American Shared Hospital Services — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 29, 2013. The company provides Gamma Knife radiosurgery and image-guided radiation therapy equipment and services. Gamma Knife represented about 89% of revenue and IGRT about 11%.
Financial results
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $17.048 million | $22.221 million |
| Gross margin | $6.930 million (40.7%) | $7.997 million (36.0%) |
| Operating income, as reported | $730,000 | $1.589 million |
| Net income, consolidated | $813,000 | $1.489 million |
| Net income attributable to ASHS | $38,000; $0.01 per diluted share | $506,000; $0.11 per diluted share |
| Cash from operating activities | $6.871 million | $6.823 million |
- Revenue declined 23.3%, primarily because FY 2011 included $4.984 million from a one-time Gamma Knife equipment sale; there were no equipment sales in 2012. Medical-services revenue was $17.048 million versus $17.237 million.
- Gamma Knife medical-services revenue fell 5.8% to $15.154 million, while procedures increased 7.1% to 2,092. Average revenue per procedure declined 12.0% to $7,244, reflecting site and contract mix and lower revenue at certain locations.
- IGRT revenue rose 65.6% to $1.894 million, aided by a site operating for a full year after opening late in 2011.
- Costs of revenue were $10.118 million, or 59.4% of revenue, compared with $14.224 million, or 64.0%, in 2011. Selling and administrative expense was essentially flat at $4.045 million. Interest expense decreased to $2.155 million from $2.367 million.
Liquidity, cash flow and debt
- Year-end cash and cash equivalents were $1.564 million, down from $2.580 million; the company also held a $9.0 million certificate of deposit pledged as collateral for its credit line. Working capital was $6.303 million, versus $7.671 million.
- Operating cash flow of $6.871 million was largely supported by $6.096 million of depreciation and amortization. Investing used $6.665 million, mainly for property and equipment; financing used $1.222 million. Cash declined by $1.016 million over the year.
- Long-term debt and capital leases totaled $34.684 million at year-end, separate from $8.550 million drawn on a $9.0 million line of credit. The line matures August 2014; management intended to renew it. The company reported compliance with debt covenants.
- Contractual obligations totaled $89.498 million, including $40.008 million of future equipment purchases in the obligations table. Separately, notes describe approximately $48.195 million of equipment purchase commitments and $8.186 million of deposits and progress payments. Financing had not been obtained for all planned equipment.
Material changes, outlook and risks
- The American Taxpayer Relief Act of 2012 reduces Medicare outpatient Gamma Knife delivery-code reimbursement from $7,910 to $3,300 per treatment, effective April 1, 2013. The direct effect applies to five U.S. retail contracts; hospitals under fixed-fee contracts may also seek revised terms. Management estimated that, assuming a similar business mix, revenue could decline by $500,000–$650,000 and pretax income by $300,000–$400,000 over the final nine months of 2013. Actual impact was uncertain, and the company was pursuing legislative changes.
- ASHS had committed $3.0 million in deposits toward three Mevion proton therapy systems, with anticipated deliveries beginning in 2014. Mevion had obtained FDA clearance, but the technology remained development-stage and first-unit completion had been delayed. ASHS carried its Mevion investment at $2.687 million while estimating an unrealized loss of about $1.3 million; management considered the impairment temporary and did not record a write-down.
- Customer concentration is material: two customers represented approximately 13% and 11% of 2012 revenue, and six customers together accounted for more than half. The business also faces reimbursement, utilization, competition, technology-obsolescence, financing and international currency risks.
- Management said cash was adequate for 2013 needs and that the company met existing debt covenants. It provided no broader earnings or revenue guidance. Proton beam, OR21 and several international initiatives were not expected to generate significant near-term revenue.
- Other notable items: foreign-currency translation reduced comprehensive income by $637,000, producing a $319,000 comprehensive loss attributable to ASHS despite positive net income. The company repurchased about 9,000 shares for $28,000 and paid no dividends.
Important facts for investors to verify
- The realized reimbursement and contract impact of the April 2013 Medicare rate reduction, including any renegotiation of fixed-fee agreements.
- Whether the credit line was renewed on acceptable terms and whether planned equipment purchases received financing.
- Gamma Knife procedure volumes, revenue per procedure, and customer concentration after the loss of the contract associated with the 2011 equipment sale.
- Mevion system delivery, installation and clinical milestones, and whether ASHS’s investment or equipment deposits require impairment or additional funding.
- The composition and timing of equipment commitments: the filing’s obligations table and notes give different total purchase-commitment figures.