PEDIATRIX MEDICAL GROUP, INC. 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 our Consolidated Financial Statements and the related notes included in Item 8 of this Form 10-K. This discussion contains forward-looking statements. Please see the explanatory note concerning "Forward-Looking Statements" preceding Part I of this Form 10-K and Item 1A. Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not significantly affected by inflation. OVERVIEWMEDNAX is a leading provider of physician services including newborn, anesthesia, 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 39 states andPuerto Rico . AtDecember 31, 2019 , our national network comprised over 4,325 affiliated physicians, including 1,290 physicians who provide neonatal clinical care, primarily within hospital-based NICUs, to babies born prematurely or with medical complications. We have 1,300 affiliated physicians who provide anesthesia care to patients in connection with surgical and other procedures, as well as pain management. In addition, we have 400 affiliated physicians who provide 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 220 physicians providing pediatric intensive care, 105 physicians providing pediatric cardiology care, 150 physicians providing hospital-based pediatric care, 25 physicians providing pediatric surgical care, 10 physicians providing pediatric ear, nose and throat services, and five physicians providing pediatric ophthalmology services.MEDNAX also provides radiology services including diagnostic imaging and interventional radiology, through a network of more than 390 affiliated physicians, as well as teleradiology services in all 50 states, theDistrict of Columbia andPuerto Rico through a network of over 420 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. 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 our management services organization being classified as discontinued operations. See - "Divestiture of theManagement Services Organization " below. 2019 Acquisition Activity During 2019, we completed nine physician group practice acquisitions, including two neonatology physician practices, two maternal-fetal physician practices, one radiology practice, and four other pediatric subspecialty practices. Based on our experience, we expect that we can improve the results of acquired physician practices through improved managed care contracting, improved collections, identification of growth initiatives and operating and cost savings based upon the significant infrastructure that we have developed. Divestiture of theManagement Services Organization InNovember 2018 , we announced the initiation of a process to divest our management services service line, which operated asMedData , to allow us to focus on our core physician services business. OnOctober 10, 2019 , we entered into a securities purchase agreement with an affiliate ofFrazier Healthcare Partners to divestMedData , and the transaction closed onOctober 31, 2019 . Pursuant to the terms and conditions of the agreement, 56 -------------------------------------------------------------------------------- Table of Contents at the closing of the transaction, we received cash proceeds of$249.7 million , net of certain net working capital and similar adjustments, as well as contingent economic consideration in an indirect holding company of the buyer, the value of which is contingent on both short and long-term performance ofMedData and the maximum amount payable in respect of which is$50.0 million . We also realized certain cash tax benefits from the transaction during the fourth quarter of 2019 and expect incremental cash tax benefits in the coming periods. The operating results ofMedData were reported as discontinued operations in our consolidated statements of income for the year endedDecember 31, 2019 , and prior period financial statements have been presented on a consistent basis. Goodwill Impairment Charge We test goodwill for impairment at a reporting unit level on at least an annual basis, in accordance with the subsequent measurement provisions of the accounting guidance for goodwill. Consistent with prior years, we performed our annual impairment test in the third quarter, specifically as ofJuly 31, 2019 . We used a combination of income and market-based valuation approaches to determine the fair value of our reporting units. Based on the analysis performed, we recorded a non-cash impairment charge of$1.30 billion during the year endedDecember 31, 2019 , nearly all of which related to our anesthesiology reporting unit. Recognition of the non-cash charge against goodwill resulted in a tax benefit which generated an additional deferred tax asset of$147.2 million that increased the fair value of the reporting units. An incremental non-cash charge is then required to reduce the reporting units to their previously determined fair value. Accordingly, we recorded the incremental non-cash charge of$147.2 million for a total non-cash charge of$1.45 billion . The primary factors driving the non-cash impairment charge were (i) a change in management structure effective during the third quarter of 2019 that resulted in the determination of reporting units at one level below our single operating segment of physician services, which is also our single reportable segment, (ii) the decrease in our share price used in the market capitalization reconciliation and (iii) changes in the assumptions used in the valuation analysis, specifically the discount rate used in the cash flow analysis which included a company specific-risk premium. Our goodwill balance atDecember 31, 2019 was$2.71 billion . We believe that the current assumptions and estimates used in our goodwill analysis are reasonable, supportable and appropriate. A 1% change in the discount rate used in the cash flow analysis would have impacted the non-cash impairment charge in the range of$75.0 million to$90.0 million . 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 of income beginning in 2019, and we expect these activities to continue through at least 2020. In our shared services departments, we are 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 have 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 currently intend to make a series of information-technology and other investments to improve processes and performance across our enterprise, using both internal and external resources. We believe these strategic initiatives, together with our continued plans to invest in focused, targeted and strategic organic and acquisitive growth, position us well to deliver a differentiated value proposition to our stakeholders while continuing to provide the highest quality care for our patients. 57 -------------------------------------------------------------------------------- Table of Contents Senior Notes InFebruary 2019 , we completed a private offering of$500.0 million aggregate principal amount of 6.25% senior unsecured notes due 2027 (the "Additional 2027 Notes"), which are treated as a single class together with the 6.25% senior unsecured notes due 2027 that we issued inNovember 2018 ("the Initial 2027 Notes" and, collectively with the Additional 2027 Notes, 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 (the "Credit Agreement"). We used the net proceeds of$491.7 million from the issuance of the Additional 2027 Notes to repay a portion of the indebtedness outstanding under our Credit Agreement. Interest on the 2027 Notes accrues at the rate of 6.25% per annum and is payable semi-annually in arrears onJanuary 15 andJuly 15 . Common Stock Repurchase Programs InJuly 2013 , our Board of Directors authorized the repurchase of 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. The share repurchase program allows us 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 our common stock to offset the dilutive impact from the issuance of shares, if any, related to our acquisition program. We did not repurchase any shares under this program during the twelve months endedDecember 31, 2019 . InAugust 2018 , we announced that our Board of Directors had authorized the repurchase of up to$500.0 