RadNet, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; compared with the corresponding 2012 periods. Amounts are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise. RadNet operated 248 outpatient diagnostic imaging centers across seven states and performed 2.26 million procedures in the first half.
Financial results
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Service fee revenue before bad-debt provision | $183.5 | $171.7 | $363.2 | $340.2 |
| Net service fee revenue | $176.5 | $165.4 | $349.5 | $327.4 |
| Operating income | $13.0 | $13.5 | $21.3 | $24.7 |
| Net income attributable to RadNet | $2.7 | $2.9 | $1.3 | $2.8 |
| Diluted earnings per share | $0.07 | $0.07 | $0.03 | $0.07 |
| Adjusted EBITDA (non-GAAP) | $30.0 | $31.4 | $55.6 | $60.5 |
- Reported net service fee revenue rose 6.8% in both Q2 and H1. However, same-center service fee revenue fell 5.2% in both comparisons, reflecting lower procedure volumes and weaker collection rates; acquisitions and other portfolio changes contributed to reported growth.
- Operating margin, measured against service fee revenue before bad debts, declined to 7.1% from 7.8% in Q2 and to 5.9% from 7.3% in H1. Cost of operations rose 8.9% in Q2 and 9.7% in H1, faster than reported revenue.
- Bad-debt provision was $7.0 million in Q2 and $13.8 million in H1, approximately 3.8% of service fee revenue in each period. Q2 net income also reflected a $2.5 million tax provision, versus $0.4 million a year earlier.
- H1 operating cash flow was $28.8 million, down from $40.8 million. Investing cash outflow was $26.7 million, including $28.3 million of property and equipment purchases and $3.6 million of facility acquisitions, partly offset by disposal proceeds. Financing cash outflow was $2.1 million; cash decreased $0.1 million to $0.25 million.
- At June 30, working capital was $41.8 million, up from $37.3 million at year-end. Current assets were $162.3 million and current liabilities $120.4 million; receivables were $139.4 million, up from $129.2 million. Cash was limited.
- Reported borrowings included $200 million face value of 10.375% senior notes due 2018, approximately $387.3 million face value of secured term debt, and $1.0 million drawn on the revolver. The balance sheet also reports other notes payable and capital lease obligations. Stockholders’ equity was $4.9 million, versus a $2.0 million deficit at year-end.
Changes, outlook, and risks
- Debt repricing: An April 2013 amendment added $40 million to the term loan and reduced its stated spreads over LIBOR and the alternative base rate by 1 percentage point. The company estimated approximately $19.9 million of interest savings over the comparable financing period on the prior $348.3 million principal. Quarterly term-loan amortization began at $975,000. The debt is secured and subject to financial covenants, including leverage and capital-expenditure limits; RadNet reported covenant compliance at quarter-end.
- Portfolio activity: RadNet acquired or increased interests in several imaging facilities and a breast surgery practice, acquired a 40% interest in an oncology center, and sold a New Jersey imaging center for $3.9 million, recording a $2.1 million gain. After quarter-end, it acquired four Manhattan imaging centers for $2.3 million.
- Management outlook: No quantified earnings or revenue guidance is stated in the provided filing text. Management believed operating cash flow, available cash, and borrowing availability would meet liquidity needs, while cautioning that economic and other factors beyond its control could require additional financing.
- Reimbursement and operating risks: CMS proposed changes to practice-expense relative value units that could reduce Medicare payments for some services; the affected codes had not yet been published. Management also cited lower same-center volume and collection rates. Bad-debt estimates depend partly on patient copay and deductible collection experience.
- Other disclosures: The company operates in a capital-intensive, high-fixed-cost business. Variable-rate debt creates interest-rate exposure. Certain physician entities are consolidated variable-interest entities; although their creditors lack recourse to RadNet’s general credit, RadNet may need to cover operating shortfalls. Management said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective; no material internal-control changes were reported.
Investor verification priorities
- Determine whether same-center volume and collection-rate declines continued, and how they affected revenue, bad debt, and margins.
- Review receivables aging and cash conversion, given receivables growth alongside lower H1 operating cash flow and minimal cash on hand.
- Confirm debt balances, maturity and refinancing requirements, covenant headroom, revolver availability, and realized savings from the April repricing.
- Assess the sustainability of reported earnings and EBITDA, including the one-time $2.1 million facility-sale gain, tax expense, and non-GAAP adjustments.
- Monitor the final CMS reimbursement rules, acquisition integration and performance, and any support needs arising from the physician-related entities.