American Shared Hospital Services — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 29, 2019. This is an annual report, not a standalone fourth-quarter report. The company provides Gamma Knife radiosurgery and radiation-therapy equipment and services to hospitals, and operates a Gamma Knife facility in Peru.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $19.714 million | $19.556 million |
| Gross margin | $7.486 million (38.0%) | $8.663 million (44.3%) |
| Operating income | $1.861 million | $2.413 million |
| Net income | $1.630 million | $2.940 million |
| Net income attributable to ASHS | $1.023 million; diluted EPS $0.17 | $1.923 million; diluted EPS $0.33 |
| Operating cash flow | $8.062 million | $7.853 million |
- Revenue was nearly flat year over year. Gamma Knife revenue declined 8.6% to $13.578 million as contracts expired and procedures fell 10.5% to 1,460. PBRT revenue increased 22.4% to $5.042 million; IGRT revenue rose to $1.094 million.
- Costs of revenue rose 12.3% to $12.228 million, including higher PBRT maintenance costs. Gross margin declined. Selling and administrative expense fell 7.6% to $3.994 million, and interest expense fell 15.4% to $1.631 million.
- FY 2017 earnings included a $1.546 million tax benefit from U.S. tax reform and a $579,000 Mevion investment impairment. Management says that, excluding these items and the 2016 debt-extinguishment loss for the comparative analysis, 2018 net income increased $45,000 versus 2017.
Liquidity, debt and cash flow
- Cash and cash equivalents were $1.442 million at year-end, down $710,000; restricted cash was $350,000. Working capital was positive $472,000, versus a $114,000 deficit a year earlier.
- Operating activities generated $8.062 million. Investing activities used $1.526 million, and financing activities used $7.246 million, principally for debt and lease principal payments and distributions to non-controlling interests.
- Combined long-term debt and capital leases were approximately $20.166 million, including $6.526 million due within one year. Trade receivables were $5.502 million, and days sales outstanding increased to 102 from 94.
- Management believes cash on hand, operating cash flow and other resources are adequate for scheduled debt and lease payments over the next 12 months. This assessment must be considered alongside substantial equipment commitments and the company’s limited cash balance.
Material changes, outlook and risks
- Revenue mix shifted as Gamma Knife revenue contracted and PBRT and IGRT grew. One customer represented approximately 26% of revenue in 2018; four customers together represented about 50%.
- The company has committed to purchase two additional PBRT systems for $34 million and had made $2.25 million of non-refundable deposits. It had no placement or financing agreements for those units and expects delivery to begin no later than 2023; failure to secure customers or an extension could put deposits at risk.
- Total contractual obligations were reported as $70.469 million, including debt and lease payments, future equipment purchases, service contracts and operating leases. Separately, disclosed equipment and service commitments totaled $45.758 million.
- A PBRT unit sustained water damage in 2018 and was out of service for two weeks. The company recorded $1.137 million of insurance receivable for repair coverage and $185,000 of business-interruption income; repair costs were approximately $977,000. Insurance amounts and related costs were settled after year-end.
- The company expects its existing IGRT contract, which is month-to-month, to terminate sometime in the second quarter of 2019. A new Gamma Knife site began treating patients in January 2019. Management provided no quantified earnings or revenue guidance.
- Key risks include reimbursement-rate changes, customer concentration and contract expirations, competition and technology obsolescence, high capital requirements and debt, and the ability to finance or place additional PBRT equipment. The PBRT service agreement may cost an additional $250,000 annually if a second unit is not placed at Orlando Health before September 2019.
- ASHS adopted ASC 606 in 2018 with no material retained-earnings impact. It expected adoption of the new lease standard in 2019 to add approximately $1.0 million of operating-lease right-of-use assets and liabilities, with no initial material income-statement effect.
Important facts for investors to verify
- Progress on customer placements and financing for the two committed PBRT systems, and the status and recoverability of the $2.25 million deposits.
- Whether the company’s customer concentration, contract expirations and falling Gamma Knife procedure volumes continue to pressure revenue.
- Cash conversion and collections, including the 102-day DSO, insurance receivable settlement, and capacity to meet near-term debt and lease payments.
- Whether the IGRT contract terminates as expected and whether the PBRT service-cost increase is triggered.
- Reconciliation of the filing’s various commitment totals and the financing assumptions underlying management’s liquidity assessment.
The auditor issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not express an opinion on internal control effectiveness.