million of shares of our common stock in addition to our existing share repurchase program, of which$250.0 million remained available as ofJanuary 1, 2019 . Under this share repurchase program, during the twelve months endedDecember 31, 2019 , we repurchased 5.1 million shares of our common stock for$145.3 million , inclusive of 96,918 shares withheld to satisfy minimum statutory withholding obligations of$2.5 million in connection with the vesting of restricted stock. As ofDecember 31, 2019 ,$107.2 million remained available under this share repurchase program. We may utilize various methods to effect any future share repurchases, including, among others, open market purchases and accelerated share repurchase programs. General Economic Conditions and Other Factors Our operations and performance depend significantly on economic conditions. During the year endedDecember 31, 2019 , the percentage of our patient service revenue being reimbursed under GHC Programs remained relatively consistent as compared to the year endedDecember 31, 2018 . If economic conditions inthe United States deteriorate, we could experience shifts toward GHC Programs, and patient volumes could decline. Further, we could experience and have experienced shifts toward GHC Programs if changes occur in population demographics within geographic locations in which we provide services. 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. See Item 1A. Risk Factors, in this Form 10-K for additional discussion on the general economic conditions inthe United States and recent developments in the healthcare industry that could affect our business. 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 58 -------------------------------------------------------------------------------- Table of Contents 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. In light of these changes, inDecember 2018 , a federal district court inTexas declared that key portions of the ACA were inconsistent withthe United States Constitution and that the entire ACA is invalid as a result. Several states appealed this decision, and inDecember 2019 , a federal court of appeals upheld the district court's conclusion that part of the ACA is unconstitutional but remanded for further evaluation whether in light of this defect the entire ACA must be invalidated. These legal proceedings are likely to continue for several years, and the fate of the ACA will be unresolved and uncertain during this period. In 2020, there will be federal and state elections that could affect which persons and parties occupy the Office of the President of the United States, control one or both chambers ofCongress and many states' governors and legislatures. Many candidates running for President ofthe United States are proposing sweeping changes to theU.S. healthcare system, including replacing current healthcare financing mechanisms with systems that would be entirely administered by the federal government. If the ACA is repealed or further substantially modified by judicial, legislative or administrative action, or if implementation of certain aspects of the ACA are diluted, delayed or replaced with a "Medicare for All" or single payor system, such repeal, modification or delay may impact our business, financial condition, results of operations, cash flows and the trading price of our securities. We are unable to predict the impact of any repeal, modification or delay in the implementation of the ACA, including the repeal of the individual mandate or implementation of a single payor system, on us at this time. In addition to the potential impacts to the ACA, there could be changes to other GHC Programs, such as a change to the structure of Medicaid.Congress and the Administration have sought to convert Medicaid into a block grant or to institute "per capita spending caps", among other things. These changes, if implemented could eliminate the guarantee that everyone who is eligible and applies for benefits would receive them and could potentially give states new authority to restrict eligibility, cut benefits and make it more difficult for people to enroll. Additionally, several states are considering and pursuing changes to their Medicaid programs, such as requiring recipients to engage in employment or education activities as a condition of eligibility for most adults, disenrolling recipients for failure to pay a premium, or adjusting premium amounts based on income. 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 Medicare pays for most physician services based upon a national service-specific fee schedule. The Medicare Access and CHIP Reauthorization Act ("MACRA") provided physicians 0.5% annual increases in 59 -------------------------------------------------------------------------------- Table of Contents reimbursement through 2019 as Medicare transitioned to a payment system designed to reward physicians for the quality of care provided, rather than the quantity of procedures performed. MACRA requires physicians to choose to participate in one of two payment formulas, Merit-Based Incentive Payment System ("MIPS") or Alternative Payment Models ("APMs"). Beginning in 2020, MIPS will allow 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 advanced APMs, and physicians who are meaningful participants in APMs will receive bonus payments from Medicare pursuant to the law. MACRA also remains subject to review and potential modification byCongress , as well as shifting regulatory requirements established by CMS. Our affiliated physicians achieved bonus payments in 2020 through participation in the MIPS, although the amounts of such bonus payments is not currently known. We will continue to operationalize the provisions of MACRA and assess any further changes to the law or additional regulations enacted pursuant to the law. We cannot predict the ultimate effect that these changes will have on us, nor can we provide any assurance that its provisions will not have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our securities. Medicaid Expansion The ACA also allows states to expand their Medicaid programs through federal payments that fund most of the cost of increasing the Medicaid eligibility income limit from a state's historic eligibility levels to 133% of the federal poverty level. To date, 36 states and theDistrict of Columbia have expanded Medicaid eligibility to cover this additional low-income patient population, and other states are considering expansion. All of the states in which we operate, however, already cover children in the first year of life and pregnant women if their household income is at or below 133% of the federal poverty level. "Surprise" Billing Legislation "Surprise" medical bills arise when an insured patient receives care from an out-of-network provider resulting in costs that were not expected by the patient. The bill is a "surprise" either because the patient did not expect to receive care from an out-of-network provider, or because their cost-sharing responsibility is higher than the patient expected. For the past several years, state legislatures have been enacting laws that are intended to address the problems associated with surprise billing or balance billing. More recently,Congress andPresident Trump have proposed bipartisan solutions to address this circumstance, either by working in tandem with, or in the absence of, applicable state laws. Several committees of jurisdiction in theU.S. House of Representatives and in theU.S. Senate have proposed solutions to address surprise medical bills, but it is unclear whether any of the proposed solutions will become law. In addition, state legislatures and regulatory bodies continue to address and modify existing laws on the same issue. Any state or federal legislation on the topic of surprise billing may have an unfavorable impact on out-of-network reimbursement that we receive. In addition, actual or prospective legislative changes in this area may impact, and may have impacted, our ability to contract with private payors at favorable reimbursement rates or remain in contract with such payors. Although our out-of-network revenue is currently immaterial, 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. 