News Column

MEDNAX, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 12, 2014

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.

OVERVIEW

MEDNAX is a leading provider of physician services including newborn, anesthesia, maternal-fetal and other pediatric subspecialties. At December 31, 2013, our national network was composed of more than 2,300 affiliated physicians, including more than 1,050 physicians who provide neonatal clinical care in 34 states and Puerto Rico, primarily within hospital-based neonatal intensive care units, to babies born prematurely or with medical complications. We have over 775 physicians who provide anesthesia care to patients in connection with surgical and other procedures as well as pain management. We have approximately 200 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 approximately 120 physicians providing pediatric cardiology care, 110 physicians providing pediatric intensive care, 60 physicians providing hospital-based pediatric care and 15 physicians providing pediatric surgical care.

On December 5, 2013, we announced that our board of directors authorized a two-for-one stock split of our common stock. Shareholders of record at the close of business on December 19, 2013 received one additional share of MEDNAX common stock for each share held of record on that date. The shares were issued on December 20, 2013. All share and per share amounts presented in this Form 10-K reflect the effect of the two-for-one stock split.

In July 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 permits us to make open market purchases from time-to-time based upon general economic and market conditions and trading restrictions. During the year ended December 31, 2013, we repurchased approximately 1.1 million shares of our common stock for approximately $51.9 million. This repurchase program was also expanded to allow 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.

During the year ended December 31, 2013, we completed the acquisition of 11 physician group practices. These acquisitions consisted of six anesthesiology practices and five neonatology practices. With the acquisition of these six established anesthesiology practices, we continued the expansion of our anesthesia platform bringing the number of anesthesia groups acquired since 2007 to 23. We also continued to focus on the integration of previously acquired practices and the ongoing development of the infrastructure to support those practices. Based on our experience, we expect that we can improve the results of all of our acquired practices through improved managed care contracting, improved collections, identification of growth initiatives, as well as, operating and cost savings based upon the significant infrastructure that we have developed.

We have an unsecured $800 million revolving credit facility ("Line of Credit") that matures in 2017. The Line of Credit provides a funding source for future acquisitions, our share repurchase program, as well as other corporate purposes. The Line of Credit is guaranteed by substantially all of our subsidiaries and affiliated professional contractors and includes a $75 million sub-facility for the issuance of letters of credit and a $37.5 million sub-facility for swingline loans. In addition, the Line of Credit may be increased to $1.0 billion subject to the satisfaction of specified conditions.

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Although economic conditions in the United States have gradually improved, the number of unemployed and under-employed workers remains significant and economic growth has been slow. During the year ended December 31, 2013, the percentage of our patient services being reimbursed under government-sponsored healthcare programs increased slightly as compared to the year ended December 31, 2012. If economic conditions do not improve or if they deteriorate, we could experience additional shifts toward government-sponsored programs and patient volumes could decline. Payments received from government-sponsored 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, coupled with the current economic environment, we may experience increased bad debt due to patients' inability to pay for certain services. Further, in part due to volatility in economic conditions, many states continue to experience lower than anticipated revenue and are facing budget shortfalls. Although the shortfalls for the more recent budgetary years have declined, they are still significant by historical standards. These shortfalls, and any future shortfalls, could lead to reduced or delayed funding for state Medicaid programs and, in turn, reduced or delayed reimbursement for physician services. See Item 1A. Risk Factors, in this Form 10-K for additional discussion on the general economic conditions in the United States and recent developments in the healthcare industry that could affect our business.

