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, 2020, filed with the Securities and Exchange Commission on February 18, 2021 (the “2020 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 2020 Form 10-K, including Item 1A, Risk Factors, for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. In addition, please see “Caution Concerning Forward-Looking Statements” below.
Overview
Mednax is a leading provider of physician services including newborn, maternal-fetal, pediatric cardiology and other pediatric subspecialty care. Our national network is comprised of affiliated physicians who provide clinical care in 39 states and Puerto Rico. Our affiliated physicians provide neonatal clinical care, primarily within hospital-based neonatal intensive care units (“NICUs”), to babies born prematurely or with medical complications; and maternal-fetal and obstetrical medical care to expectant mothers experiencing complicated pregnancies primarily in areas where our affiliated neonatal physicians practice. Our network also includes other pediatric subspecialists, including those who provide pediatric intensive care, pediatric cardiology care, hospital-based pediatric care, pediatric surgical care, pediatric ear, nose and throat, pediatric ophthalmology, pediatric urology services and pediatric urgent care.
Coronavirus Pandemic (COVID-19)
COVID-19 has had an impact on the demand for medical services provided by our affiliated clinicians. Beginning in mid-March 2020, our affiliated office-based practices, which specialize in maternal-fetal medicine, pediatric cardiology, and numerous pediatric subspecialties, experienced a significant elevation of appointment cancellations compared to historical normal levels. We believe COVID-19, either directly or indirectly, also had an impact on our NICU patient volumes, and there is no assurance that impacts from COVID-19 will not further adversely affect our NICU patient volumes or otherwise adversely affect our NICU and related neonatology business. Further, in late 2020, we saw a shift in the mix of patients reimbursed under government-sponsored healthcare programs, but that shift materially reversed during the nine months ended September 30, 2021. Overall, our operating results were significantly impacted by COVID-19 beginning in mid-March 2020, but volumes began to normalize in mid-2020 and substantially recovered throughout 2020 and 2021.
During 2020, we 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 during the second quarter of 2020; (ii) the board of directors agreed to forego their annual cash retainer and cash meeting payments, also during the second quarter of 2020; (iii) we enacted a combination of salary reductions and furloughs for non-clinical employees; (iv) we enacted significant operational and practice-specific expense reduction plans across its clinical operations; and (v) amended and restated our credit agreement.
Due to the 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, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act is a relief package intended to assist many aspects of the American economy, including providing up to $100 billion in aid to the healthcare industry to reimburse healthcare providers for lost revenue and expenses attributable to COVID-19. The remaining $70 billion in aid is intended to focus on providers in areas particularly impacted by COVID-19, rural providers, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for the treatment of uninsured Americans. It is unknown what, if any, portion of the remaining healthcare industry funding on the CARES Act our affiliated physician practices will qualify for and receive. The Department of Health and Human Services (“HHS”) is administering this program, and our affiliated physician practices within continuing operations received an aggregate of $22.0 million in relief payments during the year ended December 31, 2020 and $7.7 million during the nine months ended September 30, 2021. 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, and we utilized this deferral option throughout 2020. We repaid almost all of these deferred social security taxes during the second quarter of 2021 with an immaterial amount due on each of December 31, 2021 and 2022.
13
Under current tax law, net operating losses can be carried forward indefinitely. The CARES Act enacted rules allowing net operating losses arising in 2020 to be carried back five taxable years. We generated a net operating loss for the 2020 tax year which has been carried back to the 2015 tax year under these provisions to obtain a refund of income tax at the prior 35% corporate tax rate.
General Economic Conditions and Other Factors
Our operations and performance depend significantly on economic conditions. Economic conditions in the United States (“U.S.”) deteriorated as a result of COVID-19, which impacted patient volumes, although patient volumes substantially recovered as of September 30, 2021. During the three months ended September 30, 2021, the percentage of our patient service revenue being reimbursed under government-sponsored healthcare programs (“GHC Programs”) decreased as compared to the three months ended September 30, 2020. We could, however, experience shifts toward GHC Programs if changes occur in economic behaviors or population demographics within geographic locations in which we provide services, including an increase in unemployment and underemployment as well as losses of commercial health insurance. For example, during the three months ended December 31, 2020, we experienced significant shifts to GHC programs. 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.
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.
