activities
  
(20,220
)  
(8,691
)
         
Cash flows from financing activities:
      
Borrowings on credit agreement
  
515,000
   
518,500
 
Payments on credit agreement
  
(146,500
)  
(866,000
)
Proceeds from issuance of senior notes
  
—
   
500,000
 
Payments for credit facility amendment and financing costs
  
(500
)  
(8,380
)
Payments of contingent consideration liabilities
  
(1,248
)  
(1,308
)
Payments on finance lease obligations
  
(3
)  
(42
)
Proceeds from issuance of common stock
  
1,832
   
2,876
 
Repurchases of common stock
  
(2,542
)  
(78,982
)
         
Net cash provided from financing activities – continuing operations
  
366,039
   
66,664
 
Net cash provided from financing activities
-
 discontinued operations
  
—
   
—
 
         
Net cash provided from financing activities
  
366,039
   
66,664
 
         
Net increase in cash and cash equivalents
  
199,388
   
1,156
 
Cash and cash equivalents at beginning of period
  
112,767
   
56,745
 
Less cash and cash equivalents of discontinued operations at end of period
  
—   
   
(11,425
)
         
Cash and cash equivalents of continuing operations at end of period
 $
312,155
  $
46,476
 
         
   
Common Stock
          
   
Number of
     
Additional
Paid-in
  
Retained
(Deficit)
  
Total
 
   
Shares
  
Amount
  
Capital
  
Earnings
  
Equity
 
2019
      
Balance at January 1, 2019
   87,820  $ 878  $ 992,647  $2,094,359  $3,087,884 
Net loss
   —     —     —     (242,872)   (242,872) 
Unrealized holding loss on investments, net of tax
(1)
   —     —     —     (194)   (194) 
Common stock issued under employee stock option, employee stock purchase plan and stock purchase plan
   140   1   3,541   —     3,542 
Issuance of restricted stock
   978   10   (10)   —     —   
Forfeitures of restricted stock
   (6)   —     —     —     —   
Stock swaps
   (20)   —     (666)   —     (666) 
Stock-based compensation expense
   —     —     11,100   —     11,100 
Repurchased common stock
   (2,525)   (25)   (28,740)   (50,217)   (78,982) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at March 31, 2019
   86,387  $864  $977,872  $1,801,076  $2,779,812 
Net loss
   —     —     —     (8,245)   (8,245) 
Unrealized holding gain on investments, net of tax
(1)
   —     —     —     232   232 
Common stock issued under employee stock option, employee stock purchase plan
 
and stock purchase plan
   155   2   3,673   —     3,675 
Issuance of restricted stock
   123   1   (1)   —     —   
Forfeitures of restricted stock
   (61)   (1)   1   —     —   
Stock-based compensation expense
   —     —     15,080   —     15,080 
Repurchased common stock
   (2,508)   (25)   (29,196)   (36,306)   (65,527) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at June 30, 2019
   84,096  $841  $967,429  $1,756,757  $2,725,027 
Net loss
   —     —     —     (1,255,916)   (1,255,916) 
Unrealized holding gain on investments, net of tax
(1)
   —     —     —     (32)   (32) 
Common stock issued under employee stock option, employee stock purchase plan and stock purchase plan
   124   1   2,605   —     2,606 
Issuance of restricted stock
   12   —     —     —     —   
Forfeitures of restricted stock
   (27)   —     —     —     —   
Stock-based compensation expense
   —     —     8,090   —     8,090 
Repurchased common stock
   (20)   —     (415)   —     (415) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2019
   84,185  $842  $977,709  $500,809  $1,479,360 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
(2) 
Presented within retained (deficit) earnings as the balance is immaterial.
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
MEDNAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
   
Nine Months Ended September 30,
 
   
2020
   
2019
 
Cash flows from operating activities:
    
Net loss
  $(732,192)   $(1,507,033) 
Loss from discontinued operations
   718,125    1,539,314 
Adjustments to reconcile net income to net cash from operating activities:
    
Depreciation and amortization
   20,749    18,830 
Amortization of premiums, discounts and issuance costs
   4,076    4,293 
Stock-based compensation expense
   36,120    27,512 
Deferred income taxes
   30,214    (13,484) 
Other
   (30)    3,370 
Changes in assets and liabilities:
    
Accounts receivable
   30,006    7,491 
Prepaid expenses and other current assets
   (1,716)    (22,545) 
Other long-term assets
   7,703    21,825 
Accounts payable and accrued expenses
   (36,433)    (2,238) 
Income taxes payable / receivable
   (28,837)    (25,838) 
Long-term professional liabilities
   15,703    4,508 
Other liabilities
   8,157    (19,768) 
  
 
 
   
 
 
 
Net cash provided by operating activities – continuing operations
   71,645    36,237 
Net cash provided by operating activities—discontinued operations
   144,841    186,177 
  
 
 
   
 
 
 
Net cash provided by operating activities
   216,486    222,414 
  
 
 
   
 
 
 
Cash flows from investing activities:
    
Acquisition payments, net of cash acquired
   (2,225)    (31,200) 
Purchases of investments
   (36,090)    (13,907) 
Proceeds from maturities or sales of investments
   30,865    26,240 
Purchases of property and equipment
   (21,809)    (14,862) 
Proceeds from sale of business, net of cash sold
   1,080    0 
  
 
 
   
 
 
 
Net cash used in investing activities – continuing operations
   (28,179)    (33,729) 
Net cash provided by (used in) investing activities—discontinued operations
   3,079    (20,793) 
  
 
 
   
 
 
 
Net cash used in investing activities
   (25,100)    (54,522) 
  
 
 
   
 
 
 
Cash flows from financing activities:
    
Borrowings on credit agreement
   527,500    1,225,800 
Payments on credit agreement
   (527,500)    (1,755,500) 
Proceeds from issuance of senior notes
   0      500,000 
Payments for credit facility amendment and financing costs
   (510)    (9,194) 
Payments on finance lease obligations
   (433)    0 
Proceeds from issuance of common stock
   5,697    9,157 
Contribution from noncontrolling interests
   245    0 
Repurchases of common stock
   (8,495)    (144,925) 
  
 
 
   
 
 
 
Net cash used in financing activities – continuing operations
   (3,496)    (174,662) 
Net cash used in financing activities—discontinued operations
   (1,248)    (8,909) 
  
 
 
   
 
 
 
Net cash used in financing activities
   (4,744)    (183,571) 
  
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
   186,642    (15,679) 
Cash and cash equivalents at beginning of period
   107,870    40,774 
  
 
 
   
 
 
 
Cash and cash equivalents at end of period
  $294,512   $25,095 
  
 
 
   
 