The Affordable Care Act contains a number of provisions that could affect us over the next several years. These provisions include the establishment of health insurance exchanges to facilitate the purchase of qualified health plans, expanding Medicaid eligibility, subsidizing insurance premiums and creating requirements and incentives for businesses to provide healthcare benefits, the effects of which are unpredictable and complex. Other provisions contain changes to healthcare fraud and abuse laws and expand the scope of the Federal False Claims Act. Additionally, in November 2012, the Centers for Medicare & Medicaid Services ("CMS") adopted a rule under the Affordable Care Act that generally allows physicians who provide eligible primary care services to be paid at the Medicare reimbursement rates in effect in calendar years 2013 and 2014 instead of state-established Medicaid reimbursement rates. Generally, state Medicaid reimbursement rates are lower than federally-established Medicare rates. During 2013, state agencies were required to submit their state plan amendments ("SPAs") outlining how they will implement the rule, including frequency and timing of payments to CMS for review and approval. In December 2013, CMS indicated that all SPAs had been approved. During the year ended December 31, 2013, we recognized approximately $31.2 million in parity revenue that contributed approximately $0.10 to our net income per diluted share, reflecting the impacts from incentive compensation and income taxes.

The Affordable Care Act contains numerous other measures that could also affect us. For example, payment modifiers are to be developed that will differentiate payments to physicians under federal healthcare programs based on quality and cost of care. In addition, other provisions authorize voluntary demonstration projects relating to the bundling of payments for episodes of hospital care and the sharing of cost savings achieved under the Medicare program.

Many of the Affordable Care Act's most significant reforms, such as the establishment of state-based and federally facilitated insurance exchanges that provide a marketplace for eligible individuals and small employers to purchase health care insurance, became effective only recently. On October 1, 2013, individuals began enrolling in health care insurance plans offered under these state-based and federally-facilitated insurance exchanges, notwithstanding significant technical issues in accessing and enrolling in the federal online exchange. Such issues may have delayed or reduced the purchase of health care insurance by uninsured persons. In order to be covered on the effective date of January 1, 2014 individuals were required to enroll and pay their first premium by December 24, 2013, however, extensions may be granted on a case by case basis depending on specific circumstances. Uninsured persons who do not enroll in health care insurance plans by March 31, 2014 will be required to pay a penalty to the Internal Revenue Service, unless a hardship exception applies. The patient responsibility costs related to health care plans obtained through the insurance exchanges may be high, and we may experience increased bad debt due to patients' inability to pay for certain services.

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The Affordable Care Act also allows states to expand their Medicaid programs through an increase in the Medicaid eligibility income limit from a state's current eligibility levels to 133% of the federal poverty limit. It remains unclear to what extent states will expand their Medicaid programs by raising the income limit to 133% of the federal poverty level. As a result of this and other uncertainties, we cannot predict whether there will be more uninsured patients in 2014 than anticipated when the Affordable Care Act was enacted. 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.

Federal and state agencies are expected to continue to implement provisions of the Affordable Care Act. However, given the complexity and the number of changes expected as a result of the Affordable Care Act, as well as the implementation timetable for many of them, we cannot predict the ultimate impacts of the Affordable Care Act as they may not be known for several years. The Affordable Care Act also remains subject to continuing legislative scrutiny, including efforts by Congress to amend or repeal a number of its provisions. As a result, we cannot predict with any assurance the ultimate effect of the Affordable Care Act on our Company, nor can we provide any assurance that its provisions will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

In addition, the Budget Control Act of 2011 requires across-the-board cuts ("sequestrations") to Medicare reimbursement rates for the years 2013 through 2023. This 2% reduction in Medicare reimbursement rates commenced on April 1, 2013 but is not expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.

Geographic Coverage

During 2013, 2012 and 2011, approximately 58%, 59% and 58%, respectively, of our net patient service revenue was generated by operations in our five largest states. During 2013, our five largest states consisted of Texas, North Carolina, Florida, Tennessee and Georgia. During 2012, our five largest states consisted of Texas, North Carolina, Florida, Georgia and California. During 2011, our five largest states consisted of Texas, North Carolina, Florida, Georgia, and Washington. During 2013, 2012, and 2011, our operations in Texas accounted for approximately 22%, 24% and 21%, respectively, of our net patient service 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 patient service revenue based upon the difference between our gross fees for services and our estimated ultimate collections from payors. Net patient service revenue differs from gross fees due to (i) managed care payments at contracted rates, (ii) government-sponsored healthcare 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 Medicaid and Medicare, 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.

