RadNet, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statements are unaudited. RadNet operates outpatient diagnostic imaging centers; it reported 309 centers across seven states and one reportable segment.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total net revenue | $216.4 million | $181.3 million; up 19.4% |
| Operating income (loss) | $3.0 million; 1.4% margin | $(1.9) million; (1.1)% margin |
| Net loss attributable to RadNet common stockholders | $(1.7) million; $(0.04) per share | $(4.6) million; $(0.11) per share |
| Adjusted EBITDA | $27.1 million | $20.2 million |
| Cash from operating activities | $21.0 million | $17.5 million |
| Cash used in investing activities | $27.8 million | $19.6 million |
| Cash and cash equivalents, March 31 | $0.4 million | $0.4 million at December 31, 2015 |
| Working capital, March 31 | $83.4 million | $72.4 million at December 31, 2015, based on balance-sheet totals |
| Senior secured term loans, carrying value | $614.2 million | Plus $16.3 million drawn on the $101.25 million revolving facility |
Revenue growth reflected both acquired facilities and organic improvement. Procedure volume increased to 1,496,909 from 1,211,797. Same-center service-fee revenue grew 3.3%; management attributed this mainly to milder East Coast weather and increased market awareness. Bad-debt provision rose 37.9% to $10.3 million, or 4.5% of service-fee revenue versus 4.0%, which RadNet attributed to greater use of high-deductible plans. Capitation revenue grew 9.0% to $25.9 million, primarily from new and acquired contracts.
Material changes and notable items
- Operating results improved to operating income from an operating loss, and the common-stockholder net loss narrowed. Cost of operations increased 16.5%, slower than revenue growth; management cited improved same-center labor efficiency, partly offset by higher insurance and technology licensing costs.
- Adjusted EBITDA increased by $6.9 million year over year. It is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
- Operating cash flow was positive, but capital spending and facility acquisitions exceeded it: $22.5 million of property and equipment purchases and $5.0 million for imaging facilities. Cash declined $36,000 during the quarter.
- RadNet acquired two Astoria, New York imaging centers on March 1 for $5.0 million; preliminary accounting recorded $1.3 million of goodwill.
- After quarter-end, RadNet agreed to contribute $2.2 million for a 55% stake in a planned Dignity Health joint venture. The transaction was scheduled to close June 1, 2016, with two Glendale centers expected to begin operations by quarter-end.
Outlook, risks and contingencies
- Management said operating cash flow, available cash and borrowing capacity were expected to meet liquidity needs, while cautioning that financing needs depend on economic and business conditions and that additional financing may not be available on acceptable terms. No specific earnings or revenue guidance is provided in the filing text.
- RadNet reported compliance with its credit-agreement covenants at March 31. Its debt is substantial, includes variable-rate borrowings, and is subject to amortization, financial covenants and restrictions on activities. The company cited debt service and capital needs as ongoing liquidity requirements.
- Management identified first-quarter seasonality from winter weather and annual resets of patient deductibles. Reimbursement changes and patient collection trends are also relevant risks. A 1% borrowing-rate increase was estimated to raise annual interest expense by $6.2 million on term loans, subject to the disclosed rate-floor mechanics.
- Disclosure controls and internal control over financial reporting were not effective at March 31 because of a material weakness involving IT general controls and technology-dependent manual controls for revenue and receivables. Management reported no known material misstatement and began remediation; failure or delay in remediation could permit future misstatements.
- RadNet consolidates certain physician groups as variable-interest entities and may need to support operating costs that exceed those groups’ revenues. The filing says ordinary-course litigation was not expected to have a material adverse effect, but future claims remain possible.
Important facts for investors to verify
- Whether revenue growth and same-center improvement continue, and how acquired operations contribute to results and margins.
- Bad-debt trends, receivable collections and the impact of high-deductible plans; accounts receivable reached $177.8 million from $162.8 million at year-end.
- Debt balances, maturities, amortization, covenant headroom, variable-rate exposure and availability under the revolving facility.
- Progress and testing of remediation for the revenue-and-receivables control weakness.
- The working-capital comparison: the balance-sheet figures imply $72.4 million at December 31, 2015, while one MD&A passage states $72.9 million; the filing does not explain the discrepancy.
- Completion, funding and operating performance of the announced Dignity Health venture.