60 -------------------------------------------------------------------------------- Table of Contents Medicare Sequestration The Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012, required across-the-board cuts ("sequestrations") to Medicare reimbursement rates. These annual reductions of 2%, on average, apply to mandatory and discretionary spending through 2025. UnlessCongress acts in the future to modify these sequestrations, Medicare reimbursements will be reduced by 2%, on average, annually. However, this 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. Geographic Coverage During 2019, 2018, and 2017, approximately 52%, 52% and 51%, respectively, of our net revenue was generated by operations in our five largest states. During 2019, 2018 and 2017, our five largest states consisted ofTexas ,Florida ,Georgia ,Tennessee , andNorth Carolina . During 2019, 2018 and 2017, our operations inTexas accounted for approximately 20%, 20% and 18%, respectively, of our net revenue. Payor Mix We bill payors for professional services provided by our affiliated physicians to our patients based upon rates for specific services provided. Our billed charges are substantially the same for all parties in a particular geographic area regardless of the party responsible for paying the bill for our services. We determine our net revenue based upon the difference between our gross fees for services and our estimated ultimate collections from payors. Net revenue differs from gross fees due to (i) managed care payments at contracted rates, (ii) GHC Program reimbursements at government-established rates, (iii) various reimbursement plans and negotiated reimbursements from other third-parties, and (iv) discounted and uncollectible accounts of private-pay patients. Our payor mix is composed of contracted managed care, government, principally Medicare and Medicaid, other third-parties and private-pay patients. We benefit from the fact that most of the medical services provided in the NICU are classified as emergency services, a category typically classified as a covered service by managed care payors. The following is a summary of our payor mix, expressed as a percentage of net revenue, exclusive of administrative fees, for the periods indicated: Years Ended December 31, 2019 2018 2017 Contracted managed care 69 % 70 % 70 % Government 24 % 24 % 25 % Other third-parties 5 % 4 % 4 % Private-pay patients 2 % 2 % 1 % 100 % 100 % 100 % The payor mix shown in the table above is not necessarily representative of the amount of services provided to patients covered under these plans. For example, the gross amount billed to patients covered under GHC Programs for the years endedDecember 31, 2019 , 2018 and 2017 represented approximately 55% of our total gross patient service revenue. These percentages of gross revenue and the percentages of net revenue provided in the table above include the payor mix impact of acquisitions completed throughDecember 31, 2019 . 61 -------------------------------------------------------------------------------- Table of Contents Quarterly Results We have historically experienced and expect to continue to experience quarterly fluctuations in net revenue and net income. These fluctuations are primarily due to the following factors:
• There are fewer calendar days in the first and second quarters of the
year, as compared to the third and fourth quarters of the year. Because we
provide services in NICUs on a
24-hours-a-day
basis, 365 days a year, any reduction in service days will have a
corresponding reduction in net revenue.
• The majority of physician services provided by our office-based andanesthesia practices consist of office visits and scheduled procedures
that occur during business hours. As a result, volumes at those practices
fluctuate based on the number of business days in each calendar quarter.
• A significant number of our employees and our associated professional
contractors, primarily physicians, exceed the level of taxable wages for
social security during the first and second quarters of the year. As a
result, we incur a significantly higher payroll tax burden and our net
income is lower during those quarters.
We have significant fixed operating costs, including physician compensation,
and, as a result, are highly dependent on patient volume and capacity
utilization of our affiliated professional contractors to sustain profitability.
Additionally, quarterly results may be affected by the timing of acquisitions
and fluctuations in patient volume. As a result, the operating results for any
quarter are not necessarily indicative of results for any future period or for
the full year. Our unaudited quarterly results are presented in further detail
in Note 19 to our Consolidated Financial Statements in this Form
10-K.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires estimates and
assumptions that affect the reporting of assets, liabilities, revenue and
expenses, and the disclosure of contingent assets and liabilities. Note 2 to our
Consolidated Financial Statements provides a summary of our significant
accounting policies, which are all in accordance with GAAP. Certain of our
accounting policies are critical to understanding our Consolidated Financial
Statements because their application requires management to make assumptions
about future results and depends to a large extent on management's judgment,
because past results have fluctuated and are expected to continue to do so in
the future.
We believe that the application of the accounting policies described in the
following paragraphs is highly dependent on critical estimates and assumptions
that are inherently uncertain and highly susceptible to change. For all of these
policies, we caution that future events rarely develop exactly as estimated, and
the best estimates routinely require adjustment. On an ongoing basis, we
evaluate our estimates and assumptions, including those discussed below.
Revenue Recognition
We recognize patient service revenue at the time services are provided by our
affiliated physicians. Our performance obligations relate to the delivery of
services to patients and 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 our patient service revenue is reimbursed by GHC Programs
and third-party insurance payors. Payments for services rendered to our patients
are generally less than billed charges. We monitor our revenue and receivables
from these sources and record an estimated contractual allowance to properly
account for the anticipated differences between billed and reimbursed amounts.
Accordingly, patient service revenue is presented net of an estimated provision
for contractual adjustments and uncollectibles. Management estimates allowances
for contractual adjustments and uncollectibles on accounts receivable based upon
historical experience and other factors, including days sales outstanding
("DSO") for
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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. Collection of patient service
revenue we expect 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. 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. The evaluation of these
historical and other factors involves complex, subjective judgments. On a
routine basis, we compare our cash collections to recorded net patient service
revenue and evaluate our historical allowance for contractual adjustments and
uncollectibles based upon the ultimate resolution of the accounts receivable
balance. These procedures are completed regularly in order to monitor our
process of establishing appropriate reserves for contractual adjustments. We
have not recorded any material adjustments to prior period contractual
adjustments and uncollectibles in the years ended December 31, 2019 , 2018, or
2017.
Some of our agreements require hospitals to pay us administrative fees. Some
agreements provide for fees if the hospital does not generate sufficient patient
volume in order to guarantee that we receive a specified minimum revenue level.