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The following is a summary of our payor mix, expressed as a percentage of net patient service revenue, exclusive of administrative fees, for the periods indicated: Years Ended December 31, 2013 2012 2011 Contracted managed care 69 % 69 % 68 % Government 24 % 24 % 25 % Other third-parties 5 % 6 % 6 % Private-pay patients 2 % 1 % 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 government programs for the years ended December 31, 2013, 2012 and 2011 represented approximately 54%, 55% and 54%, respectively, 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 through December 31, 2013. On a same-unit basis, however, the gross amount billed to patients covered under government programs for the years ended December 31, 2013, 2012 and 2011 represented approximately 56%, 56% and 55%, respectively, of our total gross patient service revenue. Same units are those units at which we provided services for the entire current period and the entire comparable period.

Quarterly Results

We have historically experienced and expect to continue to experience quarterly fluctuations in net patient service 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 patient service revenue. The majority of physician services provided by our office-based and anesthesia 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 17 to the 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.

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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. Almost all of our patient service revenue is reimbursed by government-sponsored healthcare 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 accounts receivable, evaluation of expected adjustments and delinquency rates, past adjustments and collection experience in relation to amounts billed, an aging of accounts receivable, current contract and reimbursement terms, changes in payor mix and other relevant information. Contractual adjustments result from the difference between the physician rates for services performed and the reimbursements by government-sponsored healthcare programs and insurance companies 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, 2013, 2012 or 2011.

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 patient service revenue. Our net patient service 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, 2013, our DSO was 46.3 days. We had approximately $997.7 million in gross accounts receivable outstanding at December 31, 2013, 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 patient service revenue of approximately $5.0 million to $15.0 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 16 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 three and one half 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

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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 in our actuarial valuations on a routine basis, and as of December 31, 2013, based on our historical experience, a reasonably likely change of 4.0% to 8.0% in our estimates would result in an increase or decrease to net income of approximately $2.2 million to $4.4 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 cost over the fair value of the net assets acquired. We test goodwill for impairment at a reporting unit level on an annual basis. The testing for impairment is completed using a two-step test. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, a second step is performed to determine the amount of any impairment loss. We use income and market-based valuation approaches to determine the fair value of our reporting units. These approaches focus on discounted cash flows and market multiples based on our market capitalization to derive the fair value of a reporting unit. 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.

Uncertain Tax Positions

We account for uncertainty in income taxes in accordance with the accounting guidance for uncertain tax positions. This guidance prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also requires policy disclosures regarding penalties and interest and disclosures regarding increases and decreases in uncertain tax positions as a result of tax positions taken in a current or prior period, settlements with taxing authorities and any lapse of an applicable statute of limitations. Additional qualitative discussion is required for any tax position that may result in a significant increase or decrease in uncertain tax positions within a 12-month period from our reporting date. Accounting for uncertain tax positions under this guidance requires significant judgment and analyses as well as assumptions about future events. Future changes to our analyses and assumptions related to uncertain tax positions may have a material impact on our Consolidated Financial Statements.

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.

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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain information related to our operations expressed as a percentage of our net patient service revenue (patient billings net of contractual adjustments and uncollectibles, and including administrative fees):

Years Ended December 31, 2013 2012 2011 Net patient service revenue 100.0 % 100.0 % 100.0 % Operating expenses: Practice salaries and benefits 63.2 62.2 61.1 Practice supplies and other operating expenses 3.8 4.0 4.2 General and administrative expenses 10.1 10.7 10.7 Depreciation and amortization 1.9 1.7 1.6 Total operating expenses 79.0 78.6 77.6 Income from operations 21.0 21.4 22.4 Other (expense) income, net (.2 ) (.1 ) (.2 ) Income from continuing operations before income taxes 20.8 21.3 22.2 Income tax provision 7.8 8.0 8.5 Net income 13.0 % 13.3 % 13.7 %



