RadNet, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2014; unaudited consolidated results. RadNet provides outpatient diagnostic imaging and operated 250 centers across seven states, directly or through joint ventures. The company reported 1,115,847 imaging procedures, compared with 1,112,967 in Q1 2013.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total net revenue | $168.9 million | $172.9 million; down 2.3% |
| Operating income | $7.5 million | $8.3 million |
| Net loss attributable to RadNet common stockholders | $12.4 million; $0.31 per diluted share | $1.3 million; $0.03 per diluted share |
| Adjusted EBITDA (non-GAAP) | $27.7 million | $25.6 million |
| Cash from operating activities | $(4.9) million | $15.2 million provided |
| Cash used in investing activities | $18.2 million | $14.4 million |
Service fee revenue before bad-debt provision declined 3.0% to $158.8 million; capitation revenue grew 6.1% to $17.0 million. Cost of operations decreased 3.0% to $145.0 million, while depreciation and amortization increased 5.5% to $15.6 million. Interest expense was $11.8 million, down from $12.1 million. The company recorded a $1.8 million meaningful-use incentive as other income.
At March 31, cash was $0.3 million, accounts receivable $140.6 million, working capital $61.4 million, and total stockholders’ equity was a deficit of $9.3 million. Cash fell from $8.4 million at year-end. Operating cash flow was affected by higher receivables and lower accounts payable and accrued expenses. Capital spending on property and equipment was $17.0 million; the company also added approximately $12.6 million of equipment capital-lease debt.
Material changes and financing
- Lower service-fee revenue was attributed mainly to fewer procedures at comparable centers amid severe East Coast winter weather. Capitation growth was attributed mainly to new private-insurer contracts. Procedure volume was slightly higher overall despite lower revenue.
- Q1 net loss included a $15.5 million loss on early extinguishment of senior notes. The loss substantially explains why reported net loss worsened despite higher Adjusted EBITDA.
- On March 25, RadNet borrowed $30 million of additional first-lien term loans and $180 million of second-lien term loans, using proceeds mainly to tender for and refinance senior notes. Holders tendered $193.5 million principal, or 96.73%, at total consideration of $1,056.88 per $1,000, plus accrued interest.
- At quarter-end, the filing reported $581.2 million of senior secured term-loan debt, net of discounts, $18.1 million drawn on the revolving facility, and $6.5 million of senior notes. The revolving facility has a stated $101.25 million capacity. Remaining senior notes were redeemed on April 24, 2014; the company said it would record an additional approximately $0.5 million extinguishment loss in Q2.
- First-lien scheduled quarterly amortization increased from $975,000 to approximately $5.2 million beginning June 2014. Management estimated the higher annual amortization would be partly offset by interest savings, leaving an approximately $11.8 million annual net increase in cash obligations. Second-lien loans bear a higher stated margin and have no scheduled principal amortization, with principal due at maturity in 2021 or earlier upon acceleration.
Outlook, risks, and controls
Management said operating cash flow, available cash, and borrowing availability under senior secured facilities should meet short- and long-term liquidity needs, while cautioning that economic, business, and other factors could require additional financing and that acceptable financing may not be available. The company said it was in compliance with its debt covenants at March 31, 2014. No numerical revenue or earnings guidance was provided in the supplied filing text.
Risks discussed include weather-related disruptions and closures, Medicare and other third-party reimbursement changes, patient collection trends and high deductibles, capital and debt-service requirements, and interest-rate exposure. Medicare sequestration cuts were extended through 2015; Congress delayed the SGR formula for another year. Management also disclosed that disclosure controls and internal control over financial reporting remained ineffective because of a material weakness in income-tax accounting controls. Remediation efforts were ongoing. The company said existing ordinary-course litigation was not expected to have a material adverse impact.
Important facts for investors to verify
- Whether receivables and collections improve, and whether operating cash flow recovers from the Q1 use of cash.
- Debt terms, available revolver capacity, higher required amortization, interest-rate sensitivity, and ongoing covenant compliance.
- The effect of the senior-note redemption and related Q2 charge on interest expense, cash, and reported earnings.
- Progress in remediating the income-tax accounting material weakness and restoring effective controls.
- Whether weather, reimbursement rates, patient cost-sharing, and capitation growth continue to affect procedure revenue and margins.