We also receive fees from hospitals for administrative services performed by our
affiliated physicians providing medical director or other services at the
hospital.
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. Any
significant change in our DSO results in additional analyses of outstanding
accounts receivable and the associated reserves. We calculate our DSO using a
three-month rolling average of net revenue. Our net revenue, net income and
operating cash flows may be materially and adversely affected if actual
adjustments and uncollectibles exceed management's estimated provisions as a
result of changes in these factors. As of December 31, 2019 , our DSO was 50.7
days. We had approximately $1.94 billion in gross accounts receivable
outstanding at December 31, 2019 , and considering this outstanding balance,
based on our historical experience, a reasonably likely change of 0.5% to 1.50%
in our estimated collection rate would result in an impact to net revenue of
$9.7 million to $29.2 million . The impact of this change does not include
adjustments that may be required as a result of audits, inquiries and
investigations from government authorities and agencies and other third-party
payors that may occur in the ordinary course of business. See Note 18 to our
Consolidated Financial Statements in this Form
10-K.
Professional Liability Coverage
We maintain professional liability insurance policies with third-party insurers
generally on a claims-made basis, subject to self-insured retention, exclusions
and other restrictions. Our self-insured retention under our professional
liability insurance program is maintained primarily 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. Liabilities for claims incurred but not reported are not
discounted. The average lag period from the date a claim is reported to the date
it reaches final settlement is approximately four years, although the facts and
circumstances of individual claims could result in lag periods that vary from
this average. Our actuarial assumptions incorporate multiple complex
methodologies to determine the best liability estimate for claims incurred but
not reported and the future development of known claims, including methodologies
that focus on industry trends, paid loss development, reported loss development
and industry-based expected pure premiums. The most significant assumptions used
in the estimation process include the use of loss development factors to
determine the future emergence of claim liabilities, the use of frequency and
trend factors to estimate the impact of economic, judicial and social changes
affecting claim costs, and assumptions regarding legal and other costs
associated with the ultimate settlement of claims. The key assumptions used in
our actuarial valuations are subject to constant adjustments as a result of
changes in our actual loss history and the movement of projected emergence
patterns as claims develop. We evaluate the need for professional liability
insurance reserves in excess of amounts estimated
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in our actuarial valuations on a routine basis, and as of December 31, 2019 ,
based on our historical experience, a reasonably likely change of 4% to 13% in
our estimates would result in an increase or decrease to net income of
$4.0 million to $14.2 million . However, because many factors can affect
historical and future loss patterns, the determination of an appropriate
professional liability reserve involves complex, subjective judgment, and actual
results may vary significantly from estimates.
Goodwill
We record acquired assets, including identifiable intangible assets and
liabilities at their respective fair values, recording to goodwill the excess of
purchase price over the fair value of the net assets acquired. We test goodwill
for impairment at a reporting unit level on an annual basis, and more frequently
if impairment indicators exist. We use a single-step quantitative test with any
goodwill impairment measured as the amount by which a reporting unit's carrying
value exceeds its fair value. We use income and market-based valuation
approaches to determine the fair value of our reporting units. These approaches
focus on various significant assumptions, including the weighted average cost of
capital discount factor, revenue growth rates and market multiples for revenue
and earnings before interest, taxes and depreciation and amortization
("EBITDA"). We also consider the economic outlook for the healthcare services
industry and various other factors during the testing process, including
hospital and physician contract changes, local market developments, changes in
third-party payor payments, and other publicly available information.
Other Matters
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of our Consolidated Financial Statements. For example, our
Consolidated Financial Statements are presented on a consolidated basis with our
affiliated professional contractors because we or one of our subsidiaries have
entered into management agreements with our affiliated professional contractors
meeting the "controlling financial interest" criteria set forth in accounting
guidance for consolidations. Our management agreements are further described in
Note 2 to our Consolidated Financial Statements in this Form
10-K.
The policies described in Note 2 often require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance and
are frequently reexamined by accounting standards setters and regulators. See
"New Accounting Pronouncements" below for matters that may affect our accounting
policies in the future.
Non-GAAP
Measures
In our analysis of our results of operations, we use certain
non-GAAP
financial measures. Prior to January 1, 2019 , we reported EBITDA and adjusted
earnings per common share ("Adjusted EPS"). During 2019, we 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 through the divestiture date of October 31, 2019 , we reported
MedData as assets held for sale and discontinued operations. Accordingly,
beginning with the first quarter of 2019, we began reporting Adjusted EBITDA
from continuing operations, defined as income (loss) from continuing operations
before interest, taxes, depreciation and amortization, and transformational and
restructuring related expenses. Adjusted EPS from continuing operations has also
been further adjusted for these items and beginning with the first quarter of
2019 consists of diluted income (loss) from continuing operations per common and
common equivalent share adjusted for amortization expense, stock-based
compensation expense and transformational and restructuring related expenses.
Adjusted EPS from continuing operations is being further adjusted to reflect the
impacts from discrete tax events. 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.
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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 years ended December 31, 2019 , 2018 and 2017, refer to the
tables below (in thousands, except per share data). In addition, historical
reconciliations of Adjusted EBITDA from continuing operations and Adjusted EPS
from continuing operations are available on our internet website at
www.mednax.com under the Investors tab. Our internet website and the information
contained therein or connected thereto are not incorporated into or deemed a
part of this Form
10-K.