Despite the ACA going into effect over a decade ago, continuous legal and Congressional challenges to the law’s provisions and persisting uncertainty with respect to the scope and effect of certain provisions have made compliance costly. In 2017, Congress unsuccessfully sought to replace substantial parts of the ACA with different mechanisms for facilitating insurance coverage in the commercial and Medicaid markets. Congress may again attempt to enact substantial or target changes to the ACA in the future. Additionally, Centers for Medicare & Medicaid Services (“CMS”) has administratively revised a number of provisions and may seek to advance additional significant changes through regulation, guidance and enforcement in the future.
At the end of 2017, Congress repealed the part of the ACA that required most individuals to purchase and maintain health insurance or face a tax penalty, known as the individual mandate. In light of these changes, in December 2018, a federal district court in Texas declared that key portions of the ACA were inconsistent with the U.S. Constitution and that the entire ACA is invalid as a result. Several states appealed this decision, and in December 2019, a federal court of appeals upheld the district court’s conclusion that part of the ACA is unconstitutional but remanded for further evaluation whether in light of this defect the entire ACA must be invalidated. Democratic attorneys general and the House appealed the Fifth Circuit’s decision to the Supreme Court. On March 2, 2020, the Supreme Court agreed to hear the case, styled California v. Texas, during the 2020-21 term. Oral arguments took place on November 2, 2020 and on June 17, 2021 , the Court held that the plaintiffs lacked standing to challenge the ACA. Notwithstanding the Supreme Court's ruling, we cannot say for certain whether there will be future challenges to the ACA or what impact, if any, such challenges may have on our business. Changes resulting from these proceedings could have a material impact on our business.
In late 2020 and early 2021, the results of the federal and state elections changed which persons and parties occupy the Office of the President of the United States and the U.S. Senate and many states’ governors and legislatures. The current Administration may propose sweeping changes to the U.S. healthcare system, including expanding government-funded health insurance options, additional Medicaid expansion or replacing current healthcare financing mechanisms with systems that would be entirely administered by the federal government. Any legislative or administrative change to the current healthcare financing system could have a material adverse effect on our financial condition, results of operations, cash flows and the trading price of our securities.
In addition to the potential impacts to the ACA, there could be changes to other GHC Programs, such as a change to the structure of Medicaid or Medicaid payment rates set forth under state law. Historically, Congress and the Administration have sought to convert Medicaid into a block grant or to institute per capita spending caps, among other things. These changes, if implemented, could eliminate the guarantee that everyone who is eligible and applies for benefits would receive them and could potentially give states new authority to restrict eligibility, cut benefits and make it more difficult for people to enroll. Additionally, several states are considering and pursuing changes to their Medicaid programs, such as requiring recipients to engage in employment or education activities as a condition of eligibility for most adults, disenrolling recipients for failure to pay a premium, or adjusting premium amounts based on income. Many states have recently shifted a majority or all of their Medicaid program beneficiaries into Managed Medicaid Plans. Managed Medicaid Plans have some flexibility to set rates for providers, but many states require minimum provider rates in their contracts with such plans. In July of each year, CMS releases the annual Medicaid Managed Care Rate Development Guide which provides federal baseline rules for setting reimbursement rates in managed care plans. We could be affected by lower reimbursement rates in some of all of the Managed Medicaid Plans with which we participate. We could also be materially impacted if we are dropped from the provider network in one or more of the Managed Medicaid Plans with which we currently participate.
We cannot predict with any assurance the ultimate effect of these laws and resulting changes to payments under GHC Programs, nor can we provide any assurance that they will not have a material adverse effect on our business, financial condition, results of operations, cash
14
flows and the trading price of our securities. Further, any fiscal tightening impacting GHC Programs or changes to the structure of any GHC Programs could have a material adverse effect on our financial condition, results of operations, cash flows and the trading price of our securities.
Medicaid Expansion
The ACA also allows states to expand their Medicaid programs through federal payments that fund most of the cost of increasing the Medicaid eligibility income limit from a state’s historic eligibility levels to 133% of the federal poverty level. To date, 38 states and the District of Columbia have expanded Medicaid eligibility to cover this additional low-income patient population, and other states are considering expansion. All of the states in which we operate, however, already cover children in the first year of life and pregnant women if their household income is at or below 133% of the federal poverty level. As noted above, Congress is currently considering altering the terms and state remuneration for Medicaid expansion pursuant to the ACA. Should these changes take effect, we cannot predict with any assurance the ultimate effect to reimbursements for our services.