Year Ended December 31, 2013 as Compared to Year Ended December 31, 2012

Our net patient service revenue increased $337.4 million, or 18.6%, to $2.15 billion for the year ended December 31, 2013, as compared to $1.82 billion for 2012. Of this $337.4 million increase, $265.0 million, or 78.5%, was attributable to revenue generated from acquisitions completed after December 31, 2011. Same-unit net patient service revenue increased $72.4 million, or 4.2%, for the year ended December 31, 2013. The change in same-unit net patient service revenue was the result of an increase in revenue of approximately $70.3 million, or 4.1%, related to net reimbursement-related factors and a net increase of $2.1 million, or 0.1%, from higher overall patient service volumes. The net increase in revenue of $70.3 million related to reimbursement-related factors was primarily due to the favorable impact from the parity revenue recorded, continued improvements in managed care contracting and the flow through of revenue from modest price increases, partially offset by a slight decrease in revenue caused by an increase in the percentage of our patients being enrolled in government-sponsored programs. The increase in revenue of $2.1 million from higher patient service volumes includes increases in our other pediatric services, primarily newborn nursery services, and increases in our anesthesiology and maternal-fetal medicine services, partially offset by declines in our neonatal and pediatric cardiology services. Same units are those units at which we provided services for the entire current period and the entire comparable period.

Practice salaries and benefits increased by $230.4 million, or 20.4%, to $1.36 billion for the year ended December 31, 2013, as compared to $1.13 billion for 2012. This $230.4 million increase was primarily attributable to increased costs associated with new physicians and other staff to support acquisition-related growth and growth at existing units, of which $184.5 million was related to salaries and $45.9 million was related to benefits and incentive compensation.

Practice supplies and other operating expenses increased $10.6 million, or 14.7%, to $82.4 million for the year ended December 31, 2013, as compared to $71.8 million for 2012. The increase was primarily attributable to practice supply, rent and other costs related to our acquisitions, of which approximately $1.8 million was related to the net change in the fair value of contingent consideration liabilities.

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General and administrative expenses 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 group practices. General and administrative expenses increased $24.7 million, or 12.8%, to $218.2 million for the year ended December 31, 2013, as compared to $193.5 million for 2012. This increase of $24.7 million is attributable to the overall growth of the Company including acquisition-related growth. General and administrative expenses as a percentage of net patient service revenue were 10.1% for the year ended December 31, 2013 as compared to 10.7% for the year ended December 31, 2012 and grew at a rate considerably slower than the rate of revenue growth.

Depreciation and amortization expense increased by $9.2 million, or 29.7%, to $40.0 million for the year ended December 31, 2013, as compared to $30.8 million for 2012. The increase was primarily attributable to the amortization of intangible assets related to acquisitions.

Income from operations increased $62.6 million, or 16.1%, to $452.1 million for the year ended December 31, 2013, as compared to $389.5 million for 2012. Our operating margin was 21.0% for the year ended December 31, 2013, as compared to 21.4% for 2012. This decrease of 45 basis points was primarily due to the variability in margins related to the mix of practices acquired after December 31, 2011.

We recorded net interest expense of $3.7 million for the year ended December 31, 2013, as compared to $1.3 million for 2012. The increase in net interest expense was primarily due to higher outstanding borrowings and a higher effective interest rate on borrowings under our Line of Credit as well as increases in accretion expense related to our contingent consideration liabilities.

Our effective income tax rate was 37.4% for the year ended December 31, 2013, as compared to 37.9% for 2012.

Net income increased by 16.4% to $280.5 million for the year ended December 31, 2013, as compared to $240.9 million for 2012.

Diluted net income per common and common equivalent share was $2.78 on weighted average shares outstanding of 101.0 million for the year ended December 31, 2013, as compared to $2.42 on weighted average shares outstanding of 99.4 million for 2012. The increase of 1.6 million in our weighted average shares outstanding during 2013 is primarily due to the exercise of employee stock options, the vesting of restricted and deferred stock and the issuance of shares under our employee stock purchase plan ("Stock Purchase Plan"), partially offset by the impact of shares repurchased under the repurchase program approved by our board of directors in July 2013.