Years Ended December 31,
2019 2018 2017
(Loss) income from continuing operations
$ 305,442 Interest expense 119,381 88,789
74,556
Income tax (benefit) provision (91,886 ) 96,453
80,231
Depreciation and amortization 78,860 83,832
78,856
Transformational and restructuring related expenses 95,329 - - Goodwill impairment 1,449,215 - - Adjusted EBITDA from continuing operations$ 500,805 $ 527,685 $ 539,085 Years Ended December 31, 2019 2018 2017 Weighted average diluted shares outstanding 83,495 91,606 92,958 (Loss) income from continuing operations and diluted income from continuing operations per share$ (1,150,094 ) $ (13.78 ) $ 258,611 $ 2.82 $ 305,442 $ 3.29 Adjustments (1) : Amortization (net of tax of$13,192 ,$14,793 and$20,452 ) 35,668 0.43 39,743 0.43 32,042 0.34 Stock-based compensation (net of tax of$9,544 ,$10,284 and$11,223 ) 25,807 0.31 27,626 0.30 17,555 0.19 Transformational and restructuring related expenses (net of tax of$25,739 ) 69,590 0.83 - - - -Goodwill impairment (net of tax of$147,215 ) 1,302,000 15.59 - - - - Net impact from discrete tax events (773 ) - - - (70,014 ) (0.75 ) Adjusted income and diluted EPS from continuing operations$ 282,198 $ 3.38 $ 325,980 $ 3.55 $ 285,025 $ 3.07
(1) Tax rates of 27.0%, 27.1% and 39.0% were used to calculate the tax effects of
the adjustments for the year ended
respectively. The tax rates used for the years ended
2017 exclude the impact of discrete tax events.
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Table of Contents
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain information
related to our continuing operations expressed as a percentage of our net
revenue:
Years Ended December 31,
2019 2018 2017
Net revenue 100.0 % 100.0 % 100.0 %
Operating expenses:
Practice salaries and benefits 71.4 70.2 68.5
Practice supplies and other operating expenses 3.2 3.2 3.2
General and administrative expenses 11.5 11.7 11.9
Depreciation and amortization 2.2 2.4 2.4
Transformational and restructuring related expenses 2.7 - -
Goodwill impairment 41.3 - -
Total operating expenses 132.3 87.5 86.0
(Loss) income from operations (32.3 ) 12.5 14.0
Non-operating
expense, net 3.0 2.2 2.1
(Loss) income from continuing operations before income taxes (35.3 )
10.3 11.9
Income tax benefit (provision) 2.6 (2.8 ) (2.5 )
(Loss) income from continuing operations (32.7 )%
7.5 % 9.4 %
Year EndedDecember 31, 2019 as Compared to Year EndedDecember 31, 2018 Our net revenue attributable to continuing operations was$3.51 billion for the year endedDecember 31, 2019 , as compared to$3.45 billion for 2018. The increase in revenue of$58.7 million , or 1.7%, was attributable to an increase in same-unit net revenue, partially offset by a decline in revenue from the non-renewal of certain contracts. Same units are those units at which we provided services for the entire current period and the entire comparable period. Same-unit net revenue grew by$73.3 million , or 2.2%, in the year endedDecember 31, 2019 , as compared to the same period in 2018. The increase in same-unit net revenue was comprised of a net increase of$40.2 million , or 1.2%, related to patient service volumes and a net increase of$33.1 million , or 1.0%, from net reimbursement-related factors. The net increase in revenue related to net reimbursement-related factors was primarily due to favorable rate impacts from our radiology services, modest increases from managed care contracting and an increase in administrative fees received from our hospital partners. The increase in revenue from patient service volumes was primarily related to growth across almost all of our services, driven by growth in neonatology and other pediatric services, including newborn nursery, and anesthesiology services. Practice salaries and benefits attributable to continuing operations increased$82.4 million , or 3.4%, to$2.51 billion for the year endedDecember 31, 2019 , as compared to$2.43 billion for 2018. 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$82.4 million increase,$39.2 million was related to salaries and$43.2 million was related to benefits and incentive compensation. 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 increased$3.9 million , or 3.6%, to$112.8 million for the year endedDecember 31, 2019 , as compared to$108.9 million for 2018. The increase was primarily attributable to increases in other practice operating expenses as compared to the prior year. 66 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses attributable to continuing operations primarily include all billing and collection functions and all other salaries, benefits, supplies and operating expenses not specifically related to the day-to-day operations of our physician practices and services. General and administrative expenses were$404.6 million for the year endedDecember 31, 2019 , as compared to$403.9 million for 2018. General and administrative expenses as a percentage of net revenue was 11.5% for the year endedDecember 31, 2019 , as compared to 11.7% for the same period in 2018. Transformational and restructuring related expenses attributable to continuing operations were$95.3 million for the year endedDecember 31, 2019 of which$65.7 million was related to external consulting costs for various process improvement and restructuring initiatives,$18.0 million was related to severance benefits for eliminated positions and$11.6 million was associated with contract terminations and other such activities.Goodwill impairment charges attributable to continuing operations was$1.45 billion for the year endedDecember 31, 2019 , nearly all of which related to our anesthesiology service line. See Note 7 -Goodwill and Intangible Assets for more information. Depreciation and amortization expense attributable to continuing operations decreased$5.0 million , or 5.9%, to$78.9 million for the year endedDecember 31, 2019 , as compared to$83.8 million for 2018, primarily related to a decrease in amortization expense underlying various finite lived intangible assets due to the expiration of amortization periods. Loss from operations attributable to continuing operations was$1.14 billion for the year endedDecember 31, 2019 , as compared to income from operations attributable to continuing operations of$431.8 million for 2018. Our operating margin was (32.3)% for the year endedDecember 31, 2019 , as compared to 12.5% for 2018. The decrease in our operating margin was primarily due to the non-cash goodwill impairment charge recorded during 2019 as well as higher operating expense growth, including transformation and restructuring expenses, combined with lower revenue growth. Excluding the non-cash goodwill impairment charge and the transformation and restructuring expenses, our income from operations attributable to continuing operations was$408.5 million , and our operating margin was 11.6%. We believe excluding the impacts from the non-cash goodwill impairment charge and transformational and restructuring activity provides a more comparable view of our operating income and operating margin from continuing operations. Net non-operating expenses attributable to continuing operations were$105.9 million for the year endedDecember 31, 2019 , as compared to$76.8 million for 2018. The net increase of$29.1 million , or 38.0%, was primarily related to an increase