“Surprise” Billing Legislation
In late 2020, Congress enacted legislation intended to protect patients from “surprise” medical bills when services are furnished by providers who are not subject to contractual arrangements and payment limitations with the patient’s insurer. Effective January 1, 2022, patients will be protected from unexpected or “surprise” medical bills that could arise from out-of-network emergency care provided at an out-of-network facility or at in-network facilities by out-of-network providers and out-of-network nonemergency care provided at in-network facilities without the patient’s informed consent. Many states have passed similar legislation, but the federal government has been working to enact a ban on surprise billing for quite some time that pertains to ERISA health insurance plans that are not addressed under state legislation.
Under the “No Surprises Act,” patients are only required to pay the in-network cost-sharing amount, which has been determined through an established regulatory formula and will count toward the patient’s health plan deductible and out-of-pocket cost-sharing limits. Providers will generally not be permitted to balance bill patients beyond this cost-sharing amount. An out-of-network provider will only be permitted to bill a patient more than the in-network cost-sharing amount for care if the provider gives the patient notice of the provider’s network status and delivers to the patient or their health plan an estimate of charges within certain specified timeframes, and obtains the patient’s written consent prior to the delivery of care. Providers that violate these surprise billing prohibitions may be subject to state enforcement action or federal civil monetary penalties. Out of network providers will undergo an independent dispute resolution ("IDR") process to determine their payment amounts for out of network services. These IDR results will bind both the provider and payor for a 90-day period. We cannot predict how these IDR results will compare to the rates that our affiliated physicians customarily receive for their services.
These measures could limit the amount we can charge and recover for services we furnish where we have not contracted with the patient’s insurer, and therefore could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Moreover, these measures could affect our ability to contract with certain payors and under historically similar terms and may cause, and the prospect of these changes may have caused, payors to terminate their contracts with us and our affiliated practices, further affecting our business, financial condition, results of operations, cash flows and the trading price of our securities.
Non-GAAP Measures
In our analysis of our results of operations, we use certain non-GAAP financial measures. We report adjusted earnings before interest, taxes and depreciation and amortization from continuing operations, which is defined as income (loss) from continuing operations before interest, income taxes, depreciation and amortization, and transformational and restructuring related expenses. We also report adjusted earnings per share (“Adjusted EPS”) from continuing operations which consists of diluted income (loss) from continuing operations per common and common equivalent share adjusted for amortization expense, stock-based compensation expense, transformational and restructuring related expenses and any impacts from discrete tax events. For the three and nine months ended September 30, 2021 as relevant, both Adjusted EBITDA and Adjusted EPS are being further adjusted to exclude the impacts from the gain on sale of building and loss on the early extinguishment of debt.
We believe these measures, in addition to income (loss) from continuing operations, net income (loss) and diluted net income (loss) from continuing operations per common and common equivalent share, provide investors with useful supplemental information to compare and understand our underlying business trends and performance across reporting periods on a consistent basis. These measures should be considered a supplement to, and not a substitute for, financial performance measures determined in accordance with GAAP. In addition, since these non-GAAP measures are not determined in accordance with GAAP, they are susceptible to varying calculations and may not be comparable to other similarly titled measures of other companies.
For a reconciliation of each of Adjusted EBITDA from continuing operations and Adjusted EPS from continuing operations to the most directly comparable GAAP measures for the three and nine months ended September 30, 2021 and 2020, refer to the tables below (in thousands, except per share data).
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Income (loss) from continuing operations attributable to Mednax, Inc.
|
|
$
|
31,847
|
|
|
$
|
(2,652
|
)
|
|
$
|
67,732
|
|
|
$
|
(14,067
|
)
|
Interest expense
|
|
|
17,595
|
|
|
|
27,250
|
|
|
|
52,119
|
|
|
|
83,180
|
|
Gain on sale of building
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,280
|
)
|
|
|
—
|
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
14,532
|
|
|
|
—
|
|
Income tax provision
|
|
|
11,594
|
|
|
|
6,677
|
|
|
|
14,002
|
|
|
|
10,859
|
|
Depreciation and amortization expense
|
|
|
8,151
|
|
|
|
7,195
|
|
|
|
24,288
|
|
|
|
20,749
|
|
Transformational and restructuring related expenses
|
|
|
4,232
|
|
|
|
34,291
|
|
|
|
19,042
|
|
|
|
60,846
|
|
Adjusted EBITDA from continuing operations attributable to
Mednax, Inc.
|
|
$
|
73,419
|
|
|
$
|
72,761
|
|
|
$
|
184,435
|
|
|
$
|
161,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Weighted average diluted shares outstanding
|
|
86,096
|
|
|
83,862
|
|
Income (loss) from continuing operations and diluted income from
continuing operations per share attributable to Mednax, Inc.