 
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
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MEDNAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,September 30, 2020
(Unaudited)
1.
Basis of Presentation and New Accounting Pronouncements:
The accompanying unaudited Consolidated Financial Statements of the Company and the notes thereto presented in this Form
10-Q
have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements, and do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results
r
esults of the interim periods.periods presented. The financial statements include all the accounts of MEDNAX, Inc. and its consolidated subsidiaries (collectively, “MDX”) together with the accounts of MDX’s affiliated business corporations or professional associations, professional corporations, limited liability companies and partnerships (the “affiliated professional contractors”). Certain subsidiaries of MDX have contractual management arrangements with its affiliated professional contractors, which are separate legal entities that provide physician services in certain states and Puerto Rico. The terms “MEDNAX” and the “Company” refer collectively to MEDNAX, Inc., its subsidiaries and the affiliated professional contractors.
The Company is a party to a joint venture in which it owns a 37.5% economic interest and a second joint venture in which it owns a 49.0% economic interest. The Company accounts for thesethis joint venturesventure under the equity method of accounting because the Company exercises significant influence over, but does not control, these entities.this entity.
In August 2020, the Company entered into a joint venture in which it owns a 51% economic interest and for which it is deemed the primary beneficiary. The equity interests of the outside investor in the equity of this consolidated entity is accounted for and presented as noncontrolling interests on the Company’s Consolidated Balance Sheets. Although
the
joint
venture was
formed
during the third quarter of 2020, it has not yet begun operations. Any future results of operations attributable to
the
noncontrolling interests
will be accounted for and presented as such
on the Company’s Consolidated Statements of Income.
The consolidated results of operations for the interim periods presented are not necessarily indicative of the results to be experienced for the entire fiscal year. In addition, the accompanying unaudited Consolidated Financial Statements and the notes thereto should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s most recent Annual
Report on Form
10-K
(the (the “Form
10-K”).
In October 2019, the Company divested its management services organization, which operated as MedData, to allow the Company to focus on its core physician services business. The operating results of MedData wereare reported as discontinued operations in the Company’s Consolidated Statements of Income for the three and nine months ended March 31,September 30, 2019.
In May 2020, the Company divested its anesthesiology services medical group. The operating results of this medical group are reported as discontinued operations in the Company’s Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019.
On September 
9,
 2020, the Company
entered into
 a definitive agreement to divest its radiology services medical group. The operating results of this medical group are reported as discontinued operations in the Company’s Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019.
Reclassifications have been made to certain prior period financial statements and footnote disclosures to reflect the impact of discontinued operations. See noteNote 6 – Assets Held for moreSale and Discontinued Operations for additional information.
New Accounting Pronouncements
In December 2019, accounting guidance related to income taxes was issued with the goal of enhancing and simplifying various aspects of the income tax accounting guidance, including requirements related to hybrid tax regimes, deferred taxes on
step-up
in tax basis of goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intraperiod tax allocation exception to the incremental approach, deferred tax liabilities on outside basis differences, and interim-period accounting for enacted changes in tax law and certain
year-to-date
loss limitations. The guidance becomes effective for the Company on January 1, 2021, including interim periods therein, with early adoption permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company does not believe the adoption of this new guidance will have a material impact on its Consolidated Financial Statements and related disclosures.
2.
Coronavirus Pandemic
(“COVID-19”):
COVID-19
and related “stay at home” and social distancing measures implemented across the country hashave significantly impacted demand for medical services provided by the Company’s affiliated clinicians.     Beginning in
mid-March
2020, the Company experienced a significant decline in the number of elective surgeries at the facilities where the Company’s affiliated clinicians provided anesthesiaanesthesiology services. See Note 12 - Subsequent Events for information regarding the divestment of the Company’s anesthesia medical group on May 6, 2020. Much of this decline has beenwas 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 the Company’s radiology service line,services medical group, orders for radiological studies have declined by a meaningful amount from historically normal levels,
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Table of Contents
with much of this reduction focused in
non-urgent
studies. See Note 6 – Assets Held for Sale and Discontinued Operations for information regarding the divestment of the Company’s anesthesiology services medical group and the planned divestment of the Company’s radiology services medical group. The Company’s affiliated office-based practices, which specialize in maternal-fetal medicine, pediatric cardiology, and numerous pediatric subspecialties, have seenexperienced a significant elevation of appointment cancellations compared to historical normal levels. At this time, the Company has not experienced, nor does it currently anticipate, any significant impact to neonatal intensive care unit (NICU) patient volumes as a result of
COVID-19.
Overall, the Company’s operating results were significantly impacted by
COVID-19
beginning in
mid-March
2020.
The Company has implemented a number of actions to preserve financial flexibility and partially mitigate the significant anticipated impact of
COVID-19.
These steps included a suspension of most activities related to the Company’s transformational and restructuring programs, limiting these expenditures to those that
provide
essential support for the Company’s response to
COVID-19.
In addition, (i) the Company temporarily reduced executive and key management base salaries, including 50% reductions in salaries for its named executive officers through at least June 30, 2020; (ii) the Board of Directors agreed to forego their annual cash retainer and cash meeting payments, until further notice;also through June 30, 2020; (iii) the Company enacted a combination of salary reductions and furloughs for
non-clinical
employees; and (iv) the Company enacted significant operational and practice-specific expense reduction plans across its clinical operations. The Company also divested its anesthesiology services medical group in May 2020, where operating results were significantly impacted by
COVID-19.
In response to the anticipated impact of
COVID-19
on the Company’s results of operations, on
March 25, 2020, the Company amended and restated its 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
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Table of Contents
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 the Company 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 the Company maintains 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 the Company’s ability to make restricted payments under the Credit Agreement for the remainder of 2020, subject to certain
exceptions. At March 31,September 30, 2020, the Company believes it was in compliance, in all material respects, with the financial covenants and other restrictions applicable to the Company under its Credit Agreement, its 5.25% senior unsecured notes due 2023 and its 6.25% senior unsecured notes due 2027. The Company believes it will be in compliance with these covenants for the next twelve months. At September 30, 2020, the Company had no outstanding principal balance on its Credit Agreement. The Company had outstanding letters of credit of $0.2 million which reduced the amount available on its Credit Agreement to $899.8 million at September 30, 2020, after giving effect to the temporary reduction of the capacity of its Credit Agreement described above through September 30, 2021.
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 Department of Health and Human Services (“HHS”) is administering this program and began disbursing funds from the initial $30 billion in early April 2020, of which the Company’s affiliated physician practices received an aggregate of $12.2 million based on their respective share of Medicare fee for service reimbursements in 2019. 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 the Company and its 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 the Company’s affiliated physician practices
within continuing operations
received an aggregate of approximately $20.0 million during the nine months ended September 30, 2020. The Company has 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. The Company intends to utilize this deferral option throughout 2020.
The Company currently expects thatCOVID-19
pandemic has
materially
impacted the COVID-19 situation will materially impact its Company’s
financial results, but due to the rapidly evolving environment and continued uncertainties surrounding the timeline of and impacts from COVID-19, the Company is unable to predict the ultimate impact on its business, financial condition, results of operations and cash flows. The Company, however, believes it will be able to generate sufficient liquidity to satisfy its obligations for the next twelve months.
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Table of Contents
3.
Cash Equivalents and Investments:
As of March 31,September 30, 2020 and December 31, 2019, the Company’s cash equivalents consisted entirely of money market funds totaling $6.4$2.4 million and $16.8 million, respectively. Investments consisted of corporate securities, municipal debt securities, federal home loan securities and certificates of deposit. All investments are classified as current.
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Investments held at March 31,September 30, 2020 and December 31, 2019 are summarized as follows (in thousands):
 
March 31, 2020
  
December 31, 2019
 
Corporate securities
 $
46,883
  $
32,962
 
Municipal debt securities
  
23,327
   
29,066
 
Federal home loan securities
  
8,052
   
8,013
 
Certificates of deposit
  
6,779
   
4,469
 
         
 $
85,041
  $
74,510
 
         
   
September 30, 2020
   
December 31, 2019
 
Corporate securities
  $56,680   $32,962 
Municipal debt securities
   13,523    29,066 
Federal home loan securities
   6,529    8,013 
Certificates of deposit
   4,842    4,469 
  
 
 
   
 
 
 
  $81,574   $74,510 
  
 
 
   
 
 
 
4.
Fair Value Measurements:
The accounting guidance establishes a fair value hierarchy that prioritizes valuationvaluati
o
n inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels:
Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following table presents information about the Company’s financial instruments that are accounted for at fair value on a recurring basis at March 31,September 30, 2020 and December 31, 2019 (in thousands):
   
Fair Value
 
 
Fair Value
Category
  
March 31, 2020
  
December 31, 2019
 
Assets:
         
Money market funds
  
Level 1
  $
6,357
  $
16,775
 
Short-term investments
  
Level 2
   
85,041
   
74,510
 
Mutual Funds
  
Level 1
   
11,640
   
14,264
 
Liabilities:
         
Contingent consideration
  
Level 3
   
1,288
   
2,696
 
       
Fair Value
 
   
Fair Value
Category
   
September 30, 2020
   
December 31, 2019
 
Assets:
      
Money market funds
   Level 1   $2,411   $16,775 
Short-term investments
   Level 2    81,574    74,510 
Mutual Funds
   Level 1    14,446    14,264 
The following table presents information about the Company’s financial instruments that are not carried at fair value at March 31,September 30, 2020 and December 31, 2019 (in thousands):
 
March 31, 2020
  
December 31, 2019
 
 
Carrying
Amount
  
Fair
Value
  
Carrying
Amount
  
Fair
Value
 
Liabilities:
            
2023 Notes
  
750,000
   
611,250
   
750,000
   
766,875
 
2027 Notes
  
1,000,000
   
801,200
   
1,000,000
   
1,025,600
 
   
September 30, 2020
   
December 31, 2019
 
   
Carrying
Amount
   
Fair

Value
   
Carrying
Amount
   
Fair

Value
 
Liabilities:
        
2023 Notes
   750,000    759,375    750,000    766,875 
2027 Notes
   1,000,000    1,035,000    1,000,000    1,025,600 
The carrying amounts of cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value due to the short maturities of the respective instruments. The carrying value of the Company’s line of credit approximates fair value. If the Company’s line of credit was measured at fair value, it would be
categorized as Level 2 in the fair value hierarchy.
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55.
.
Accounts Receivable and Net Revenue:
Accounts receivable, net consists of the following (in thousands):
 
March 31, 2020
  
December 31, 2019
 
Gross accounts receivable
 $
1,840,118
  $
1,943,664
 
Allowance for contractual adjustments and uncollectibles
  
(1,363,127
)  
(1,444,795
)
         
 $
476,991
  $
498,869
 
         
   
September 30, 2020
   
December 31, 2019
 
Gross accounts receivable
  $1,119,171   $1,750,264 
Allowance for contractual adjustments and uncollectibles
   (852,046)    (1,315,998) 
  
 
 
   
 
 
 
  $267,125   $434,266 
  
 
 
   
 
 
 
Patient
service
revenue is recognized at the time services are provided by the Company’s affiliated physicians. The Company’s performance obligations related to the delivery of services to patients are satisfied at the time of service. Accordingly, there are no performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period with respect to patient service revenue. Almost all of the Company’s patient service revenue is reimbursed by government-sponsored healthcare programs (“GHC Programs”) and third-party insurance payors. Payments for services rendered to the Company’s patients are generally less than billed charges. The Company monitors its revenue and receivables from these sources and records an estimated contractual allowance to properly account for the anticipated differences between billed and reimbursed amounts.
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Table of Contents
Accordingly, patient service revenue is presented net of an estimated provision for contractual adjustments and uncollectibles. The Company estimates allowances for contractual adjustments and uncollectibles on accounts receivable based upon historical experience and other factors, including days sales outstanding (“DSO”) for accounts receivable, evaluation of expected adjustments and delinquency rates, past adjustments and collection experience in relation to amounts billed, an aging of accounts receivable, current contract and reimbursement terms, changes in payor mix and other relevant information. Contractual adjustments result from the difference between the physician rates for services performed and the reimbursements by GHC Programs and third-party insurance payors for such services.
Collection of patient service revenue the Company expects to receive is normally a function of providing complete and correct billing information to the GHC Programs and third-party insurance payors within the various filing deadlines and typically occurs within 30 to 60 days of billing.
Some of the Company’s hospital agreements require hospitals to pay the Company administrative fees. Some agreements provide for fees if the hospital does not generate sufficient patient volume in order to guarantee that the Company receives a specified minimum revenue level. The Company also receives fees from hospitals for administrative services performed by its affiliated physicians providing medical director or other services at the hospital.
The following table summarizes the Company’s net revenue by category (in thousands):
         
