RadNet, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance sheet compared with December 31, 2016. Amounts are in U.S. dollars; financial figures are in millions unless noted. RadNet operated 303 outpatient imaging centers across seven states and reported as one segment.
Financial performance and liquidity
- Revenue: Total net revenue was $229.0 million, up 5.8% from $216.4 million. Net service fee revenue rose 5.6% to $201.1 million; capitation revenue increased 8.0% to $27.9 million. Procedures performed increased 2.5% to 1.53 million.
- Profitability: Operating income increased to $6.7 million from $3.0 million. Operating margin was approximately 2.9%, versus 1.4%. Net loss attributable to RadNet common stockholders narrowed to $1.2 million from $1.4 million; loss per share was $0.03 in both periods. Adjusted EBITDA, a non-GAAP measure, rose to $28.7 million from $27.1 million.
- Costs and cash flow: Operating expenses rose 4.2% to $222.3 million, slower than revenue growth. Operating cash flow was $30.9 million, compared with $21.0 million. Investing cash outflow was $34.0 million, including $30.4 million in property and equipment purchases; financing cash outflow was $9.3 million. Cash declined $12.3 million to $8.3 million.
- Liquidity: Working capital was $49.5 million, down from $62.6 million at year-end. Accounts receivable increased to $169.5 million from $164.2 million. The $117.5 million revolving facility had no borrowings outstanding at quarter-end.
- Debt: Total debt obligations were $635.9 million, including $624.3 million of term loans net of discounts; term-loan face value was $640.9 million. The first-lien margin was cut by 50 basis points in February. The second-lien rate was 8.15% at quarter-end. RadNet reported covenant compliance.
Changes versus Q1 2016
- Same-center service fee revenue increased 5.3%; same-center MRI, CT and PET volumes rose 3.8%. Management attributed growth to higher reimbursement rates and procedure volumes.
- Same-center capitation revenue increased 8.2%, reflecting 4% growth in insured members and a 4.2% annualized reimbursement-rate increase.
- Bad-debt provision increased 13.0% to $11.6 million, or 5.5% of service fee revenue, from 5.1% a year earlier.
- Other operating expenses rose 10.1%, including costs for a new company-wide billing system and legal, temporary staffing and collections services. Medical supplies expense declined 7.9%, attributed to supplier contract renegotiations and inventory controls.
- Meaningful-use incentive income fell to $0.25 million from $2.8 million, partly offsetting operating improvement. Equity earnings from joint ventures declined to $1.9 million from $2.3 million.
Outlook, risks and notable items
- No specific financial guidance was provided. Management said available cash, operating cash flow and credit-facility availability were expected to meet liquidity needs, while noting future requirements for working capital, capital spending and debt service and the possibility that additional financing may be needed.
- Management noted typical first-quarter seasonality from winter weather and patients’ high-deductible plans resetting in January.
- RadNet identified a material weakness in revenue and accounts-receivable controls: certain IT-dependent manual controls and IT general controls were not operating effectively. Disclosure controls and internal control over financial reporting were deemed ineffective at March 31. Management reported no known material misstatement and began remediation, including improved control execution, system streamlining and access-control improvements.
- Interest-rate caps cover $500 million of variable-rate exposure through 2020. Management estimated a 1 percentage-point rate increase would raise annual interest expense by $6.2 million after the caps.
- Acquisitions during the quarter included two imaging centers and one MRI center. Subsequent events included Cedars-Sinai joint ventures, the sale of five Rhode Island centers for approximately $5.0 million on May 1, and the purchase of a Maryland center for approximately $2.4 million on May 3.
- RadNet described ordinary-course litigation and stated it did not expect current cases to have a material adverse effect. It also noted that the consolidated professional-service entities include variable-interest entities associated with senior executives; RadNet may need to cover their operating shortfalls.
Key facts for investors to verify
- Progress and effectiveness of remediation for the material weakness, particularly controls over revenue completeness and receivables valuation.
- Whether revenue growth and improved operating income translate into sustained cash generation, given capital expenditures, receivables growth and low quarter-end cash.
- Debt-service capacity and sensitivity to interest rates, including the terms and maturity conditions of the first- and second-lien facilities.
- Bad-debt trends, collections and payor mix, along with the economics and integration of acquisitions, divestitures and joint ventures.
- Quarterly comparability: Q1 is seasonally weak, and the 2016 comparison reflects early adoption of stock-compensation accounting that increased the reported tax benefit and reduced the comparative loss.