RadNet, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. RadNet operated 248 diagnostic imaging centers across seven states. Results are unaudited. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Service fee revenue before bad debt provision | $179.8 million | $168.5 million | Up 6.7% |
| Bad debt provision | $6.8 million | $6.5 million | 3.8% of revenue in both periods |
| Net service fee revenue | $172.9 million | $162.0 million | Up 6.7% |
| Operating income | $8.3 million | $11.3 million | Operating margin on pre-provision revenue: 4.6% vs. 6.7% |
| Net loss attributable to RadNet common stockholders | $1.3 million | $111,000 | Loss widened; diluted loss per share was $0.03 vs. effectively $0.00 |
| Adjusted EBITDA | $25.6 million | $29.1 million | Down approximately 12%; non-GAAP measure |
| Cash from operating activities | $15.2 million | $15.4 million | Nearly unchanged |
| Cash used in investing activities | $14.4 million | $12.8 million | Higher facility acquisition spending |
| Cash used in financing activities | $0.7 million | $3.3 million | Primarily principal payments, partly offset by line-of-credit borrowings |
Financial position and debt
- At March 31, cash was $431,000, accounts receivable $134.9 million, and working capital approximately $39.2 million. Total assets were $727.1 million.
- Total liabilities were $725.5 million. Stockholders’ equity was $1.6 million, compared with a $2.0 million deficit at December 31, 2012.
- Debt included $200 million par value of senior notes, $348.25 million par value of senior secured term loans, and $34.5 million outstanding on the revolving credit facility. The balance sheet reports debt carrying amounts net of discounts; capital lease obligations were additional.
- Cash was low relative to debt, and RadNet described its business as capital-intensive and reliant on financing. Management believed operating cash flow, available cash, and credit-facility availability would meet liquidity needs, while warning that future conditions or financing availability could affect that ability.
Changes, outlook and risks
- Reported revenue growth included acquired operations. For centers operating in both periods, service fee revenue decreased 7.1%; management cited one fewer workday in Q1 2013 than leap-year Q1 2012 and unusually mild prior-year Northeast winter conditions. Q1 2013 included $24.1 million of revenue from centers acquired after January 1, 2012.
- Cost of operations rose 10.5% to $149.6 million, faster than revenue; it increased from 80.4% to 83.2% of pre-provision revenue. Management attributed changes partly to acquired centers and lower same-center procedure volumes.
- On April 3, 2013, after quarter-end, RadNet amended its credit agreement: it borrowed an additional $40 million and reduced the term-loan spread over LIBOR from 4.25% to 3.25% and over the base rate from 3.25% to 2.25%. The amendment also lowered the LIBOR floor from 1.25% to 1.0%. This is a subsequent event, not part of March 31 debt balances.
- During the quarter, RadNet acquired imaging facilities in Brooklyn and Manhattan, acquired a breast surgery practice, increased its stake in a Manhattan joint venture to controlling ownership, and sold a 10% interest in two Maryland centers.
- Medicare reimbursement is a significant risk. The filing describes uncertainty around the sustainable growth rate formula, possible future payment reductions, and 2014 equipment-utilization assumption changes. CMS’s 2014 Medicare Advantage rate estimate assumed congressional action and a 0% physician-fee-schedule change; RadNet cautioned that outcomes were uncertain.
- Other risks include patient copayment and deductible collection trends, variable-rate debt exposure, acquisition integration and financing needs, and the possibility that additional financing may not be available on acceptable terms. Management reported compliance with debt covenants at March 31. Ordinary-course litigation was not expected by management to have a material adverse effect.
- No specific financial guidance was provided. Management’s liquidity assessment was qualified by economic and business uncertainties. Disclosure controls were assessed as effective; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Confirm the company’s underlying same-center procedure volumes and revenue trends, and the contribution and integration performance of acquired facilities.
- Track collections, accounts-receivable growth, and bad-debt provisions, particularly patient copayments and deductibles.
- Review the April 3 refinancing amendment’s effect on total debt, interest expense, available revolver capacity, covenant headroom, and future maturities.
- Assess the durability of operating cash flow against capital expenditures, acquisition spending, and debt service; cash at quarter-end was only $431,000.
- Reconcile inconsistent figures in the filing’s MD&A text: its liquidity discussion includes values that conflict with the primary statements, while the financial statements report a $1.3 million attributable net loss, $1.6 million equity, and approximately $39.2 million working capital.