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
Net patient service revenue
 $
  734,387
  $
  749,585
 
Hospital contract administrative fees
  
104,595
   
94,721
 
Other revenue
  
6,936
   
6,877
 
         
 $
845,918
  $
851,183
 
         
   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Net patient service revenue
  $382,936   $400,330   $1,133,313   $1,159,363 
Hospital contract administrative fees
   61,186    51,149    154,840    149,407 
Other revenue
   16,513    3,434    29,168    12,389 
  
 
 
   
 
 
   
 
 
   
 
 
 
  $460,635   $454,913   $1,317,321   $1,321,159 
  
 
 
   
 
 
   
 
 
   
 
 
 
The approximate percentage of net patient service revenue by type of payor was as follows:
         
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
Contracted managed care
  
68
%  
69
%
Government
  
25
   
24
 
Other third-parties
  
5
   
5
 
Private-pay
patients
  
2
   
2
 
         
  
100
%  
100
%
         
   
Three Months Ended

September 30,
  
Nine Months Ended

September 30,
 
   
2020
  
2019
  
2020
  
2019
 
Contracted managed care
   69%   68%   69%   68% 
Government
   26   26   26   26 
Other third-parties
   4   5   4   5 
Private-pay
patients
   1   1   1   1 
  
 
 
  
 
 
  
 
 
  
 
 
 
   100%   100%   100%   100% 
  
 
 
  
 
 
  
 
 
  
 
 
 
66.
.
Business Combinations, Assets Held for Sale and Discontinued Operations:
Business Combinations
During the nine months ended September 30, 2020, the Company completed the acquisition of 1 pediatric subspecialty practice for total consideration of $2.1 million, of which $1.9 million was paid in cash and $0.2 million was recorded as a contingent consideration liability. This acquisition expanded the Company’s national network of physician practices. In connection with this acquisition, the Company recorded
non-deductible
goodwill of $0.8 million and other intangible assets consisting primarily of physician and hospital agreements of $1.3 million.
Divestiture of
the
Radiology Services Medical Group
On October 10, 2019,September 
9
,
 2020, the Company entered into a
securities purchase
agreement with an affiliateRadiology Partners, Inc., pursuant to which Radiology Partners, Inc. will acquire the Company’s radiology services medical group for $885 million
cash, subject to certain customary adjustments.
 This divestiture will allow the Company to focus solely on its Pediatrix and Obstetrix medical groups. The Company determined that the criterion to classify the radiology services medical group as assets held for sale within the Company’s Consolidated Balance Sheets effective September 30, 2020 were met. Accordingly, the assets and liabilities of Frazier Healthcare Partnersthe radiology services medical group were classified as current assets and current liabilities held for sale at September 30, 2020 as the Company expects to divest its managementof the radiology services organization,medical group within the next twelve months. The classification to assets held for sale impacted the net book value of the assets and liabilities expected to be transferred upon sale. The estimated fair value of the radiology services medical group was determined using the purchase price in the
purchase
agreement along with estimated broker, accounting, legal and
other
selling
expenses.
 The Company deemed the carrying amount of
other
assets
within the medical group, specifically accounts receivable and property and equipment, to represent fair value and therefore recorded a
non-cash
charge of $43.0 million against goodwill, which operated as MedData,represented the difference between the estimated fair value of the radiology services medical group and the transaction closedcarrying amount of the net assets held for sale. Recognition of the charge against goodwill resulted in a tax benefit which
11
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generated an additional $4.0 million deferred tax asset that increased the fair value of the medical group. An incremental
non-cash
charge is then required to reduce the
radiology services
medical group’s net assets to its previously determined fair value. Accordingly, the Company recorded the incremental
non-cash
charge of $4.0 million for a total
non-cash
charge of $47.0 million, reducing the goodwill balance of the radiology services medical group. Upon completion of the divestiture, the Company could record an additional gain or loss on October 31, 2019. Thedisposal at the time final net proceeds are determined.
In addition, in accordance with accounting guidance for discontinued operations, the expected divestiture of the radiology services medical group was deemed to represent a fundamental strategic shift that will have a major effect on the Company’s operations, and accordingly, the operating results of the managementradiology services service linemedical group were reported as discontinued operations in the Company’s Consolidated Statements of Income for the three and nine months ended September 30, 2020 with prior periods recast to conform with the current period presentation.
The following table represents the major classes of assets and liabilities of the radiology services medical group that are included as assets and liabilities held for sale in the accompanying Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (in thousands):
   
September 30, 2020
   
December 31, 2019
 
Assets
    
Accounts receivable, net
  $54,284   $64,603 
Prepaid expenses and other
current 
assets
   9,819    9,744 
Property and equipment, net
   20,078    19,204 
Operating leases
right-of-use
assets
   14,165    15,008 
Goodwill
   640,818    685,170 
Intangible assets, net
   170,059    180,978 
Deferred income tax assets
   6,020    18,183 
Other assets
   36,305    40,724 
  
 
 
   
 
 
 
  $951,548   $1,033,614 
  
 
 
   
 
 
 
Liabilities
      
Accounts payable and accrued expenses
  $39,505   $42,474 
Operating and finance leases
   13,619    14,355 
Long-term professional liabilities
   23,744    21,978 
Other liabilities
   1,844    81 
  
 
 
   
 
 
 
  $78,712   $78,888 
  
 
 
   
 
 
 
The following table summarizes the results of discontinued operations related to the radiology services medical group for the three and nine months ended September 30, 2020 and 2019 (in thousands):
   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Net revenue
  $125,765   $125,650   $340,133   $366,678 
  
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses:
            
Cost of service salaries and benefits
   84,718    80,336    234,169    238,402 
Cost of service supplies and other operating expenses
   1,449    1,532    4,273    (1,468) 
General and administrative expenses
   19,876    20,734    57,178    64,490 
Depreciation and amortization
   5,090    7,595    20,328    22,757 
Transformational and restructuring related expenses
   2,491    441    6,517    1,487 
Goodwill impairment
   46,963    117,924    46,963    117,924 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
   160,587    228,562    369,428    443,592 
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
   (34,822)    (102,912)    (29,295)    (76,914) 
Non-operating
income, net
   1,369    2,059    3,035    4,768 
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income taxes
   (33,453)    (100,853)    (26,260)    (72,146) 
Income tax (provision) benefit
   (62)    3,907    (1,988)    (3,687) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
  $(33,515)   $(96,946)   $(28,248)   $(75,833) 
  
 
 
   
 
 
   
 
 
   
 
 
 
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Divestiture of
 the
Anesthesiology Services Medical Group
On May 6, 2020, the Company entered into a securities purchase agreement with an affiliate of North American Partners in Anesthesia (“NAPA”) to divest the Company’s anesthesiology services 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, the Company 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 Company will begin to receive a payment on its economic interest at an exit multiple of 2.0, with such payment reaching $250 million at an exit multiple of 5.0. In addition, the Company retained the accounts receivable of the anesthesiology services medical group, which net of various other working capital items, approximated $110.0 million
at March 31, 2019. Loss from2020.
The
operating results of the anesthesiology services medical group service line were reported as a component of discontinued operations, net of income taxes, as reported in the Company’s Consolidated Statements of Income for the three and nine months ended March 31, 2019
,
was $284.5 million
,
which included a loss on classification as held for sale of $321.2 million.
September 30, 2020 and 2019.
A single
10
anesthesiology
Tablepractice was not included in the divestiture of Contentsthe anesthesiology services medical group, and
Duringcontinues to operate as an affiliate of the Company. Its
results of operations are reflected in the three months ended March 31,September 30, 2020
while the incremental loss on sale
of the anesthesiology services medical group
recorded during the three months ended September 30, 2020 reflects a true up of various divested account balances during the third quarter of 2020.
The total preliminary loss on sale
of the anesthesiology services medical group
recorded during the nine months ended September 30, 2020 was $648.7 million. Upon completion of a valuation for the contingent economic interest and working capital
true-up,
final net proceeds will be determined, and the Company will adjust the loss on sale at that time. In addition, as a result of the sale, the Company currently estimates that it will generate an approximately $1.68 billion capital loss carryforward
that will expire
in 2025. Based on management’s determination that it is more likely than not that the tax benefits related to this loss carryforward will not be realized, the Company has provided an approximately $419.0 million valuation allowance against this deferred tax asset as of September 30, 2020.
The following table summarizes the results of discontinued operations related to the anesthesiology services medical group for the three and nine months ended September 30, 2020 and 2019 (in thousands):
   
Three Months Ended

September 30,
  
Nine Months Ended

September 30,
 
   
2020
  
2019
  
2020
  
2019
 
Net revenue
  $2,700  $309,602  $377,661  $924,845 
  
 
 
  
 
 
  
 
 
  
 
 
 
Operating expenses:
     