|
|
$
|
31,847
|
|
|
$
|
0.37
|
|
|
$
|
(2,652
|
)
|
|
$
|
(0.03
|
)
|
Adjustments (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization (net of tax of $583 and $601)
|
|
|
1,749
|
|
|
|
0.02
|
|
|
|
1,802
|
|
|
|
0.02
|
|
Stock-based compensation (net of tax of $1,374 and $1,132)
|
|
|
4,121
|
|
|
|
0.05
|
|
|
|
3,398
|
|
|
|
0.04
|
|
Transformational and restructuring expenses (net of tax of
$1,058 and $8,573)
|
|
|
3,174
|
|
|
|
0.03
|
|
|
|
25,718
|
|
|
|
0.31
|
|
Net impact from discrete tax events
|
|
|
(901
|
)
|
|
|
(0.01
|
)
|
|
|
2,905
|
|
|
|
0.03
|
|
Adjusted income and diluted EPS from continuing operations
attributable to Mednax, Inc.
|
|
$
|
39,990
|
|
|
$
|
0.46
|
|
|
$
|
31,171
|
|
|
$
|
0.37
|
|
(1)
Our blended statutory tax rate of 25% was used to calculate the tax effects of the adjustments for the three months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Weighted average diluted shares outstanding
|
|
85,759
|
|
|
83,260
|
|
Income (loss) from continuing operations and diluted income from
continuing operations per share attributable to Mednax, Inc.
|
|
$
|
67,732
|
|
|
$
|
0.79
|
|
|
$
|
(14,067
|
)
|
|
$
|
(0.17
|
)
|
Adjustments (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization (net of tax of $2,049 and $1,632)
|
|
|
6,149
|
|
|
|
0.07
|
|
|
|
4,896
|
|
|
|
0.06
|
|
Stock-based compensation (net of tax of $3,737 and $4,550)
|
|
|
11,210
|
|
|
|
0.13
|
|
|
|
13,652
|
|
|
|
0.16
|
|
Transformational and restructuring expenses (net of tax of
$4,760 and $15,211)
|
|
|
14,282
|
|
|
|
0.16
|
|
|
|
45,635
|
|
|
|
0.55
|
|
Gain on sale of building (net of tax of $1,820)
|
|
|
(5,460
|
)
|
|
|
(0.06
|
)
|
|
|
—
|
|
|
|
—
|
|
Loss on early extinguishment of debt (net of tax of $3,633)
|
|
|
10,899
|
|
|
|
0.13
|
|
|
|
—
|
|
|
|
—
|
|
Net impact from discrete tax events
|
|
|
(9,484
|
)
|
|
|
(0.11
|
)
|
|
|
7,849
|
|
|
|
0.10
|
|
Adjusted income and diluted EPS from continuing operations
attributable to Mednax, Inc.
|
|
$
|
95,328
|
|
|
$
|
1.11
|
|
|
$
|
57,965
|
|
|
$
|
0.70
|
|
(1)
Our blended statutory tax rate of 25% was used to calculate the tax effects of the adjustments for the nine months ended September 30, 2021 and 2020.
Results of Operations
Three Months Ended September 30, 2021 as Compared to Three Months Ended September 30, 2020
Our net revenue attributable to continuing operations was $492.9 million for the three months ended September 30, 2021, as compared to $460.6 million for the same period in 2020. The increase in revenue of $32.3 million, or 7.0%, was primarily attributable to an increase in same-unit revenue. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue increased by $26.7 million, or 5.9%. The increase in same-unit net revenue was comprised of an increase of $29.5 million, or 6.5%, related to patient service volumes, partially offset by a decrease of $2.8 million, or 0.6%, from net reimbursement-related factors. The increase in revenue from patient service volumes was related to increases across almost all of our hospital-based and office-based women’s and children’s services. Prior year volumes were unfavorably impacted by COVID-19. The net decrease in revenue related to net reimbursement-related factors was primarily due to decreases in CARES Act relief as no relief was recorded during the third quarter of 2021, as compared to $14.2 million recorded during the third quarter of 2020, partially offset by an increase in revenue resulting from a decrease in the percentage of our patients being enrolled in GHC Programs, increases in administrative fees from our hospital partners and modest improvements in managed care contracting.
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Practice salaries and benefits attributable to continuing operations increased $18.9 million, or 6.1%, to $328.8 million for the three months ended September 30, 2021, as compared to $309.9 million for the same period in 2020. Of the $18.9 million increase, $14.4 million was related to salaries which primarily reflected increases in clinician compensation expense driven by the comparison to reduced salaries expense during 2020 resulting from COVID-19 mitigation efforts. The remaining $4.5 million increase was related to benefits and incentive compensation, with the increase primarily related to incentive compensation driven by improved results.
