RadNet, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet amounts are as of September 30, 2018, compared with December 31, 2017. Unaudited. RadNet operated 305 outpatient imaging centers across six states and reported one operating segment. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total net revenue | $242.1 | $227.6 | $717.9 | $686.6 |
| Income from operations | $16.4 | $10.8 | $31.4 | $31.7 |
| Net income attributable to RadNet common stockholders | $5.0 | $3.2 | $3.1 | $7.3 |
| Diluted EPS | $0.10 | $0.07 | $0.06 | $0.16 |
| Adjusted EBITDA | $38.1 | $36.1 | $97.3 | $101.8 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $87.9 | $75.6 |
- Revenue and margins: Q3 revenue grew 6.4%; operating margin was approximately 6.8%, versus 4.8% a year earlier. Nine-month revenue grew 4.6%, while operating margin was approximately 4.4%, versus 4.6%. Same-center revenue increased 2.5% in Q3 and 2.3% for the nine-month period.
- Cash flow and investment: Nine-month investing cash outflow was $81.6 million, including $62.6 million of property and equipment purchases and $17.4 million for imaging facilities. Financing cash outflow was $30.3 million. Cash declined to $27.2 million from $51.3 million at year-end 2017.
- Liquidity: Working capital was $23.6 million, down from $43.7 million. The $117.5 million revolving facility had no borrowings; $111.2 million remained available after $6.3 million reserved for letters of credit. Management said operating cash flow, cash and available credit were expected to meet liquidity needs.
- Debt: Total debt obligations, including capital leases and equipment notes, were $586.3 million; first-lien term-loan face value was $595.5 million, with a $579.5 million carrying balance net of unamortized discount. The term loans carry variable rates. RadNet reported compliance with all credit covenants.
Material changes and notable items
- Q3 operating income and attributable net income improved year over year. For the first nine months, attributable net income and Adjusted EBITDA declined; 2017 included a $3.1 million gain on sale of imaging centers and practices. Q1 2018 was also affected by unusually severe winter weather in the Northeast and Mid-Atlantic, which together represented slightly more than half of revenue; management said lost appointments were not generally made up later.
- Cost of operations rose 5.3% in both the quarter and nine-month comparison. Salaries and professional reading fees increased 8.6% in Q3 and 9.7% year to date, reflecting staffing and acquired operations. Revenue growth included acquisitions; same-center growth was lower than total growth.
- RadNet adopted ASC 606 on January 1, 2018. Most amounts previously shown as bad-debt provision are now treated as implicit price concessions and reduce reported revenue. The company said adoption did not materially affect results, but presentation differs from 2017, when bad debt was separately presented.
- During the period, RadNet formed Beach Imaging with MemorialCare, retaining a 60% controlling interest, and completed several imaging-center acquisitions. After quarter-end, it acquired 10 Long Island centers for $61.6 million, followed by three additional centers for a combined $5.2 million.
- A June 2018 non-recourse factoring transaction covered $10.5 million of receivables and incurred approximately $440,000 in costs. Proceeds included cash and a note receivable; approximately $1.3 million in principal had been received by September 30.
Outlook, risks and contingencies
- The filing provides no quantified forward guidance. Management described liquidity as adequate based on current operations, cash flows and available credit, while noting that future financing needs and access to financing depend on conditions and factors outside its control.
- Key exposures include high leverage and variable interest rates, reimbursement and payer-contract changes, collection risk on patient receivables, acquisition integration and capital needs, and seasonal or weather-related volume fluctuations. A hypothetical 1% increase in adjusted Eurodollar rates was estimated to increase annual interest expense by $955,000 after interest-rate caps.
- Management concluded disclosure controls were not effective at September 30, 2018 because a material weakness in revenue and accounts-receivable controls remained unremediated. Certain IT-dependent manual controls intended to ensure revenue completeness and reasonable receivable valuation were not performed timely or accurately, or reviewed with sufficient precision. Remediation was ongoing.
- Most leases will be recognized on the balance sheet under the new lease standard, which RadNet expected to adopt January 1, 2019 and said would have a significant financial-statement impact; the amount was still under evaluation. The company reported ordinary-course litigation and did not expect current matters to have a material adverse effect.
Important facts for investors to verify
- Reconcile year-over-year revenue and bad-debt presentation under ASC 606, and distinguish acquisition-driven growth from same-center performance.
- Track remediation of the material weakness in revenue and receivables controls and any related changes to estimates or reported results.
- Monitor debt balances, variable-rate exposure, covenant compliance, and remaining revolver availability as acquisitions and capital spending continue.
- Assess whether operating cash flow can support capital expenditures, debt service and announced acquisitions without additional financing.
- Review the integration, funding and expected contribution of the post-quarter acquisitions, including the $61.6 million Long Island transaction.