Cost of service salaries and benefits
   2,746   250,157   351,408   746,237 
Cost of service supplies and other operating expenses
   38   2,837   5,254   9,537 
General and administrative expenses
   215   18,338   31,179   57,909 
Depreciation and amortization
   —     5,605   6,308   17,863 
Transformational and restructuring related expenses
   —     6,785   28,634   17,506 
Goodwill impairment
   —     1,331,291   —     1,331,291 
Loss on sale, net
   4,499   —     644,653   —   
  
 
 
  
 
 
  
 
 
  
 
 
 
Total operating expenses
   7,498   1,615,013   1,067,436   2,180,343 
  
 
 
  
 
 
  
 
 
  
 
 
 
Loss from operations
   (4,798)   (1,305,411)   (689,775)   (1,255,498) 
Non-operating
(expense) income, net
   —   (17)   51   (14) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Loss before income taxes
   (4,798)   (1,305,428)   (689,724)   (1,255,512) 
Income tax benefit
   100   129,241   5,661   115,987 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net loss
  $(4,698)  $(1,176,187)  $(684,063)  $(1,139,525) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Divestiture of MedData
The Company divested of
its
management services organization, MedData, in October 2019. During the nine months ended September 30, 2020, the Company recorded ana net incremental loss on the sale of MedData
of $3.6$5.8 million, primarily related tofor the finalization of certain transaction related expenses, of $5.1 million and a working capital
true-up
of $0.2 million,and incremental reserves related to indemnification matters, partially offset by the completion of its preliminary valuation for the contingent economic consideration
,
which decreasedconsideration. This incremental loss is reflected as a component of discontinued operations, net of income taxes, in the loss on sale by $1.7 million.Company’s Consolidated Statements of Income for the nine months ended September 30, 2020. The operating results of MedData were reported as a component of discontinued operations, net of income taxes, in the Company’s Consolidated Statements of Income for the three and nine months ended September 30, 2019.
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7.
Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following (in thousands):
 
March 31, 2020
  
December 31, 2019
 
Accounts payable
 $
47,519
  $
39,610
 
Accrued salaries and bonuses
  
108,079
   
268,619
 
Accrued payroll taxes and benefits
  
47,791
   
67,268
 
Accrued professional liabilities
  
48,149
   
44,869
 
Accrued contingent consideration
  
1,288
   
2,696
 
Accrued interest
  
27,422
   
32,910
 
Other accrued expenses
  
43,115
   
55,894
 
         
 $
323,363
  $
511,866
 
         
   
September 30,
2020
   
December 31,
2019
 
Accounts payable
  $60,956   $35,410 
Accrued salaries and bonuses
   158,579    193,631 
Accrued payroll taxes and benefits
   48,474    54,768 
Accrued professional liabilities
   55,469    44,699 
Accrued interest
   26,940    32,910 
Other accrued expenses
   38,099    49,219 
  
 
 
   
 
 
 
  $388,517   $410,637 
  
 
 
   
 
 
 
The net decrease in accrued salaries and bonuses of $160.5$35.1 million, from December 31, 2019 to March 31,September 30, 2020, is primarily due to the payment of performance-based incentive compensation, principally to the Company’s affiliated physicians, partially offset by performance-based incentive compensation accrued during the threenine months ended March 31,September 30, 2020. A majority of the Company’s payments for performance-based incentive compensation is paid annually during the first quarter.
88.
.
Common and Common Equivalent Shares:
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income by the weighted average number of common and potential common shares outstanding during the period. Potential common shares consist of outstanding restricted stock, deferred stock and stock options and is calculated using the treasury stock method.
The calculation of shares used in the basic and diluted net income per common share calculation for the three and nine months ended March 31,September 30, 2020 and 2019 is as follows (in thousands):
         
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
Weighted average number of common shares outstanding
  
82,799
   
86,073
 
Weighted average number of dilutive common share equivalents
  
—
   
472
 
         
Weighted average number of common and common
 
equivalent shares outstanding
 (a)
  
82,799
   
86,545
 
         
Antidilutive securities not included in the diluted
 
net income per common share
calculation
  
849
   
504
 
         
 
   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Weighted average number of common shares outstanding
   83,862    82,441    83,260    83,846 
Weighted average number of dilutive common share equivalents
   —      442    —      456 
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average number of common and common equivalent shares outstanding (a)
   83,862    82,883    83,260    84,302 
  
 
 
   
 
 
   
 
 
   
 
 
 
Antidilutive securities not included in the diluted net income per common share calculation
   829    962    1,004    796 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
(a)
Due to a loss from continuing operations for the three months and nine months ended March 31,September 30, 2020, no incremental shares are included because the effect wouldwou
l
d be antidilutive.
 
99.
.
Stock Incentive Plans and Stock Purchase Plans:
The Company’s Amended and Restated 2008 Incentive Compensation Plan (the “Amended and Restated“A&R 2008 Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted stock, deferred stock, and other stock-related awards and performance awards that may be settled in cash, stock or other property.
Under the Amended and RestatedA&R 2008 Incentive Plan, options to purchase shares of common stock may be granted at a price not less than the fair market value of the shares on the date of grant. The options must be exercised within 10 years from the date of grant and generally become exercisable on a pro rata basis over a three-year period from the date of grant. The Company issues new shares of its common stock upon exercise of its stock options. Restricted stock awards generally vest over periods of three years upon the fulfillment of specified service-based conditions and in certain instances performance-based conditions. Deferred stock awards generally vest upon the satisfaction of specified performance-based conditions and service-based conditions. The Company recognizes compensation expense related to its restricted stock, and deferred stock awards and stock options ratably over the corresponding vesting periods. During the threenine months ended March 31,September 30, 2020, the Company granted 894,7181.4 million shares of restricted stock and 1.0 million
shares
of stock underlying 
non-qualified
stock options to its employees and
non-employee
directors under the Amended and RestatedA&R 2008 Incentive Plan. At March 31,September 30, 2020, the Company had 6.6
5.0 million
shares available for future grants and awards under
the
Amended and Restated A&R 2008 Incentive Plan.
Under the Company’s 1996
Non-Qualified
Employee Stock Purchase Plan, as amended (the “ESPP”), employees are permitted to purchase the Company’s common stock at 85% of market value on January 1st, April 1st, July 1st and October 1st of each year. Under the Company’s 2015
Non-Qualified
Stock Purchase Plan (the “SPP”), certain eligible
non-employee
service providers are permitted to purchase the Company’s common stock at 90% of market value on January 1st, April 1st, July 1st and October 1st of each year.
11
14
Table of Contents
Each of the ESPP and the SPP provide for the issuance of an aggregate of 2.6 million shares of the Company’s common stock less the number of shares of common stock purchased under the other plan. The Company recognizes stock-based compensation expense for the discount received by participating employees and
non-employee
service providers. During the threenine months ended March 31,September 30, 2020, approximately 78,3000.4 million shares in the aggregate were issued under the ESPP and SPP. At March 31,September 30, 2020, the Company had approximately 1.00.6 million shares in the aggregate reserved for issuance under the ESPP and SPP.
During the three and nine months ended March 31,September 30, 2020 and 2019, the Company recognized stock-based compensation expense of $7.8$4.5 million and $11.0$18.2 million, and $7.6 million and $27.6 million, respectively.
1010.
.
Common Stock Repurchase Programs:
In July 2013, the Company’s Board of Directors authorized the repurchase of shares of the Company’s common stock up to an amount sufficient to offset the dilutive impact from the issuance of shares under the Company’s equity compensation programs. The share repurchase program allows the Company to make open market purchases from
time-to-time
based on general economic and market conditions and trading restrictions. The repurchase program also allows for the repurchase of shares of the Company’s common stock to offset the dilutive impact from the issuance of shares, if any, related to the Company’s acquisition program. No shares were purchased under this program during the threenine months ended March 31,September 30, 2020.
In August 2018, the Company announced that its Board of Directors had authorized the repurchase of up to $500.0 million of the Company’s common stock in addition to its existing share repurchase program, of which $107.2 million remained available
for repurchase as of December 31, 2019. Under this share repurchase program, during the threenine months ended March 31,September 30, 2020,
the Company withheld
125,100
approximately 0.5 million shares of
its
common stock to satisfy minimum statutory withholding obligations of $
2.5
$8.5 million in connection with the vesting of restricted stock and deferred stock.
The Company intends to utilize various methods to effect any future share repurchases, including, among others, open market purchases and accelerated share repurchase programs. The amount and timing of repurchases will depend upon several factors, including general economic and market conditions and trading restrictions.
1111.
.
Commitments and Contingencies:
The Company expects that audits, inquiries and investigations from government authorities and agencies will occur in the ordinary course of business. Such audits, inquiries and investigations and their ultimate resolutions, individually or in the aggregate, could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and the trading price of its securities. The Company has not included an accrual for these matters as of March 31,September 30, 2020 in its Consolidated Financial Statements, as the variables affecting any potential eventual liability depend on the currently unknown facts and circumstances that arise out of, and are specific to, any particular future audit, inquiry and investigation and cannot be reasonably estimated at this time.
In the ordinary course of business, the Company becomes involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by the Company’s affiliated physicians. The Company’s contracts with hospitals generally require the Company to indemnify them and their affiliates for losses resulting from the negligence of the Company’s affiliated physicians. The Company may also become subject to other lawsuits which could involve large claims and significant costs. The Company believes, based upon a review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on its business, financial condition, results of operations, cash flows and the trading price of its securities. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and the trading price of its securities.
Although the Company currently maintains liability insurance coverage intended to cover professional liability and certain other claims, the Company cannot assure that its insurance coverage will be adequate to cover liabilities arising out of claims asserted against it in the future where the outcomes of such claims are unfavorable. With respect to professional liability risk, the Company generally self-insures a portion of this risk through its wholly owned captive insurance subsidiary. Liabilities in excess of the Company’s insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows and the trading price of its securities.
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Table of Contents
12.
Subsequent Event:
On May 6, 2020, the Company entered into a securities purchase agreement with an affiliate of North American Partners in Anesthesia (“NAPA”) to divest of the Company’s 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, the Company 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 Company will begin to receive a payment on its economic interest at an exit multiple of 2.0, with such payment reaching 15
$
250
million at an exit multiple of 5.0. In addition, the Company retained the accounts receivable of the anesthesiology medical group, which net of various other working capital items, approximated
$
110.0
million at March 31, 2020. Upon completion of a valuation to determine the final net proceeds, the Company anticipates recording a loss on disposal in the range of approximately
$
500.0
 million to $
600.0
 million.
The following table represents the major classes of assets and liabilities of the anesthesiology medical group that are included in the accompanying Consolidated Balance Sheets as of March 31, 2020 (in thousands):
     