Year Ended December 31, 2012 as Compared to Year Ended December 31, 2011

Our net patient service revenue increased $228.4 million, or 14.4%, to $1.82 billion for the year ended December 31, 2012, as compared to $1.59 billion for 2011. Of this $228.4 million increase, $179.0 million, or 78.4%, was attributable to revenue generated from acquisitions completed after December 31, 2010. Same-unit net patient service revenue increased $49.4 million, or 3.2%, for the year ended December 31, 2012. The change in same-unit net patient service revenue was the result of an increase of $29.9 million, or 1.9%, from higher overall patient service volumes and a net increase in revenue of approximately $19.5 million, or 1.3%, related to net reimbursement-related factors. The increase in revenue of $29.9 million from higher patient service volumes includes an increase of $24.2 million in neonatal and other services, including newborn nursery services and hearing screens and a net increase of $5.7 million from volume growth in our anesthesiology and maternal-fetal medicine services, partially offset by a decline in pediatric cardiology services. The net increase in revenue of $19.5 million related to reimbursement-related factors was primarily due to continued improvements in managed care contracting, an increase in the administrative fees received from our hospital partners due to the expansion of our services resulting from internal growth and the flow through of revenue from modest price increases,

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partially offset by a decrease in revenue caused by an increase in the percentage of our patients being enrolled in government-sponsored programs. Same units are those units at which we provided services for the entire current period and the entire comparable period.

Practice salaries and benefits increased by $160.5 million, or 16.5%, to $1.13 billion for the year ended December 31, 2012, as compared to $970.4 million for 2011. This $160.5 million increase was primarily attributable to increased costs associated with new physicians and other staff to support acquisition-related growth and growth at existing units, of which $121.9 million was related to salaries and $38.6 million was related to benefits and incentive compensation.

Practice supplies and other operating expenses increased $5.0 million, or 7.5%, to $71.8 million for the year ended December 31, 2012, as compared to $66.8 million for 2011. The increase was primarily attributable to practice supply, rent and other costs related to our acquisitions.

General and administrative expenses 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 group practices. General and administrative expenses increased $23.1 million, or 13.6%, to $193.5 million for the year ended December 31, 2012, as compared to $170.4 million for 2011. This increase of $23.1 million is attributable to the overall growth of the Company including acquisition-related growth. General and administrative expenses as a percentage of net patient service revenue were 10.7% for the years ended December 31, 2012 and 2011, and grew at a rate slower than the rate of revenue growth.

Depreciation and amortization expense increased by $5.5 million, or 21.8%, to $30.8 million for the year ended December 31, 2012, as compared to $25.3 million for 2011. The increase was primarily attributable to the amortization of intangible assets related to acquisitions and the depreciation of fixed asset additions.

Income from operations increased $34.1 million, or 9.6%, to $389.5 million for the year ended December 31, 2012, as compared to $355.4 million for 2011. Our operating margin was 21.4% for the year ended December 31, 2012, as compared to 22.4% for 2011. This decrease of 94 basis points was primarily due to an increase in operating expenses during the year ended December 31, 2012 as compared to the year ended December 31, 2011, as well as the variability in margins due to the mix of practices acquired after December 31, 2010.

We recorded net interest expense of $1.3 million for the year ended December 31, 2012, as compared to $2.1 million for 2011. The decrease in net interest expense was primarily due to lower outstanding borrowings on our Line of Credit as well as a lower effective interest rate on borrowings under our Line of Credit, market value increases in the investments underlying our deferred compensation arrangements and an increase in interest income, partially offset by an increase in fees related to our Line of Credit.

Our effective income tax rate was 37.9% for the year ended December 31, 2012, as compared to 38.3% for 2011.

Net income increased by 10.5% to $240.9 million for the year ended December 31, 2012, as compared to $218.0 million for 2011.

Diluted net income per common and common equivalent share was $2.42 on weighted average shares outstanding of 99.4 million for the year ended December 31, 2012, as compared to $2.23 on weighted average shares outstanding of 97.6 million for 2011. The increase of 1.8 million in our weighted average shares outstanding during 2012 is primarily due to the exercise of employee stock options, the vesting of restricted stock and the issuance of shares under our Stock Purchase Plan.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2013, we had $31.1 million of cash and cash equivalents on hand as compared to $21.3 million at December 31, 2012. Additionally, we had working capital of $82.0 million at December 31, 2013, a

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decrease of $8.7 million from our working capital of $90.7 million at December 31, 2012. This net decrease in working capital is primarily due to the use of funds for practice acquisitions, repurchases of our common stock, contingent purchase price payments and net repayments on our Line of Credit, largely offset by net income, proceeds from the issuance of common stock under our stock incentive and Stock Purchase Plan and an increase in our long-term deferred tax liabilities.