Practice supplies and other operating expenses attributable to continuing operations increased $3.7 million, or 16.4%, to $26.1 million for the three months ended September 30, 2021, as compared to $22.4 million for the same period in 2020. The increase was primarily attributable to practice supply, rent and other costs related to our existing units for which the activity across many expense categories such as travel, office and professional services expenses in 2020 had decreased as a result of COVID-19 as well as increases in the current year for information technology expenses from efforts directly supporting the physician practices.
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 $66.9 million for the three months ended September 30, 2021, as compared to $66.3 million for the same period in 2020. The net increase of $0.6 million is primarily related to a net increase in compensation expense when comparing to the prior year that included decreases in compensation expense from COVID-19 mitigation efforts such as furloughs and net staffing reductions and increases in various information technology related expenses including systems fees, professional licenses and data center enhancements, partially offset by a net savings in revenue cycle management expenses and other professional fees. General and administrative expenses as a percentage of net revenue was 13.6% for the three months ended September 30, 2021, as compared to 14.4% for the same period in 2020, with the decrease of 83 basis points driven by the net expense decreases, partially offset by the increases in salaries and information technology expense in 2021.
Transformational and restructuring related expenses attributable to continuing operations were $4.2 million for the three months ended September 30, 2021, as compared to $34.3 million for the same period in 2020. The decrease of $30.1 million reflects the reduction in the scope of activities limiting them to initiatives critical to the transformation of our business operations with the expenses during the third quarter of 2021 primarily related to contract termination costs resulting from the transition of our revenue cycle management activities to a third party with the remaining expenses related to external consulting costs for other initiatives.
Depreciation and amortization expense attributable to continuing operations was $8.2 million for the three months ended September 30, 2021, as compared to $7.2 million for the same period in 2020. The increase of $1.0 million was primarily related to an increase in depreciation expense related to information technology equipment.
Income from operations attributable to continuing operations increased $38.3 million, or 187.4%, to $58.8 million for the three months ended September 30, 2021, as compared to $20.5 million for the same period in 2020. Our operating margin was 11.9% for the three months ended September 30, 2021, as compared to 4.4% for the same period in 2020. The increase in our operating margin was primarily due to higher revenue growth and decreases in transformational and restructuring related expenses, partially offset by net increases in overall operating expenses as compared to the third quarter of 2020, some of which was driven by COVID-19 cost mitigation initiatives that took place in 2020. Excluding transformation and restructuring related expenses, our income from operations attributable to continuing operations was $63.0 million and $54.8 million, and our operating margin was 12.8% and 11.9% for the three months ended September 30, 2021 and 2020, respectively. We believe excluding the impacts from the transformational and restructuring related activity provides a more comparable view of our operating income and operating margin from continuing operations.
Total non-operating expenses attributable to continuing operations were $15.4 million for the three months ended September 30, 2021, as compared to $16.4 million for the same period in 2020. The net decrease in non-operating expenses was primarily related to the decrease in interest expense resulting from the redemption of our 5.25% senior unsecured notes due 2023 (the “2023 Notes”) in January 2021, partially offset by a decrease in other income related to the transition services provided to the buyers of our divested medical groups. Interest expense for the three months ended September 30, 2021 also includes approximately $0.8 million of deferred debt costs written off as a result of the permanent reduction in the size of our revolving credit facility.
Our effective income tax rate attributable to continuing operations (“tax rate”) was 26.7% for the three months ended September 30, 2021 and our tax rate for the three months ended September 30, 2020 was not meaningful due to the decreased level of pre-tax income generated. Income taxes for the third quarter of 2020 were calculated by applying the actual year-to-date tax rate to our pre-tax income. After excluding discrete tax impacts, during the three months ended September 30, 2021, our tax rate was 28.8%. We believe excluding discrete tax impacts provides a more comparable view of our tax rate.
Income from continuing operations attributable to Mednax, Inc. was $31.8 million for the three months ended September 30, 2021, as compared to a loss of $2.7 million for the same period in 2020. Adjusted EBITDA from continuing operations attributable to Mednax, Inc. was $73.4 million for the three months ended September 30, 2021, as compared to $72.8 million for the same period in 2020.