in interest expense related to a higher average interest rate on our outstanding debt, driven by the incremental senior notes issuances in late 2018 and early 2019. Our effective income tax rate attributable to continuing operations was 7.4% and 27.2% for the years endedDecember 31, 2019 and 2018, respectively. Excluding the income tax impacts from the non-cash goodwill impairment charge and other discrete tax items, our effective income tax rate was 27.0% for the year endedDecember 31, 2019 . We believe excluding the impacts on our effective income tax rate related to the non-cash impairment charge and other discrete tax items provides a more comparable view of our effective income tax rate. Loss from continuing operations was$1.15 billion for the year endedDecember 31, 2019 , as compared to income from continuing operations of$258.6 million for 2018. Adjusted EBITDA from continuing operations was$500.8 million for the year endedDecember 31, 2019 , as compared to$527.7 million for the same period in 2018. Diluted loss from continuing operations per common and common equivalent share was$13.78 on weighted average shares outstanding of 83.5 million for the year endedDecember 31, 2019 , as compared to diluted income from continuing operations of$2.82 on weighted average shares outstanding of 91.6 million for 2018. Adjusted 67 -------------------------------------------------------------------------------- Table of Contents EPS from continuing operations was$3.38 for the year endedDecember 31, 2019 , as compared to$3.55 for 2018. The decrease of 8.1 million in our weighted average shares outstanding is primarily due to the impact of shares repurchased under a 2018 accelerated share repurchase program and through open market repurchase activity in 2018 and 2019. Loss from discontinued operations, net of tax, was$347.6 million for the year endedDecember 31, 2019 , reflecting the loss on the initial classification ofMedData as assets held for sale, the incremental impairment charge and the preliminary loss on sale recorded during the year endedDecember 31, 2019 , as compared to income from discontinued operations, net of tax, of$10.0 million for 2018. Diluted loss from discontinued operations per common and common equivalent share was$4.16 for the year endedDecember 31, 2019 , as compared to diluted income from discontinued operations per common and common equivalent share of$0.11 for 2018. Net loss was$1.5 billion for the year endedDecember 31, 2019 , as compared to net income of$268.6 million for 2018. Diluted net loss per common and common equivalent share was$17.94 for the year endedDecember 31, 2019 , as compared to diluted net income per common and common equivalent share of$2.93 for 2018. Year EndedDecember 31, 2018 as Compared to Year EndedDecember 31, 2017 Our net revenue attributable to continuing operations was$3.45 billion for the year endedDecember 31, 2018 , as compared to$3.25 billion for the same period in 2017. The increase in revenue of$201.4 million , or 6.2%, was attributable to an increase in same-unit net revenue and 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 grew by$98.7 million , or 3.3%, for the year endedDecember 31, 2018 , as compared to the same period in 2017. The increase in same-unit net revenue was comprised of a net increase of$61.6 million , or 2.1%, related to net reimbursement-related factors and a net increase of$37.1 million , or 1.2%, from patient service volumes. The net increase in revenue related to net reimbursement-related factors was primarily due to modest improvements in managed care contracting, an increase in the administrative fees received from our hospital partners and the flow through of revenue from modest price increases, partially offset by a decrease in revenue caused by an increase in the percentage of our patients enrolled in GHC Programs. The increase in revenue from patient service volumes was related to growth across almost all of our services. Practice salaries and benefits attributable to continuing operations increased$199.0 million , or 8.9%, to$2.43 billion for the year endedDecember 31, 2018 , as compared to$2.23 billion for 2017. This increase was primarily attributable to increased costs associated with physicians and other staff to support acquisition-related growth, organic growth initiatives and growth at our existing units, of which$158.9 million was related to salaries and$40.1 million was related to benefits and incentive compensation. Included within practice salaries and benefits expense in 2018 is$18.1 million for certain physicians who remained employed throughDecember 31, 2018 despite the non-renewal of an anesthesia services contract effectiveJuly 1, 2018 , under which they had previously provided services. Practice supplies and other operating expenses attributable to continuing operations increased$2.4 million , or 2.3%, to$108.8 million for the year endedDecember 31, 2018 , as compared to$106.4 million for 2017. The increase was primarily attributable to practice supply, rent and other costs related to our acquisitions. General and administrative expenses attributable to continuing operations primarily include all billing and collection functions and all other salaries, benefits, supplies and operating expenses not specifically related to the day-to-day operations of our physician practices and services. General and administrative expenses increased$18.1 million , or 4.7%, to$403.9 million for the year endedDecember 31, 2018 , as compared to$385.9 million for 2017. The increase is attributable to the overall growth of the Company, including growth from acquisitions. Included within general and administrative expenses was an increase of$9.3 million of stock-based 68 -------------------------------------------------------------------------------- Table of Contents compensation expense primarily resulting from the change in timing of our annual equity grants from June to March in order to align the timing with other compensation related activities. General and administrative expenses also included a decrease of$25.0 million resulting from cost improvements as part of our cost savings initiatives. General and administrative expenses as a percentage of net revenue was 11.7% for the year endedDecember 31, 2018 , as compared to 11.9% for the same period in 2017. Depreciation and amortization expense attributable to continuing operations increased$4.9 million , or 6.3%, to$83.8 million for the year endedDecember 31, 2018 , as compared to$78.9 million for 2017. The increase was primarily attributable to the amortization of intangible assets related to acquisitions. Income from operations attributable to continuing operations decreased$23.1 million , or 5.1%, to$431.8 million for the year endedDecember 31, 2018 , as compared to$454.9 million for 2017. Our operating margin was 12.5% for the year endedDecember 31, 2018 , as compared to 14.0% for 2017. The decrease of 148 basis points was primarily due to the impact of the non-renewal of an anesthesia services contract effectiveJuly 1, 2018 , as well as higher operating expense growth as compared to revenue growth. Net non-operating expenses attributable to continuing operations were$76.8 million for the year endedDecember 31, 2018 , as compared to$69.2 million for 