 
March 31,
2020
 
Assets
 
 
 
Cash and cash equivalents
 $
19
 
Accounts receivable, net
  
147,717
 
Prepaid expenses and other assets
  
14,519
 
Property and equipment, net
  
900
 
Goodwill
  
545,272
 
Intangible assets, net
  
60,034
 
     
 
$768,461
 
     
Liabilities
 
 
 
Accounts payable and accrued expenses
 $
54,311
 
Accrued professional liabilities
  
20,627
 
Other liabilities
  
5,174
 
     
 
$80,112
 
     
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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion highlights the principal factors that have affected our financial condition and results of operations, as well as our liquidity and capital resources, for the periods described. This discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the notes thereto included in this Quarterly Report. In addition, reference is made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form
10-K
for the fiscal year ended December 31, 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;complications and maternal-fetal and obstetrical medical care to expectant mothers experiencing complicated pregnancies primarily in areas where our affiliated neonatal physicians practice. Our network also includes other pediatric subspecialists, including those who provide pediatric intensive care, pediatric cardiology care, hospital-based pediatric care, pediatric surgical care, pediatric ear, nose and throat, pediatric ophthalmology 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 anesthesiaanesthesiology services medical group on May 6, 2020.
2020 and on September 9, 2020 entered into an agreement to divest of its radiology services medical group, which provides radiology services including diagnostic imaging and interventional radiology, as well as teleradiology services through a network of affiliated radiologists.
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 seenexperienced 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 divested our anesthesiology services medical group in May 2020, where operating results were significantly impacted by
COVID-19.
We have also entered into an agreement to divest our radiology services medical group, where operating results were meaningfully impacted by
COVID-19.
We have implemented a number of actions to preserve financial flexibility and partially mitigate the significant anticipated 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 at least June 30, 2020; (ii) our Board of Directors agreed to forego their annual cash retainer and cash meeting payments, until further notice;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 have 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.
14
Expanded Virtual Care Offerings
16
Table of Contents
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.
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 continue to 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 Department of Health and Human Services (“HHS”) is administering this program and began disbursing funds from the initial $30 billion in early April 2020, of which our affiliated physician practices received an aggregate of $12.2 million based on their respective share of Medicare fee for service reimbursements in 2019. 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 we and our affiliated physician practices will qualify for and receive.     The Department of Health and Human Services (“HHS”) is administering this program, and our affiliated physician practices within continuing operations have received an aggregate of approximately $20.0 million in relief payments during the nine months ended September 30, 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 Services 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 services 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 services medical group were reported as discontinued operations in our consolidated statements of income for the three and nine months ended September 30, 2020 and 2019, and the net assets sold were presented as assets and liabilities held for sale in our consolidated balance sheet at December 31, 2019.
Divestiture of the Radiology Services Medical Group
On September 9, 2020, we entered into a securities purchase agreement to divest our radiology services medical group for $885.0 million cash, subject to certain customary adjustments, as the next step in refocusing our business as a dedicated pediatrics and obstetrics organization. The operating results of the radiology services medical group were reported as discontinued operations in our consolidated statements of income for the three and nine months ended September 30, 2020 and 2019, and the net assets to be sold were presented as assets and liabilities held for sale in our consolidated balance sheets at September 30, 2020 and December 31, 2019.
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 services medical group and radiology services medical group being classified as assets held for sale and discontinued operations.
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General Economic Conditions and Other Factors
Our operations and performance depend significantly on economic conditions. During the three months ended March 31,September 30, 2020, the percentage of our patient service revenue being reimbursed under government-sponsored healthcare programs (“GHC Programs”) remained relatively consistentincreased as compared to the three months ended March 31,September 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 also experience additional 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.
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 services 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.
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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.
Various expenses related to our executive management and board restructuring in July 2020 were recorded as transformation and restructuring related expenses during the third quarter of 2020.
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 eventuallyIn November 2020, the Supreme Court of the United States is expected to hear this matter and could invalidate portions of, 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 November 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. SomeThe candidates running for President of the United States are proposing sweepingmay propose changes to the U.S. healthcare system, including expanding government-funded healthcare insurance options.options, “Medicare for All” or eliminating the ACA in favor of an alternative plan. 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”All,” public option 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.
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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. In the past, 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.
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 physiciansMedicare providers 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 who are eligible to participate in the MIPS program will continue to be eligible to receive MIPS 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.
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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, 3638 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 will bewere 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.
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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. In addition, beginning with the first quarter of 2019, we reported MedData as assets held for sale and discontinued operations. 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 beinghas been further adjusted to reflect the impacts from discrete tax events. Adjusted EBITDA and Adjusted EPS have also been adjusted for the
non-cash
goodwill impairment charge recorded during the third quarter of 2019. Historical periods do not include any material items that meet the current definition of transformational and restructuring related expenses or goodwill impairment, so although we are retrospectively presenting historical periods for the new definitions, we do not reflect any adjustments for these items.
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.
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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 nine months ended March 31,September 30, 2020 and 2019, refer to the tables below (in thousands, except per share data).
         
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
(Loss) income from continuing operations
 $
(16,110
) $
41,653
 
Interest expense
  
27,608
   
30,723
 
Income tax provision
  
2,286
   
8,962
 
Depreciation and amortization
  
18,673
   
20,033
 
Transformational and restructuring related expenses
  
30,907
   
3,544
 
         
Adjusted EBITDA from continuing operations
 $
63,364
  $
104,915
 
         
   
Three Months Ended

September 30,
   
Nine Months Ended

September 30,
 
   
2020
   
2019
   
2020
   
2019
 
(Loss) income from continuing operations
  $(2,652)   $12,887   $(14,067)   $32,281 
Interest expense
   27,250    29,909    83,180    91,271 
Income tax provision
   6,677    7,360    10,859    12,590 
Depreciation and amortization
   7,195    6,408    20,749    18,830 
Transformational and restructuring related expenses
   34,291    12,766    60,846    32,025 
  
 
 
   
 
 
   
 
 
   
 
 
 
Adjusted EBITDA from continuing operations
  $72,761   $69,330   $161,567   $186,997 
  
 
 
   
 
 
   
 
 
   
 
 
 
                 
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
Weighted average diluted shares outstanding
 
82,799
  
86,545
 
(Loss) income from continuing operations and diluted income from continuing operations per share
    
Adjustments
(1)
:
 $
(16,110
) $
(0.20
) $
41,653
  $
0.48
 
Amortization (net of tax of $2,740 and $3,449)
  
8,220
   
0.10
   
9,325
   
0.11
 
Stock-based compensation (net of tax of $1,962 and $2,967)
  
5,885
   
0.07
   
8,022
   
0.09
 
Transformational and restructuring expenses (net of tax of $7,727 and $957)
  
23,180
   
0.28
   
2,587
   
0.03
 
Net impact from discrete tax events
  
5,077
   
0.07
   
(4,791
)  
(0.06
)
                 
Adjusted income and diluted EPS from continuing operations
 $
26,252
  $
0.32
  $
56,796
  $
0.65
 
                 
   
Three Months Ended

September 30,
 
   
2020
   
2019
 
Weighted average diluted shares outstanding
   83,862    82,883 
(Loss) income from continuing operations and diluted (loss) income from continuing operations per share
  $(2,652)   $(0.03)   $12,887   $0.16 
Adjustments
(1)
:
        
Amortization (net of tax of $601 and $444)
   1,802    0.02    1,333    0.02 
Stock-based compensation (net of tax of $1,132 and $1,902)
   3,398    0.04    5,706    0.07 
Transformational and restructuring related expenses (net of tax
of $8,573 and $3,191)
   25,718    0.31    9,575    0.12 
Net impact from discrete tax events
   2,905    0.03    1,784    0.01 
  
 
 
   
 
 
   
 
 
   
 
 
 
Adjusted income and diluted EPS from continuing operations
  $31,171   $0.37   $31,285   $0.38 
  
 
 
   
 
 
   
 
 
   
 
 
 
(1)Effective
Our blended statutory tax ratesrate of 25.0% and 27.0% were25% was used to calculate the tax effects of the adjustments in March 31, 2020 and 2019, respectively. The effective tax rates used for the three months ended March 31,September 30, 2020 and 2019 exclude the impacts from discrete tax events.2019.
   