We generated cash flow from operating activities of $405.4 million, $324.9 million and $270.7 million for the years ended December 31, 2013, 2012 and 2011, respectively. The net increase of $80.5 million in cash flow provided from operating activities for the year ended December 31, 2013, as compared to the year ended December 31, 2012, was primarily due to improved operating results and a net increase in cash flow related to changes in the components of our accounts payable and accrued expenses, consisting primarily of a higher accrued incentive compensation liability, partially offset by a reduction in cash flow related to higher accounts receivable balances.

During the year ended December 31, 2013, accounts receivable increased by $37.3 million, as compared to an increase of $17.7 million for 2012. The increases in accounts receivable are primarily due to higher accounts receivable balances related to acquisitions, partially offset by improvements in cash collections at existing units.

Our accounts receivable are principally due from managed care payors, government payors, and other third-party insurance payors. We track our collections from these sources, monitor the age of our accounts receivable, and make all reasonable efforts to collect outstanding accounts receivable through our systems, processes and personnel at our corporate and regional billing and collection offices. We use customary collection practices, including the use of outside collection agencies, for accounts receivable due from private pay patients when appropriate. Almost all of our accounts receivable adjustments consist of contractual adjustments due to the difference between gross amounts billed and the amounts allowed by our payors. Any amounts written off related to private pay patients are based on the specific facts and circumstances related to each individual patient account.

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 was 46.3 days at December 31, 2013 as compared to 48.4 days at December 31, 2012. Our DSO improved by approximately two days, primarily as a result of improvements in cash collections at existing units and integration of acquisitions. See Application of Critical Accounting Policies and Estimates-Revenue Recognition for more information on our DSO.

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 Line of Credit. 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.

Cash flow provided from operating activities for the year ended December 31, 2012 was affected by a net increase in cash flow related to our accounts receivable, primarily due to improved cash collections at our existing units and improved operating results. Cash flow provided from operating activities for the year ended December 31, 2011 was affected by a net increase in cash flow from operations related to changes in the components of our accounts payable and accrued expenses, consisting primarily of changes in our accrued incentive compensation liability, changes in the current portion of our reserves for uncertain tax positions and improved operating results, partially offset by a reduction in cash flow related to higher accounts receivable balances and a net decrease in cash flow related to changes in our income tax liabilities, resulting primarily from higher estimated tax payments.

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During the year ended December 31, 2013, our net cash used in investing activities of $263.5 million included physician practice acquisition payments and contingent consideration payments of $238.0 million, capital expenditures of $15.7 million and net purchases of $9.8 million related to the purchase and maturity of investments. Our acquisition payments were related to the purchase of 11 physician practices, including six anesthesiology practices and five neonatology practices. Our capital expenditures were for medical equipment, computer and office equipment, leasehold and other improvements, software and furniture and fixtures. Under the accounting guidance for business combinations, payments of contingent consideration liabilities related to acquisitions completed prior to January 1, 2009 are presented as cash flows used in investing activities. Payments of contingent consideration liabilities related to acquisitions completed after January 1, 2009 are presented as cash flows used in financing activities up to the amount of fair value recorded at acquisition date with the portions of the payments related to accretion expense presented as cash flows used in operating activities.

During the year ended December 31, 2013, our net cash used in financing activities of $132.1 million consisted primarily of net payments on our Line of Credit of $117.0 million, the repurchase of $51.9 million of our common stock under the share repurchase program approved by our board of directors in July 2013 and the payment of $10.4 million for contingent consideration liabilities, partially offset by proceeds from the issuance of common stock under our Stock Purchase Plan of $28.7 million and excess tax benefits related to the exercise of employee stock options and the vesting of restricted and deferred stock of $18.6 million.