2017. The net increase in non-operating expenses attributable to continuing operations was primarily related to an increase in interest expense due to a higher effective interest rate on borrowings outstanding under our Credit Agreement. Our effective income tax rate attributable to continuing operations was 27.2% for the year endedDecember 31, 2018 , as compared to 20.8% for 2017. Our effective income tax rate attributable to continuing operations in 2017 was impacted by a$70.0 million income tax benefit resulting from the reduction of our net deferred tax liability related to the reduction in the corporate tax rate enacted under the Tax Cuts and Jobs Act of 2017 during the fourth quarter of 2017. Net income from continuing operations was$258.6 million for the year endedDecember 31, 2018 , as compared to$305.4 million for 2017. Adjusted EBITDA from continuing operations was$527.7 million for the year endedDecember 31, 2018 , as compared to$539.1 million for 2017. Diluted net income from continuing operations per common and common equivalent share was$2.82 on weighted average shares outstanding of 91.6 million for the year endedDecember 31, 2018 , as compared to$3.29 on weighted average shares outstanding of 93.0 million for 2017. Adjusted EPS from continuing operations was$3.55 for the year endedDecember 31, 2018 , as compared to$3.07 for 2017. The decrease of 1.4 million in our weighted average shares outstanding is primarily due to the impact of shares repurchased under our accelerated share repurchase program. Income from discontinued operations, net of tax, was$10.0 million for the year endedDecember 31, 2018 , as compared to$14.9 million for the same period in 2017. Diluted income from discontinued operations per common and common equivalent share was$0.11 for the year endedDecember 31, 2018 , as compared to$0.16 for the same period in 2017. Consolidated net income was$268.6 million for the year endedDecember 31, 2018 , as compared to$320.4 million for the same period in 2017. Diluted net income per common and common equivalent share was$2.93 for the year endedDecember 31, 2018 , as compared to diluted net income per common and common equivalent share of$3.45 for the same period in 2017. LIQUIDITY AND CAPITAL RESOURCES As ofDecember 31, 2019 , we had$112.8 million of cash and cash equivalents attributable to continuing operations as compared to$25.5 million atDecember 31, 2018 . Additionally, we had working capital attributable 69 -------------------------------------------------------------------------------- Table of Contents to continuing operations of$189.7 million atDecember 31, 2019 , an increase of$60.7 million from our working capital from continuing operations of$129.0 million atDecember 31, 2018 . This net increase in working capital is primarily due to 2019 earnings and an increase in our operating cash balance, partially offset by the use of funds for repurchases of our common stock and acquisitions. Cash Flows Cash provided by (used in) operating, investing and financing activities from continuing operations is summarized as follows (in thousands): Years Ended December 31, 2019 2018 2017
Operating activities
Operating Activities We generated cash flow from operating activities for continuing operations of$338.5 million ,$274.1 million and$483.4 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The net increase in cash flow provided of$64.4 million for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , was primarily related to a combination of favorable impacts from lower tax payments in 2019 and a decrease in cash flow in 2018 for tax payments made in the first quarter of 2018 for 2017 taxes that were deferred by the Internal Revenue Service for companies impacted by the 2017 hurricanes. Cash flow from operating activities in 2019 was also impacted by cash payments made for transformation and restructuring related expenses which resulted in cash outflows of$69.0 million . During the year endedDecember 31, 2019 , cash flow provided by accounts receivable for continuing operations was$7.9 million , as compared to cash used of$43.4 million for the same period in 2018. The increase in cash flow from accounts receivable for the year endedDecember 31, 2019 was primarily due to decreases in ending accounts receivable balances at existing units due to timing of cash collections. 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 50.7 days atDecember 31, 2019 as compared to 52.5 days atDecember 31, 2018 . Our cash flow from operating activities is significantly affected by the payment of physician incentive compensation. A large majority of our affiliated physicians participate in our performance-based incentive compensation program and almost all of the payments due under the program are made annually in the first quarter. As a result, we typically experience negative cash flow from operations in the first quarter of each year and fund our operations during this period with cash on hand or funds borrowed under our Credit Agreement. In addition, during the first quarter of each year, we use cash to make any discretionary matching contributions for participants in our qualified contributory savings plans. We generated cash flow from operating activities for continuing operations of$274.1 million and$483.4 million for the years endedDecember 31, 2018 and 2017, respectively. Cash flow for the year endedDecember 31, 2018 was impacted by a decrease in cash flow from income taxes payable resulting from tax payments made in the first quarter of 2018 for 2017 taxes that were deferred by the Internal Revenue Service for companies impacted by the 2017 hurricanes, as well as a net decrease in cash flow related to accounts receivable, partially offset by an increase in cash flow related to changes in deferred taxes. Cash flow for the year endedDecember 31, 2017 was impacted by changes in the components of income taxes payable for income taxes payments that were deferred to 2018 as a result of the 2017 hurricanes, accounts receivable and professional liability reserves. 70 -------------------------------------------------------------------------------- Table of Contents Investing Activities During the year endedDecember 31, 2019 , our net cash provided from investing activities for continuing operations of$121.9 million primarily included net proceeds of$249.7 million from the sale ofMedData and net proceeds of$16.0 million related to the purchase and maturity of investments, partially offset by acquisition payments of$112.0 million and capital expenditures of$31.9 million . Financing Activities During the year endedDecember 31, 2019 , our net cash used in financing activities of$393.1 million consisted primarily of net repayments on our Credit Agreement of$739.5 million and the repurchase of$145.3 million of our common stock, partially offset by proceeds from our 2027 Notes of$500.0 million . Liquidity OnMarch 28, 2019 , we amended and restated our Credit Agreement to reduce the size of the revolving credit facility, extend the maturity and make other technical and conforming changes. As amended and restated, the Credit Agreement provides for a$1.2 billion unsecured revolving credit facility and includes a$37.5 million sub-facility for the issuance of letters of credit. The Credit Agreement