Nine Months Ended

September 30,
 
   
2020
   
2019
 
Weighted average diluted shares outstanding
   83,260    84,302 
(Loss) income from continuing operations and diluted (loss) income from continuing operations per share
  $(14,067)   $(0.17)   $32,281   $0.38 
Adjustments
(1)
:
        
Amortization (net of tax of $1,632 and $1,289)
   4,896    0.06    3,867    0.05 
Stock-based compensation (net of tax of $4,550 and $6,893)
   13,652    0.16    20,672    0.25 
Transformational and restructuring related expenses (net of tax
of $15,211 and $8,006)
   45,635    0.55    24,019    0.28 
Net impact from discrete tax events
   7,849    0.10    (5)    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Adjusted income and diluted EPS from continuing operations
  $57,965   $0.70   $80,834   $0.96 
  
 
 
   
 
 
   
 
 
   
 
 
 
(2)
Our blended statutory tax rate of 25% was used to calculate the tax effects of the adjustments for the nine months ended September 30, 2020 and 2019.
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Results of Operations
Three Months Ended March 31,September 30, 2020 as Compared to Three Months Ended March 31,September 30, 2019
Our net revenue attributable to continuing operations was $845.9$460.6 million for the three months ended March 31,September 30, 2020, as compared to $851.2$454.9 million for the same period in 2019. The decreaseincrease in revenue of $5.3$5.7 million, or 0.6%1.3%, was primarily attributable to the unfavorable impactsan increase in revenue from
COVID-19
on acquisitions, partially offset by a decline in same-unit revenue. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue declined by $8.1$1.7 million, or 1.0%0.4%. The decline in same-unit net revenue was comprised of a decrease of $16.3$19.2 million, or 2.0%4.3%, related to patient service volumes, partially offset by a net increase of $8.2$17.5 million, or 1.0%3.9%, from net reimbursement-related factors. The decrease in revenue from patient service volumes was primarily related to a decline inacross all our anesthesia and office-based women’s and children’s services, primarily as a result of the continued impacts from
COVID-19.
The net increase in revenue related to net reimbursement-related factors was primarily due to increasesapproximately $14.2 million in administrative fees from our hospital partnersCARES Act relief and modest improvements in managed care contracting.contracting, partially offset by a decrease in revenue caused by an increase in the percentage of our patients enrolled in GHC programs.
Practice salaries and benefits attributable to continuing operations increased $31.2$8.6 million, or 5.0%2.9%, to $652.7$309.9 million for the three months ended March 31,September 30, 2020, as compared to $621.5$301.3 million for the same period in 2019. This increase was primarily attributable to increased costs associated with physicians and other staff to support organic-growth initiatives and growth at our existing units, as well as increases in malpractice expense due to unfavorable trends in claims experience. Of the $31.2$8.6 million increase, $20.0 million was related to salaries and $11.2$5.6 million was related to benefits and incentive compensation.compensation, primarily bonus expense, and $3.0 million was related to salaries. We anticipate that we will continue to 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 $0.5$0.2 million, or 2.0%0.6%, to $25.3$22.4 million for the three months ended March 31,September 30, 2020, as compared to $25.8$22.6 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.year, primarily related to decreased activity across many expense categories such as travel, office expenses and professional services resulting from the continued 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 relatedidentifiable to the
day-to-day
operations of our physician practices and services. General and administrative expenses were $105.2$66.3 million for the three months ended March 31,September 30, 2020, as compared to $101.8$63.3 million for the same period in 2019. The increase of $3.0 million is primarily related to legal and professional services fees, partially offset by decreases in compensation from net staffing reductions as well as decreases in general travel expenses. General and administrative expenses as a percentage of net revenue was 12.4%14.4% for the three months ended March 31,September 30, 2020, as compared to 12.0%13.9% for the same period in 2019. Certain general and administrative expenses related to corporate overhead represent various support services provided across the company, including approximately $10 million in costs related to support for the recently divested anesthesiology services medical group through a transition services agreement. Because a portion of such expenses were previously allocated to but not specifically identifiable to, the anesthesiology services 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 $30.9$34.3 million for the three months ended March 31,September 30, 2020, as compared to $3.5$12.8 million for the same period in 2019. TheApproximately $26.7 million of the expenses incurred during the three months ended September 30, 2020 were for compensation-related expenses resulting from the restructuring changes in executive management and the board of directors, with the remainder primarily for external consulting costs for various process improvement and restructuring initiatives.
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Tableinitiatives, position eliminations and contract termination and other fees. Beginning in April 2020, we reduced the scope of Contentsour 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.
Various activities related to executive management and board of directors restructuring were recorded as transformational and restructuring related expenses during the three months ended September 30, 2020.
Depreciation and amortization expense attributable to continuing operations was $18.7$7.2 million for the three months ended March 31,September 30, 2020, as compared to $20.0$6.4 million for the same period in 2019. The decrease of $1.3 million was primarily related to a decrease in amortization expense underlying various finite lived intangible assets due to the expiration of amortization periods.
Income from operations attributable to continuing operations decreased $65.4$28.1 million, or 83.3%57.9%, to $13.1$20.5 million for the three months ended March 31,September 30, 2020, as compared to $78.5$48.6 million for the same period in 2019. Our operating margin was 1.6%4.4% for the three months ended March 31,September 30, 2020, as compared to 9.2%10.7% for the same period in 2019. The decrease in our operating margin was primarily due to higher operating expense growth, includingthe decrease in revenue related to
COVID-19
and an increase in transformation and restructuring related expenses, and the decrease in revenue.expenses. Excluding the transformation and restructuring related expenses, our income from operations attributable to continuing operations for the three months ended September 30, 2020 and 2019 was $44.0$54.8 million and $61.3 million, respectively, and our operating margin was 5.2%.11.9% and 13.5%, 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.operations; however, this comparison is affected by the impacts from
COVID-19
during 2020.
Total
non-operating
expenses attributable to continuing operations were $26.9$16.4 million for the three months ended March 31,September 30, 2020, as compared to $27.8$28.3 million for the same period in 2019. The decrease in
non-operating
expenses was primarily related to an increase in other income related to the transition services being provided to the buyer of our former anesthesiology services medical group and a decrease in interest expense, primarily due to lower average borrowings under our credit agreement (the “Credit Agreement”), partially offset by the settlement.
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Our effective income tax rate attributable to continuing operations was
-16.5%
and 17.7%is not meaningful as calculated for the three months ended March 31,September 30, 2020 and 2019, respectively.due to the decreased level of
pre-tax
income generated. Income taxes for the first quarter ofthree months ended September 30, 2020 were calculated by applying the actual
year-to-date
effective rate to our
pre-tax
loss.income. Our effective income tax attributable to continuing operations was 36.4% for the three months ended September 30, 2019. After excluding discrete tax impacts, during the three months ended March 31, 2020 andSeptember 30, 2019, our effective income tax rate was 20.0% and 27.0%, respectively.27.5%. We believe excluding discrete tax impacts on our effective income tax rate provides a more comparable view of our effective income tax rate. The decrease in the effective tax rate during the three months ended March 31, 2020 is primarily due to the reduction in income before taxes due to the impacts from
COVID-19.
Loss from continuing operations was $16.1$2.7 million for the three months ended March 31,September 30, 2020, as compared to income from continuing operations of $41.7$12.9 million for the same period in 2019. Adjusted EBITDA from continuing operations was $63.4$72.8 million for the three months ended March 31,September 30, 2020, as compared to $104.9$69.3 million for the same period in 2019.