Diluted earnings from continuing operations per common and common equivalent share attributable to Mednax, Inc. was $0.37 on weighted average shares outstanding of 86.1 million for the three months ended September 30, 2021, as compared to a diluted loss per share of $0.03 on weighted average shares outstanding of 83.9 million for the same period in 2020. Adjusted EPS from continuing operations was $0.46 for the three months ended September 30, 2021, as compared to $0.37 for the same period in 2020. The increase of 2.2 million in our weighted average shares outstanding is primarily due to the impact of shares issued in 2020 and 2021 through various equity programs.
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Loss from discontinued operations, net of tax, was $1.1 million for the three months ended September 30, 2021, as compared to $38.4 million for the same period in 2020. Diluted loss from discontinued operations per common and common equivalent share was $0.01 for the three months ended September 30, 2021, as compared to $0.46 three months ended September 30, 2020.
Net income attributable to Mednax, Inc. was $30.8 million for the three months ended September 30, 2021, as compared to a loss of $41.0 million for the same period in 2020. Diluted net income per common and common equivalent share attributable to Mednax, Inc. was $0.36 for the three months ended September 30, 2021, as compared to a diluted loss per share of $0.49 for the same period in 2020.
Nine Months Ended September 30, 2021 as Compared to Nine Months Ended September 30, 2020
Our net revenue attributable to continuing operations was $1.41 billion for the nine months ended September 30, 2021, as compared to $1.32 billion for the same period in 2020. The increase in revenue of $95.3 million, or 7.2%, was primarily attributable to an increase in same-unit revenue. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue increased by $93.3 million, or 7.3%. The increase in same-unit net revenue was comprised of an increase of $58.7 million, or 4.6%, related to patient service volumes and an increase of $34.6 million, or 2.7%, from net reimbursement-related factors. The increase in revenue from patient service volumes was related to increases across all our hospital-based and office-based women’s and children’s services. Prior year volumes were significantly unfavorably impacted by COVID-19. The net increase in revenue related to net reimbursement-related factors was primarily due to an increase in revenue resulting from a decrease in the percentage of our patients being enrolled in GHC Programs, increases in administrative fees from our hospital partners and modest improvements in managed care contracting, partially offset by a decrease in CARES Act relief.
Practice salaries and benefits attributable to continuing operations increased $55.6 million, or 6.1%, to $964.8 million for the nine months ended September 30, 2021, as compared to $909.2 million for the same period in 2020. Of the $55.6 million increase, $40.6 million was related to salaries which primarily reflected increases in clinician compensation expense driven by the comparison to reduced salaries expense during 2020 resulting from COVID-19 mitigation efforts. The remaining $15.0 million was related to benefits and incentive compensation, with the increase to incentive compensation driven by improved results, partially offset by a decrease in malpractice expense.
Practice supplies and other operating expenses attributable to continuing operations increased $6.0 million, or 9.1%, to $72.5 million for the nine months ended September 30, 2021, as compared to $66.5 million for the same period in 2020. The increase was primarily attributable to practice supply, rent and other costs related to our existing units for which the activity across many expense categories such as travel, office and professional services expenses in 2020 had decreased as a result of COVID-19 as well as increases in the current year for information technology expenses from efforts directly supporting the physician practices.
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 $204.4 million for the nine months ended September 30, 2021, as compared to $194.3 million for the same period in 2020. The net increase of $10.1 million is primarily related to increases in various information technology related expenses including systems fees, professional licenses, data center enhancements, and security as well as a net increase in compensation expense when comparing to the prior year that included decreases in compensation expense from COVID-19 mitigation efforts such as furloughs and net staffing reductions. General and administrative expenses as a percentage of net revenue was 14.5% for the nine months ended September 30, 2021, as compared to 14.7% for the same period in 2020.
Gain on sale of building was $7.3 million for the nine months ended September 30, 2021 and resulted from the sale of our secondary corporate office building during the second quarter.
Transformational and restructuring related expenses attributable to continuing operations were $19.0 million for the nine months ended September 30, 2021, as compared to $60.8 million for the same period in 2020. The decrease of $41.8 million reflects the reduction in the scope of activities limiting them to initiatives critical to our business operations with the expenses during the nine months ended September 30, 2021 primarily for contract termination and external consulting costs.
Depreciation and amortization expense attributable to continuing operations was $24.3 million for the nine months ended September 30, 2021, as compared to $20.7 million for the same period in 2020. The increase of $3.6 million was primarily related to an increase in depreciation expense related to information technology equipment.