matures onMarch 28, 2024 and is guaranteed by substantially all of our subsidiaries and affiliated professional associations and corporations. At our option, borrowings under the Credit Agreement will bear interest at (i) the alternate base rate (defined as the higher of (a) the prime rate, (b) the Federal Funds Rate plus 1/2 of 1.00% and (c) LIBOR for an interest period of one month plus 1.00%) plus an applicable margin rate ranging from 0.125% to 0.750% based on our consolidated leverage ratio or (ii) the LIBOR rate plus an applicable margin rate ranging from 1.125% to 1.750% based on our consolidated leverage ratio. The Credit Agreement also calls for other customary fees and charges, including an unused commitment fee ranging from 0.150% to 0.200% of the unused lending commitments, based on our consolidated leverage ratio. The Credit Agreement contains customary covenants and restrictions, including covenants that require us to maintain a minimum interest charge ratio, not to exceed a specified consolidated leverage ratio and to comply with laws, and restrictions on the ability to pay dividends and make certain other distributions, as specified therein. Failure to comply with these covenants would constitute an event of default under the Credit Agreement, notwithstanding the ability of the company to meet its debt service obligations. The Credit Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Credit Agreement. AtDecember 31, 2019 , we had no borrowings outstanding on our Credit Agreement. We had outstanding letters of credit of$0.2 million , and the amount available on our Credit Agreement was$1.2 billion atDecember 31, 2019 . InFebruary 2019 , we completed a private offering of the Additional 2027 Notes. AtDecember 31, 2019 , the outstanding balance on the 2027 Notes was$1.0 billion . We also had an outstanding principal balance of$750.0 million on our 5.25% senior unsecured notes due 2023 (the "2023 Notes"). Our obligations under the 2023 Notes and the 2027 Notes are guaranteed on an unsecured senior basis by the same subsidiaries and affiliated professional contractors that guarantee our Credit Agreement. Interest on the 2023 Notes accrues at the rate of 5.25% per annum, or$39.4 million , and is payable semi-annually in arrears onJune 1 andDecember 1 . Interest on the 2027 Notes accrues at the rate of 6.25% per annum, or$62.5 million , and is payable semi-annually in arrears onJanuary 15 andJuly 15 . The indenture under which the 2023 Notes and the 2027 Notes are issued, among other things, limits our ability to (1) incur liens and (2) enter into sale and lease-back transactions, and also limits our ability to merge or dispose of all or substantially all of our assets, in all cases, subject to a number of customary exceptions. Although we are not required to make mandatory redemption or sinking fund payments with respect to the 2023 Notes or the 2027 Notes, upon the occurrence of a change in control ofMEDNAX , we may be required to repurchase the 2023 Notes and the 2027 Notes at a purchase price equal to 101% of the aggregate principal amount of the 2023 Notes and the 2027 Notes repurchased plus accrued and unpaid interest. 71 -------------------------------------------------------------------------------- Table of Contents AtDecember 31, 2019 , 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. The exercise of employee stock options and the purchase of common stock by employees participating in our ESPP and SPP generated cash proceeds of$11.3 million ,$16.3 million and$23.3 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Because stock option exercises and purchases under the ESPP and SPP are dependent on several factors, including the market price of our common stock, we cannot predict the timing and amount of any future proceeds. 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 atDecember 31, 2019 was$271.8 million , of which$44.9 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$29.8 million recorded as a component of other assets for certain professional liability claims that are covered by insurance policies. We anticipate that funds generated from operations, together with our current cash on hand and funds available under our Credit Agreement, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and capital expenditures, fund expenses related to our transformational and restructuring activities, fund our share repurchase programs and meet our contractual obligations as described below for at least the next 12 months from the date of issuance of this Form 10-K. CONTRACTUAL OBLIGATIONS AtDecember 31, 2019 , we had the following obligations and commitments (in thousands): Payments Due 2021 2023 2025 Obligation Total 2020 and 2022 and 2024 and Later Senior notes (1)$ 2,344,116 $ 101,875 $ 203,750 $ 911,094 $ 1,127,397 Operating leases 102,184 25,060 41,703 22,214 13,207$ 2,446,300 $ 126,935 $ 245,453 $ 933,308 $ 1,140,604
(1) Amounts include interest payments at the applicable rate as of
2019 and assume the amount outstanding under our 2023 Notes and the 2027
Notes will be paid on their maturity dates of December 1, 2023 and
January 15, 2027 , respectively.
Certain of our acquisition agreements contain contingent consideration
provisions based on volume and other performance measures over an up to
five-year period. Potential payments under these provisions are not contingent
upon the future employment of the sellers. As of December 31, 2019 , cash
payments of up to $2.7 million may be due through 2020 under all contingent
consideration provisions.
At December 31, 2019 , our total liability for uncertain tax positions was
$8.0 million , all of which is included within other liabilities on our
Consolidated Balance Sheets. The timing and amount of future cash flows for each
year beyond 2019 cannot be reasonably estimated. See Note 13 to our Consolidated
Financial Statements in this Form
10-K
for more information regarding our uncertain tax positions.
72
--------------------------------------------------------------------------------Table of Contents OFF-BALANCE SHEET ARRANGEMENTS We did not have any off-balance sheet arrangements as ofDecember 31, 2019 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS InFebruary 2016 , the accounting guidance related to leases was issued that requires an entity to recognize leased assets and the rights and obligations created by those leased assets on the balance sheet and to disclose key information about the entity's leasing arrangements. This guidance became effective for us onJanuary 1, 2019 . The adoption of this guidance had a material impact on our Consolidated Balance Sheets and related disclosures, resulting from the recognition of significant right of use assets and related liabilities, primarily related to our operating lease arrangements for space in hospitals and certain other facilities for its business and medical offices. See Note 10 - Lease for more information. NEW ACCOUNTING PRONOUNCEMENTS InDecember 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 onJanuary 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. We do not believe the adoption of this new guidance will have a material impact on our consolidated financial statements and related disclosures. 73
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