Diluted loss from continuing operations per common and common equivalent share was $0.20$0.03 on weighted average shares outstanding of 82.883.9 million for the three months ended March 31,September 30, 2020, as compared to diluted income from continuing operations per common and common equivalent share of $0.48$0.16 on weighted average shares outstanding of 86.582.9 million for the same period in 2019. Adjusted EPS from continuing operations was $0.32$0.37 for the three months ended March 31,September 30, 2020, as compared to $0.65$0.38 for the same period in 2019.
Loss from discontinued operations, net of tax, was $38.4 million for the three months ended September 30, 2020, as compared to a loss from discontinued operations of $1.27 billion for the same period in 2019. Diluted loss from discontinued operations per common and common equivalent share was $0.46 for the three months ended September 30, 2020, as compared to $15.31 for the same period in 2019.
Net loss was $41.0 million for the three months ended September 30, 2020, as compared to $1.26 billion for the same period in 2019. Diluted net loss per common and common equivalent share was $0.49 for the three months ended September 30, 2020, as compared to $15.15 for the same period in 2019.
Nine Months Ended September 30, 2020 as Compared to Nine Months Ended September 30, 2019
Our net revenue attributable to continuing operations was $1.32 billion for the nine months ended September 30, 2020 and 2019. The slight decrease in revenue of $3.8 million, or 0.3%, was primarily attributable to the unfavorable impacts from
COVID-19
on same-unit revenue, driven by declines in volume, partially offset by an increase in revenue from acquisitions. 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 $25.3 million, or 1.9%. The decline in same-unit net revenue was comprised of a decrease of $60.3 million, or 4.6%, related to patient service volumes, partially offset by a net increase of $35.0 million, or 2.7%, 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 approximately $20.0 million in CARES Act relief, modest improvements in managed care contracting and an increase in administrative fees received from our hospital partners.
Practice salaries and benefits attributable to continuing operations increased $28.5 million, or 3.2%, to $909.2 million for the nine months ended September 30, 2020, as compared to $880.7 million for the same period in 2019. The increase of $28.5 million was comprised of $22.7 million in benefits and incentive compensation, primarily bonus expense and malpractice expense, and $5.8 million from salaries. We anticipate that we will experience a higher rate of growth in clinician compensation 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 $6.2 million, or 8.6%, to $66.5 million for the nine months ended September 30, 2020, as compared to $72.7 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 $194.3 million for the nine months ended September 30, 2020, as compared to $185.3 million for the same period in 2019. The increase of $9.0 million is primarily related to legal and professional services fees, partially offset by decreases in compensation from net staffing reductions as well as decreases in general travel expenses. General and administrative expenses as a percentage of net revenue was 14.7% for the three months ended September 30, 2020, as compared to 14.0% for the same period in 2019. Certain general and administrative expenses related to corporate overhead represent various support services provided across the company, including approximately $13 million in costs related to support for the recently divested anesthesiology services medical group through a transition services agreement. Because a portion of such expenses were previously allocated to but not specifically identifiable to the anesthesiology services 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 $60.8 million for the nine months ended September 30, 2020, as compared to $32.0 million for the same period in 2019. Approximately $30.1 million of the expenses incurred during the nine months ended September 30, 2020 were for external consulting costs for various process improvement and restructuring initiatives and approximately $26.7 million were for compensation-related expenses resulting from the restructuring changes in executive management and the board of directors, with the remainder for position eliminations and contract termination and other fees. Beginning in
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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.
Various activities related to executive management and board of directors restructuring were recorded as transformational and restructuring related expenses during the three months ended September 30, 2020.
Depreciation and amortization expense attributable to continuing operations was $20.7 million for the nine months ended September 30, 2020, as compared to $18.8 million for the same period in 2019.
Income from operations attributable to continuing operations decreased $65.8 million, or 50.0%, to $65.8 million for the nine months ended September 30, 2020, as compared to $131.6 million for the same period in 2019. Our operating margin was 5.0% for the nine months ended September 30, 2020, as compared to 10.0% for the same period in 2019. The decrease in our operating margin was primarily due to an increase in transformation and restructuring related expenses and practice salaries and benefits. Excluding transformation and restructuring expenses, our income from operations attributable to continuing operations for the nine months ended September 30, 2020 and 2019 was $126.7 million and $163.6 million, respectively, and our operating margin was 9.6% and 12.4%, 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 $69.0 million for the nine months ended September 30, 2020, as compared to $86.7 million for the same period in 2019. The decrease in
non-operating
expenses was primarily related to an increase in other income related to the transition services being provided to the buyer of our former anesthesiology services medical group and 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 nine months ended September 30, 2020 due to the
pre-tax
loss generated, primarily due to the impacts from
COVID-19.
Income taxes for the nine months ended September 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 28.1% for the nine months ended September 30, 2019. The net discrete tax impacts during the nine months ended September 30, 2019 were not material.
Loss from continuing operations was $14.1 million for the nine months ended September 30, 2020, as compared to income from continuing operations of $32.3 million for the same period in 2019. Adjusted EBITDA from continuing operations was $161.6 million for the nine months ended September 30, 2020, as compared to $187.0 million for the same period in 2019.
Diluted loss from continuing operations per common and common equivalent share was $0.17 on weighted average shares outstanding of 83.3 million for the nine months ended September 30, 2020, as compared to diluted income per common and common equivalent share of $0.38 on weighted average shares outstanding of 84.3 million for the same period in 2019. Adjusted EPS from continuing operations was $0.70 for the nine months ended September 30, 2020, as compared to $0.96 for the same period in 2019. The decrease of 3.71.0 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 threenine months ended March 31,September 30, 2020 as the effect would have been antidilutive.
Loss from discontinued operations, net of tax, was $2.6$718.1 million for the threenine months ended March 31,September 30, 2020, as compared to loss from discontinued operations of $284.5 million$1.54 billion for the same period in 2019. Diluted loss from discontinued operations per common and common equivalent share was $0.03$8.62 for the threenine months ended March 31,September 30, 2020, as compared to $3.29a diluted loss from discontinued operations per common and common equivalent share of $18.26 for the same period in 2019.
Net loss was $18.7$732.2 million for the threenine months ended March 31,September 30, 2020, as compared to $242.9 milliona net loss of $1.51 billion for the same period in 2019. Diluted net loss per common and common equivalent share was $0.23$8.79 for the threenine months ended March 31,September 30, 2020, as compared to $2.81$17.88 for the same period in 2019.
Liquidity and Capital Resources
As of March 31,September 30, 2020, we had $312.2$294.5 million of cash and cash equivalents attributable to our continuing operations as compared to $112.8$107.9 million at December 31, 2019. Additionally, we had working capital attributable to our continuing operations of $594.5$290.0 million at March 31,September 30, 2020, an increase of $404.8$79.3 million from working capital of $189.7$210.7 million at December 31, 2019. The net increase in working capital is primarily due to net borrowings on our Credit Agreement, partially offset by a decline in operating results.
Cash Flows from Continuing Operations
Cash provided by (used in) provided by operating, investing and financing activities from continuing operations is summarized as follows (in thousands):
         