Income from operations attributable to continuing operations increased $69.1 million, or 105.0%, to $134.9 million for the nine months ended September 30, 2021, as compared to $65.8 million for the same period in 2020. Our operating margin was 9.6% for the nine months ended September 30, 2021, as compared to 5.0% for the same period in 2020. The increase in our operating margin was primarily due to higher revenue growth, partially offset by net increases in overall operating expenses as compared to 2020, some of which was driven by COVID-19 cost mitigation initiatives that took place in 2020 as well as increases in incentive compensation expense in 2021 from improved results. Excluding the transformation and restructuring related expenses and gain on sale of building, our income from operations attributable to continuing operations was $154.0 million and $126.7 million, and our operating margin was 10.9% and 9.6% for the nine months ended September 30, 2021 and 2020, respectively. We believe excluding the impacts from the transformational and restructuring related activity and gain on sale of building provides a more comparable view of our operating income and operating margin from continuing operations.
Total non-operating expenses attributable to continuing operations were $53.2 million for the nine months ended September 30, 2021, as compared to $69.0 million for the same period in 2020. The decrease in non-operating expenses was primarily related to a decrease in interest expense resulting from the redemption of our 2023 Notes in January 2021, partially offset by the loss on the early redemption of our 2023
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Notes. The nine months ended September 30, 2020 also included the unfavorable impact from the settlement of a litigation matter within investment and other income.
Our tax rate was 17.1% for the nine months ended September 30, 2021 and our tax rate for the nine months ended September 30, 2020 was not meaningful due to the pre-tax loss generated due to the impacts from COVID-19. The tax rate for the nine months ended September 30, 2021 includes a net discrete tax benefit of $9.5 million, primarily related to a change in estimate for the 2020 net operating loss carryback as allowed under the CARES Act for refund at the 35% federal tax rate. Income taxes for the nine months ended September 30, 2020 were calculated by applying the actual year-to-date tax rate to our pre-tax loss. After excluding discrete tax impacts, during the nine months ended September 30, 2021, our tax rate was 28.7%. We believe excluding discrete tax impacts on our tax rate provides a more comparable view of our effective income tax rate.
Income from continuing operations attributable to Mednax, Inc. was $67.7 million for the nine months ended September 30, 2021, as compared to a loss of $14.1 million for the same period in 2020. Adjusted EBITDA from continuing operations was $184.4 million for the nine months ended September 30, 2021, as compared to $161.6 million for the same period in 2020.
Diluted earnings from continuing operations per common and common equivalent share attributable to Mednax, Inc. was $0.79 on weighted average shares outstanding of 85.8 million for the nine months ended September 30, 2021, as compared to diluted loss per share of $0.17 on weighted average shares outstanding of 83.3 million for the same period in 2020. Adjusted EPS from continuing operations was $1.11 for the nine months ended September 30, 2021, as compared to $0.70 for the same period in 2020. The increase of 2.5 million in our weighted average shares outstanding is primarily due to the impact of shares issued in 2020 and early 2021 through various equity programs.
Income from discontinued operations, net of tax, was $15.7 million for the nine months ended September 30, 2021, as compared to a loss of $718.1 million for the same period in 2020. Diluted income from discontinued operations per common and common equivalent share was $0.18 for the nine months ended September 30, 2021, as compared to diluted loss per share of $8.62 for the same period in 2020.
Net income attributable to Mednax, Inc. was $83.4 million for the nine months ended September 30, 2021, as compared to a loss of $732.2 million for the same period in 2020. Diluted net income per common and common equivalent share was $0.97 for the nine months ended September 30, 2021, as compared to diluted loss per share of $8.79 for the same period in 2020.
Liquidity and Capital Resources
As of September 30, 2021, we had $357.9 million of cash and cash equivalents attributable to continuing operations as compared to $1.12 billion at December 31, 2020. Additionally, we had working capital attributable to continuing operations of $390.5 million at September 30, 2021, a decrease of $714.5 million from working capital of $1.1 billion at December 31, 2020. The net decrease in working capital is primarily due to the redemption of the 2023 Notes in January 2021.
Cash Flows from Continuing Operations
Cash provided by (used in) operating, investing and financing activities from continuing operations is summarized as follows (in thousands):
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|
|
|
|
|
|
|
|
|
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Nine Months Ended
September 30,
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2021
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|
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2020
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Operating activities
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$
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38,718
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$
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71,645
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Investing activities
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(39,839
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)
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(28,179
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)
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Financing activities
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(760,941
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)
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(3,496
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)
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Operating Activities from Continuing Operations
During the nine months ended September 30, 2021, our net cash provided by operating activities for continuing operations was $38.7 million, compared to $71.6 million for the same period in 2020. The net decrease in cash provided of $32.9 million was primarily due to decreases in cash flow from accounts receivable and deferred income taxes as well as changes in other liabilities, partially offset by an increase in cash flow from higher earnings and changes in accounts payable and accrued expenses, primarily incentive compensation.