Our Line of Credit, which is guaranteed by substantially all of our subsidiaries and affiliated professional contractors, includes (1) a $75 million sub-facility for the issuance of letters of credit and (2) a $37.5 million sub-facility for swingline loans. The Line of Credit may be increased up to $1.0 billion, subject to the satisfaction of specified conditions. At our option, borrowings under the Line of Credit (other than swingline loans) bear interest at (1) the alternate base rate (defined as the highest of (i) the Wells Fargo Bank, National Association prime rate, (ii) the Federal Funds Rate plus 1/2 of 1.00% and (iii) one month LIBOR plus 1.00%) or (2) the LIBOR rate, as defined in the Line of Credit, plus an applicable margin rate ranging from 0.125% to 0.750% for alternate base rate borrowings and 1.125% to 1.750% for LIBOR rate borrowings, in each case based on our consolidated leverage ratio. Swingline loans bear interest at the alternate base rate plus the applicable margin rate. We are subject to certain covenants and restrictions specified in the Line of Credit, including covenants that require us to maintain a minimum fixed charge coverage ratio and not to exceed a specified consolidated leverage ratio, to comply with laws, and restrict us from paying dividends and making certain other distributions, as specified therein. Failure to comply with these covenants would constitute an event of default under the Line of Credit, notwithstanding our ability to meet our debt service obligations. The Line of Credit includes various customary remedies for the lenders following an event of default.

At December 31, 2013, we had an outstanding principal balance of $27.0 million on our Line of Credit. We also had outstanding letters of credit associated with our professional liability insurance program of $5.3 million which reduced the amount available on our Line of Credit to $767.7 million at December 31, 2013.

At December 31, 2013, we believe we were in compliance, in all material respects, with the financial covenants and other restrictions applicable to us under the Line of Credit. Based on our current expectations, we believe we will be in compliance with these covenants and other restrictions throughout 2014.

The exercise of employee stock options and the purchase of common stock by employees participating in our Stock Purchase Plan generated cash proceeds of $28.7 million, $28.8 million and $31.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. Because stock option exercises and purchases under the Stock Purchase Plan 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

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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 December 31, 2013 was $158.7 million, of which $19.3 million is classified as a current liability within accounts payable and accrued expenses in the Consolidated Balance Sheet.

We anticipate that funds generated from operations, together with our current cash on hand and funds available under our Line of Credit, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and capital expenditures, fund our share repurchase program and meet our contractual obligations as described below for at least the next 12 months.

CONTRACTUAL OBLIGATIONS

At December 31, 2013, we had certain obligations and commitments under our Line of Credit, capital leases and operating leases totaling approximately $113.7 million as follows (in thousands):

Payments Due 2015 2017 2019 Obligation Total 2014 and 2016 and 2018 and Later Line of Credit (1) $ 30,402$ 878$ 1,755$ 27,769 $ - Capital leases 235 92 143 - - Operating leases 83,047 24,521 33,087 16,041 9,398 $ 113,684$ 25,491$ 34,985$ 43,810$ 9,398



(1) Amounts include interest payments at the applicable rate as of December 31,

2013 and assumes the amount outstanding at December 31, 2013 will be paid on

the maturity date.

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, 2013, payments of up to $45.4 million may be due through 2018 under all contingent consideration provisions as follows (in thousands):

2014 $ 19.9 2015 12.9 2016 7.8 2017 2.7 2018 2.1 $ 45.4



At December 31, 2013, our total liability for uncertain tax positions was $23.3 million, and is included within other liabilities on our Consolidated Balance Sheet. The timing and amount of future cash flows for each year beyond 2013 cannot be reasonably estimated. See Note 11 to our Consolidated Financial Statements in this Form 10-K for more information regarding our uncertain tax positions.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2013, we did not have any off-balance sheet arrangements 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.

NEW ACCOUNTING PRONOUNCEMENTS

There were no new accounting pronouncements issued or effective during the year ended December 31, 2013 that had or are expected to have a material impact on our consolidated financial statements.

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