 
Three Months Ended
March 31,
 
 
2020
  
2019
 
Operating activities
 $
(146,431
) $
(60,408
)
Investing activities
  
(20,220
)  
(5,271
)
Financing activities
  
366,039
   
66,664
 
 
   
Nine Months Ended

September 30,
 
   
2020
   
2019
 
Operating activities
  $71,645   $36,237 
Investing activities
   (28,179)    (33,729) 
Financing activities
   (3,496)    (174,662) 
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Operating Activities from Continuing Operations
During the threenine months ended March 31,September 30, 2020, our net cash used inprovided by operating activities for continuing operations was $146.4$71.6 million, compared to $60.4$36.2 million for the same period in 2019. The net increase in cash usedprovided of $86.0$35.4 million was primarily due to an increase in cash flow from deferred income taxes and accounts receivable, partially offset by a decrease in cash flow from lower earnings a decrease in cash flow fromand changes in accounts payable and accrued expenses, primarily incentive compensation payments, and a decrease in cash flow from income taxes payable, partially offset by an increase in cash flow from accounts receivable and deferred income taxes.expenses.
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During the threenine months ended March 31,September 30, 2020, cash flow from accounts receivable for continuing operations increased by $25.9was $30.0 million, as compared to a decrease of $15.9$7.5 million for the same period in 2019. The increase in cash flow from accounts receivable for the threenine months ended March 31,September 30, 2020 was primarily due to decreases in ending accounts receivable balances at existing units due to lower revenue.and improvements in the 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 51.348.2 days at March 31,September 30, 2020 as compared to 50.751.0 days at December 31, 2019. The increase in our DSO primarily related to the increases in our accounts receivable balances at existing units due to timing of cash collections.
Investing Activities from Continuing Operations
During the threenine months ended March 31,September 30, 2020, our net cash used in investing activities for continuing operations of $20.2$28.2 million consisted primarily of capital expenditures of $13.7$21.8 million and net purchases of investments of $11.2 million, partially offset by proceeds from the sale of assets of $4.8$5.2 million.
Financing Activities from Continuing Operations
During the threenine months ended March 31,September 30, 2020, our net cash provided fromused in financing activities for continuing operations of $366.0$3.5 million consisted of net borrowings on our Credit Agreement of $368.5 million, partially offset by the repurchase of $2.5$8.5 million of our common stock.stock, partially offset by proceeds from the issuance of common stock of $5.7 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 March 31,September 30, 2020, we had anno outstanding principal balance of $368.5 million on our Credit Agreement, of which approximately $300.0 million is included in cash on the Consolidated Balance Sheet.Agreement. We also had outstanding letters of credit of $0.2 million which reduced the amount available on our Credit Agreement to $531.3$899.8 million at March 31,September 30, 2020, after giving effect to the temporary reduction of the capacity of our Credit Agreement described above through September 30, 2021.
At March 31,September 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.
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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.
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At March 31,September 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.
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 for continuing operations at March 31,September 30, 2020 was $286.5$297.8 million, of which $48.1$55.5 million is classified as a current liability within accounts payable and accrued expenses in the Consolidated Balance Sheet.Sheets. In addition, there is a corresponding insurance receivable of $35.6$23.6 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 sectionsections entitled “Risk Factors.”
21
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to market risk primarily from exposure to changes in interest rates based on our financing, investing and cash management activities. We intend to manage interest rate risk through the use of a combination of fixed rate and variable rate debt. We borrow under our Credit Agreement at various interest rate options based on the Alternate Base Rate or LIBOR rate depending on certain financial ratios. At March 31,September 30, 2020, thewe had no outstanding principal balance on our Credit Agreement was $368.5 million, and considering this outstanding balance, a 1% change in interest rates would result in an impact to income before income taxes of approximately $3.7 million per year.Agreement.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules
13a-15(e)
and
15d-15(e)
under the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31,September 30, 2020.
Changes in Internal Controls Over Financial Reporting
No changes in our internal control over financial reporting occurred during the three months ended March 31,September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
22
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We expect that audits, inquiries and investigations from government authorities and agencies will occur in the ordinary course of business. Such audits, inquiries and investigations and their ultimate resolutions, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.
In the ordinary course of our business, we become involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by our affiliated physicians. Our contracts with hospitals generally require us to indemnify them and their affiliates for losses resulting from the negligence of our affiliated physicians and other clinicians. We may also become subject to other lawsuits that could involve large claims and significant defense costs. We believe, based upon a review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on our business, financial condition, results of operations, cash flows or the trading price of our securities. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.
Although we currently maintain liability insurance coverage intended to cover professional liability and certain other claims, we cannot assure that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us in the future where the outcomes of such claims are unfavorable to us. With respect to professional liability risk, we self-insure a significant portion of this risk through our wholly owned captive insurance subsidiary. Liabilities in excess of our insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities.
On July 10, 2018, a securities class action lawsuit was filed against our company and certain of our officers and a director in the U.S. District Court for the Southern District of Florida (Case No.
0:18-cv-61572-WPD)
that purports to state a claim for alleged violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule
10b-5
thereunder, based on statements made by the defendants primarily concerning our former anesthesiology business. The complaint was seeking unspecified damages, interest, attorneys’ fees and other costs. We filed a motion to dismiss in April 2019, which was granted in October 2019; however, the plaintiff filed a second amended complaint on October 25, 2019. On November 25, 2019, we filed a motion to dismiss the second amended complaint, and on February 7, 2020 a final order granting our motion to dismiss the second amended complaint with prejudice was issued.
On March 20, 2019, a separate derivative action was filed by plaintiff Beverly Jackson on behalf of MEDNAX, Inc. against MEDNAX, Inc. and certain of its officers and directors in the Seventeenth Judicial Circuit in and for Broward County, Florida (Case Number
CACE-19-006253).
The plaintiff purported to bring suit derivatively on behalf of our company against certain of our officers and directors for breach of fiduciary duties and unjust enrichment. The derivative complaint repeated many of the allegations in the securities class action described above. We filed a motion to dismiss in December 2019, and on March 16, 2020, an order granting our motion to dismiss without prejudice was issued. On April 6, 2020, the plaintiff filed an amended complaint, and on April 30, 2020, we filed a motion to dismiss the amended complaint. On September 24, 2020, our motion to dismiss was granted, but the plaintiff was granted 20 days to amend their complaint, and on October 14, 2020, the plaintiff filed a second amended complaint. We filed our motion to dismiss the second amended complaint on October 26, 2020.
Item 1A. Risk Factors
Item 1A. Risk Factors in our most recent Annual Report on Form
10-K
includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors disclosed in our most recent Annual Report on Form
10-K.
Except as presented below, there have been no material changes to the risk factors disclosed in our most recent Annual Report on Form
10-K.
Our financial condition and results of operations for fiscal year 2020 and beyond may be materially adversely affected by the ongoing coronavirus pandemic
(COVID-19).
outbreak.
The outbreak of
COVID-19
has evolved into a global pandemic. The coronavirus has spread to manymost regions of the world, including virtually all of the United States and Europe.States. The full extent to which the
COVID-19
outbreak will impact our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning
COVID-19
and the actions to contain it or treat its impact.impact, such as the potential for further shutdown or stay at home orders, and 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.
Our anesthesiology services medical group, which we divested on May 6, 2020, experienced a significant decline in the number of elective surgeries at a number of the facilities where its affiliated clinicians provide anesthesia services as a result of
COVID-19.
A significant portion 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 services medical group, which in September 2020 we entered into an agreement to divest, orders for radiological studies have declined by a meaningful amount from historically normal levels as a result of
COVID-19,
with much of this reduction focused in
non-urgent
studies. Additionally, our office-based practices, which specialize in maternal-fetal medicine, pediatric cardiology, and numerous pediatric subspecialties, have seensaw a significant elevation of appointment cancellations compared to historical normal levels as a result of
COVID-19.
To date, we have not experienced, nor do we currently anticipate, any significant impact to our neonatal intensive care unit (“NICU”)NICU patient volumes as a result of
COVID-19,
however, there is no assurance that
COVID-19
will not adversely affect our NICU patient volumes or otherwise adversely affect our NICU and related neonatology business. 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 months of June 2020 through September 2020.
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Across ourthese medical groups, we believe that these patient volume declines primarily reflect a deferral of healthcare services utilization to a later period, rather than a permanent reduction in demand for our services. Given the general necessity of the services our affiliated clinicians provide, we anticipate that this deferral of services may create a backlog of demand in the future, in addition to the resumption of historically normal activity, however, there is no assurance that either will occur. We may also require an increased level of working capital if we
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experience extended billing and collection cycles as a result of displaced employees, payors, revenue cycle management contractors, or otherwise. The foregoing and other continued disruptions to our business as a result of
COVID-19
could result in a material adverse effect on our business, results of operations, financial condition, prospects and the trading prices of our securities in the near-term and beyond 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31,September 30, 2020, we repurchased 125,100310,589 shares of our common stock that were withheld to satisfy minimum statutory withholding obligations in connection with the vesting of restricted stock and deferred stock.
                 
Period
 
Total Number of
Shares
Repurchased
  
Average
Price Paid
per Share
  
Total Number of
Shares Purchased as
part of the
Repurchase Program
  
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Repurchase Programs
(a)
 
January 1 – January 31, 2020
  
40,150
(b) $
  27.17
   
—  
   
(a
)
February 1 – February 29, 2020
  
—  
   
—  
   
—  
   
(a
)
March 1 – March 31, 2020
  
84,950
(b)  
17.09
   
—  
   
(a
)
                 
Total
  
125,100
  $
20.33
   
—  
   
(a
)
 
Period
  
Total Number of
Shares
Repurchased (a)
  
Average
Price Paid
per Share
   
Total Number of
Shares Purchased as
part of the
Repurchase Programs
   
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Repurchase
Programs (a)
 
July 1 – July 31, 2020
   290,716 (b)  $17.65    —      (a) 
August 1 – August 31, 2020
   —     —      —      (a) 
September 1 – September 30, 2020
   19,873 (b)   16.14    —      (a) 
  
 
 
  
 
 
   
 
 
   
 
 
 
Total
   310,589  $17.55    —      (a) 
 
(a)
We have two active repurchase programs. Our July 2013 program allows us to repurchase shares of our common stock up to an amount sufficient to offset the dilutive impact from the issuance of shares under our equity compensation programs, which is estimated to be approximately 1.4 million shares for 2020.programs. Our August 2018 repurchase program allows us to repurchase up to an additional $500.0 million of shares of our common stock, of which we repurchased $395.3$401.3 million as of March 31,September 30, 2020.
(b)
Represents shares withheld to satisfy minimum statutory withholding obligations of an aggregate of $2.5$5.5 million in connection with the vesting of restricted stock.
The amount and timing of any future repurchases will depend upon several factors, including general economic and market conditions and trading restrictions.
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Item 6. Exhibits
Exhibit No.
  
Description
2.1  
10.1+
Amendment No.3, dated as of March 25, 2020, to the CreditSecurities Purchase Agreement, dated as of October 30, 2017,September 9, 2020, by and between MEDNAX Services, Inc. and Radiology Partners, Inc. (incorporated by reference to Exhibit 2.1 to MEDNAX’s Current Report on Form 8-K filed on September 15, 2020).
10.1Agreement, dated as of July 12, 2020, by and among MEDNAX, Inc., Starboard Value LP and certain of its domestic subsidiaries from timeaffiliates (incorporated by reference to time party thereto as Guarantors, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.Exhibit 10.1 to MEDNAX’s Current Report on Form 8-K filed on July 13, 2020).
10.2  Separation Agreement, dated July 12, 2020, by and between MEDNAX Services, Inc. and Roger J. Medel, M.D. (incorporated by reference to Exhibit 10.2 to MEDNAX’s Current Report on Form 8-K filed on July 13, 2020).
10.3  Employment Agreement, dated July 12, 2020, by and between MEDNAX Services, Inc. and Mark S. Ordan (incorporated by Reference to Exhibit 10.1 to MEDNAX’s Quarterly Report on Form 10-Q filed on July 30, 2020).
31.1+
10.4+  Employment Agreement, effective September 8, 2020, by and between MEDNAX Services, Inc. and C. Marc Richards.
10.5+Amended and Restated Employment Agreement, effective September 27, 2020, by and between MEDNAX Services, Inc. and Dominic J. Andreano.
31.1+Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+  
31.2+
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*  
32.1*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1+  Interactive Data File
101.INS+  
101.1+
Interactive Data File
101.INS+
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH+  XBRL Schema Document.
101.CAL+  
101.SCH+
XBRL Schema Document.
101.CAL+
XBRL Calculation Linkbase Document.
101.DEF+  
101.DEF+
XBRL Definition Linkbase Document.
101.LAB+  
101.LAB+
XBRL Label Linkbase Document.
101.PRE+  
101.PRE+
XBRL Presentation Linkbase Document.
104+  
104+
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
 
+
Filed herewith.
*
Furnished herewith.
 
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MEDNAX, INC.
Date: May 7, 2020
By:
/s/ Roger J. Medel, M.D.
  
Roger J. Medel, M.D.MEDNAX, INC.
Date: November 6, 2020By:
/s/ Mark S. Ordan
   
Mark S. Ordan
Chief Executive Officer
(Principal Executive Officer)
Date: November 6, 2020By:
/s/ C. Marc Richards
   
(Principal Executive Officer)
C. Marc Richards
Date: May 7, 2020
By:
/s/ Stephen D. Farber
  
Stephen D. Farber
 Chief Financial Officer
  
Chief
(Principal Financial OfficerOfficer)
Date: November 6, 2020  
(Principal Financial Officer)
Date: May 7, 2020
By:
 
/s/ John C. Pepia
   
John C. Pepia
  
Chief Accounting Officer
  
(Principal Accounting Officer)
 
 
2630