During the nine months ended September 30, 2021, cash flow from accounts receivable for continuing operations decreased by $42.0 million, as compared to an increase of $30.0 million for the same period in 2020. The decrease in cash flow from accounts receivable for the nine months ended September 30, 2021 was primarily due to net increases in ending accounts receivable balances at existing units due to higher revenue, partially offset by improved 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 49.9 days at September 30, 2021 as compared to 52.3 days at December 31, 2020. The decrease in our DSO primarily related to the timing of cash collections at our existing units.
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Investing Activities from Continuing Operations
During the nine months ended September 30, 2021, our net cash used in investing activities for continuing operations of $39.8 million consisted of capital expenditures of $29.1 million, the payment associated with a strategic investment of $20.0 million and acquisitions payments of $19.6 million, partially offset by net proceeds from the sale of a building of $24.7 million and net proceeds from maturities or sale of investments of $4.1 million.
Financing Activities from Continuing Operations
During the nine months ended September 30, 2021, our net cash used in financing activities for continuing operations of $760.9 million primarily consisted of $759.8 million related to the redemption of the 2023 Notes, including the call premium, and the repurchase of $4.7 million of our common stock, partially offset by proceeds from the issuance of common stock of $5.6 million.
Liquidity
During the three months ended September 30, 2021, we permanently reduced the size of our unsecured revolving credit facility by $600.0 million to $600.0 million. The Credit Agreement remains subject to the limitations discussed below, 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 contractors. 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.
LIBOR is expected to be discontinued after 2021, with one-month LIBOR being discontinued in 2023. The Credit Agreement provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable. We may also continue to make borrowings under the Credit Agreement at the alternate base rate in the event that LIBOR is unavailable regardless of whether a replacement or alternative rate has been determined. The alternate base rate or LIBOR replacement or alternative rate may be more or less favorable to us than LIBOR. Due to these features of the Credit Agreement, we do not believe that the LIBOR transition will have a material impact on our consolidated financial statements.
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 restricted our ability to make restricted payments under the Credit Agreement for the remainder of 2020, subject to certain exceptions.
At September 30, 2021, we had no outstanding principal balance on our Credit Agreement. We had one outstanding letter of credit of $0.1 million which reduced the amount available on our Credit Agreement to $299.9 million at September 30, 2021, after giving effect to the temporary reduction of the capacity of our Credit Agreement described above through September 30, 2021.
During the nine months ended September 30, 2021, we redeemed the outstanding principal balance of $750.0 million on the 2023 Notes. We recognized a loss on debt extinguishment of $14.5 million, which primarily included cash premiums and accelerated amortization of deferred financing costs. During the three months ended September 30, 2021, in connection with the reduction in our revolving credit facility, we wrote off approximately $0.8 million of deferred debt costs which is included as a component of interest expense.
At September 30, 2021, we had an outstanding principal balance of $1.0 billion on our 6.25% senior unsecured notes due 2027 (the “2027 Notes”). Our obligations under 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 2027 Notes accrues at the rate of 6.25% per annum, or $62.5 million, and is payable semi-annually in arrears on January 15 and July 15.
The indenture under which the 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 2027 Notes, upon the occurrence of a change in control of Mednax, we may be required to repurchase the 2027 Notes at a purchase price equal to 101% of the aggregate principal amount of the 2027 Notes repurchased plus accrued and unpaid interest.
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At September 30, 2021, 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 2027 Notes. We believe we will be in compliance with these covenants throughout 2021.
We maintain professional liability insurance policies with third-party insurers, subject to self-insured retention, exclusions and other restrictions. We self-insure our liabilities to pay self-insured retention amounts under our professional liability insurance coverage through a wholly owned captive insurance subsidiary. We record liabilities for self-insured amounts and claims incurred but not reported based on an actuarial valuation using historical loss information, claim emergence patterns and various actuarial assumptions. Our total liability related to professional liability risks at September 30, 2021 was $306.6 million, of which $40.2 million is classified as a current liability within accounts payable and accrued expenses in the Consolidated Balance Sheet. In addition, there is a corresponding insurance receivable of $58.9 million recorded as a component of other assets for certain professional liability claims that are covered by insurance policies.
We anticipate that funds generated from operations, together with our current cash on hand and funds available under our 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 2020 Form 10-K, including the section entitled “Risk Factors.”
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