RadNet, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparison with the same 2016 periods. Financial figures below are in millions of dollars unless stated otherwise. RadNet operated 295 outpatient imaging centers across six states.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total net revenue | $230.0 | $218.6 | $459.0 | $435.0 |
| Operating income | $14.2 | $8.1 | $20.9 | $11.1 |
| Net income attributable to RadNet common stockholders | $5.3 | $3.6 | $4.1 | $2.2 |
| Diluted earnings per share | $0.11 | $0.08 | $0.09 | $0.05 |
| Adjusted EBITDA | $37.0 | $35.1 | $65.7 | $62.2 |
- Revenue and growth: Revenue increased 5.2% in Q2 and 5.5% in the first half year over year. Same-center service-fee revenue rose 3.8% in Q2 and 4.8% in the first half; management attributed growth to reimbursement rates and procedure volumes, including advanced imaging. First-half procedures increased to 3.10 million from 3.06 million.
- Margins: Operating margin, calculated as operating income divided by reported net revenue, was approximately 6.2% in Q2 and 4.6% for the first half, versus 3.7% and 2.5%, respectively, in 2016. Common-stockholder net margin was approximately 2.3% in Q2 and 0.9% in the first half. Adjusted EBITDA is a non-GAAP measure.
- Cash flow and investment: First-half operating cash flow was $50.2 million versus $51.4 million. Investing activities used $46.0 million, including $42.6 million for property and equipment and $9.9 million for facility acquisitions, partly offset by sale proceeds. Financing activities used $12.1 million. Cash declined $7.9 million to $12.7 million.
- Liquidity: Working capital was $55.9 million, down from $62.6 million at year-end 2016. Accounts receivable were $170.2 million. The company said operating cash flow, cash and available credit should meet liquidity needs, while noting future requirements and financing depend on conditions beyond its control.
- Debt: Total debt obligations, including leases and other notes, were $629.0 million; senior secured term loans had $634.8 million face value and $618.9 million carrying value after discounts. The $117.5 million revolving facility had no balance outstanding. The company reported covenant compliance. First-lien pricing margins were reduced by 50 basis points to 3.25% over adjusted Eurodollar rates; second-lien debt bore 8.15% at June 30.
Material changes and notable items
- Operating income improved substantially year over year, while first-half net income benefited from stronger operations but was affected by higher income-tax expense ($3.1 million versus $0.8 million).
- Q2 2017 included a reported $2.3 million gain on imaging-center sales. First-half meaningful-use incentive income fell to $0.25 million from $2.8 million in 2016; the prior-year comparison also included a $5.0 million gain from return of common stock.
- During the first half, RadNet acquired several imaging operations, sold five Rhode Island centers and two oncology practices, and formed or expanded joint ventures. Subsequent events included a July sale of a 25% interest in a Maryland center for $3.9 million and an August acquisition of seven Delaware centers for $13.0 million cash plus $1.5 million in stock.
- At June 30, cash-flow hedges had a $2.0 million fair-value liability; the company reported a $1.7 million first-half loss in other comprehensive income. Management estimated a hypothetical 1% increase in adjusted Eurodollar rates would add $6.3 million to annual interest expense after the caps.
Outlook, risks and controls
- No specific financial guidance was provided. Management cited seasonality, including typically lower first-quarter volumes from winter weather and resets of patient deductibles.
- RadNet disclosed a material weakness in internal control over financial reporting involving revenue and accounts-receivable controls, including IT-dependent manual controls and IT general controls. Management said it was implementing remediation and was not aware of a material misstatement in the reported statements.
- Key business risks include high leverage and capital needs, variable interest rates, reimbursement and payor-mix changes, patient collection trends, and the possibility that remediation efforts may be insufficient or delayed. Management stated a 1% currency move would have a limited estimated annual operating-expense impact of about $31,000.
- The filing says ordinary-course litigation is ongoing, but management did not expect current matters to materially adversely affect the company. The interim results are unaudited and are not necessarily indicative of full-year results.
Investor verification priorities
- Track remediation and independent testing of the revenue and receivables control material weakness.
- Reconcile Adjusted EBITDA to GAAP results and assess the effects of sale gains, prior-year unusual items and tax-rate changes.
- Monitor debt repayment, refinancing and interest-rate exposure, including the second-lien maturity provisions and hedge coverage.
- Review receivables aging, bad-debt assumptions and collection trends, given the $170.2 million receivable balance.
- Assess acquisition and joint-venture returns, capital spending, and whether operating cash flow is sufficient for investment and debt service.