RadNet, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Figures are in millions of dollars except per-share data. The unaudited filing covers RadNet’s outpatient diagnostic imaging operations, which comprised 300 centers across six states at quarter-end.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total net revenue | $231.4 | $229.0 |
| Operating income (loss) | $(0.9) | $6.7 |
| Net loss attributable to RadNet common stockholders | $(7.3); $(0.15) per share | $(1.2); $(0.03) per share |
| Adjusted EBITDA, non-GAAP | $21.0 | $28.7 |
| Cash from operating activities | $24.3 | $30.9 |
| Cash and cash equivalents | $35.0 | $51.3 at Dec. 31, 2017 |
| Working capital | $25.3 | $43.7 at Dec. 31, 2017 |
| Total assets / total liabilities | $923.6 / $807.3 | $869.0 / $799.1 at Dec. 31, 2017 |
- Revenue increased about 1.0%. Net service fee revenue was $204.2 million, versus $201.1 million, while capitation revenue declined 2.5% to $27.2 million.
- Operating expenses rose 4.5% to $232.3 million, exceeding revenue. Salaries and professional reading fees, excluding stock compensation, rose 7.6%; rent and equipment costs increased 8.1%. The $1.9 million equipment-sale gain partly offset operating costs.
- Reported operating margin was approximately negative 0.4%, compared with approximately 2.9% in Q1 2017. Adjusted EBITDA fell about 27% year over year.
- Investing activities used $29.8 million, including $23.9 million for property and equipment, $5.8 million for an imaging facility acquisition, and $2.2 million for investments. Financing activities used $10.8 million, primarily for scheduled debt and lease payments. Cash decreased $16.3 million during the quarter.
- Debt obligations totaled $604.0 million, including $612.0 million face value of First Lien Term Loans (reported net of discounts). The company had no revolver borrowings and reported $109.3 million available under its $117.5 million facility after letters of credit. It reported compliance with all credit covenants.
Material changes and management commentary
- Same-center service fee revenue was nearly flat; management estimated adverse East Coast weather reduced revenue by $5.9 million. Management also cited winter weather and January deductibles as typical first-quarter seasonality.
- Management attributed higher same-center payroll costs to staffing increases, wage and benefit increases, and a newly implemented 401(k) match. Capitation revenue declined partly because of lower enrollment in existing plans.
- RadNet adopted ASC 606 on January 1, 2018. Most amounts previously reported as bad-debt provision are now treated as implicit price concessions reducing revenue. The company said the presentation changed but adoption did not materially affect Q1 results or expected 2018 results; comparisons with 2017 therefore reflect different presentation.
- RadNet formed Beach Imaging with MemorialCare, contributing operations from 24 centers; MemorialCare contributed $22.3 million cash and $16.8 million in net assets. RadNet retained a 60% controlling interest and MemorialCare a 40% noncontrolling interest. RadNet also acquired a New York imaging center for $5.8 million. Four additional center acquisitions and a $2.0 million Nulogix investment closed in April, after quarter-end.
- Management said operating cash flow, available cash, and credit-facility availability should meet liquidity needs at current operating levels, while noting that future needs depend on economic and other factors beyond its control. No specific financial guidance or quantified outlook was provided.
Risks, contingencies, and unusual items
- Material control weakness: Disclosure controls and internal control over financial reporting were reported ineffective at March 31, 2018. Certain IT-dependent manual controls over revenue completeness and accounts-receivable valuation were not timely, accurate, or sufficiently reviewed. The weakness had persisted from prior years; remediation was ongoing.
- Leverage and interest rates: The company has substantial variable-rate debt. Interest-rate caps cover $500 million of notional borrowings through 2020; management estimated a 1% rate increase would add about $1.7 million of annual interest expense after the caps. Scheduled quarterly term-loan principal payments are about $8.3 million.
- Liquidity and collections: The business is capital-intensive and depends on collecting payer and patient receivables. Management noted that additional financing might be needed if operating cash and existing facilities are insufficient; availability on acceptable terms is not assured.
- Leases: The company expected adoption of the new lease-accounting standard, effective for it in 2019, to significantly affect its financial statements; the impact was still under evaluation.
- The filing reports ordinary-course litigation, with no current matter believed likely to have a material adverse effect. It also describes long-term radiology-group agreements and related-party medical-group arrangements. No impairment indicators for goodwill or long-lived assets were identified through quarter-end.
Important facts for investors to verify
- Whether the persistent revenue and receivables control weakness is remediated, and whether future filings report any related adjustments.
- Whether revenue growth, same-center performance, and operating costs improve after the weather-affected quarter; distinguish ASC 606 presentation changes from underlying trends.
- Cash conversion, receivables collections, capital spending, and liquidity relative to debt service and the reduced working-capital balance.
- Debt balance, leverage and covenant headroom, variable-rate exposure, and the effectiveness and coverage of interest-rate caps.
- Integration and performance of the Beach Imaging and other acquisitions, plus the financial impact of the post-quarter acquisitions and investments.