RadNet, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. RadNet operated 306 outpatient diagnostic imaging centers across seven states. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total net revenue | $224.6 | $208.4 | $659.6 | $593.9 |
| Income from operations | $12.5 | $17.2 | $23.5 | $28.7 |
| Net income attributable to RadNet common stockholders | $1.6 | $8.0 | $3.5 | $6.8 |
| Diluted EPS | $0.04 | $0.18 | $0.08 | $0.15 |
| Adjusted EBITDA, a non-GAAP measure | $35.9 | $35.3 | $98.1 | $89.1 |
- Q3 operating margin was approximately 5.5%, down from 8.3%; nine-month operating margin was 3.6%, down from 4.8%. RadNet-attributable net margin was approximately 0.7% versus 3.8% in Q3, and 0.5% versus 1.1% for nine months.
- Nine-month operating cash flow was $54.7 million, compared with $40.1 million. Investing cash use was $59.0 million, including $52.1 million of property and equipment purchases and $5.0 million for imaging-center assets. Financing cash provided was $4.2 million. Cash ended at just $0.4 million. Operating cash flow less reported property-and-equipment purchases was approximately $2.6 million, before acquisitions and other investing items.
- Accounts receivable was $183.2 million, up from $162.8 million at year-end 2015. Working capital was $85.1 million, compared with $72.4 million.
- At September 30, term-loan carrying value was $635.5 million, with $1.6 million drawn on the $117.5 million revolver; cash was $0.4 million. The company also reported capital-lease obligations of $9.8 million. It stated that it was in compliance with credit-facility covenants.
Changes versus comparable periods
- Revenue grew 7.8% in Q3 and 11.1% for nine months. Nine-month imaging procedures increased to 4.59 million from 4.18 million. Management reported same-center net service-fee revenue growth of 0.3% in Q3 and 2.8% for nine months; acquired or divested centers contributed materially to reported growth.
- Bad-debt provisions rose to $11.3 million from $9.4 million in Q3 and to $33.9 million from $25.3 million for nine months. As a share of service-fee revenue, provisions increased to 5.4% from 4.9% in Q3 and to 5.5% from 4.6% year to date.
- Operating costs grew faster than revenue in Q3: cost of operations rose 9.8%, while revenue rose 7.8%. Q3 severance was $2.2 million, primarily related to integrating New York acquisitions. Management cited higher insurance, contract labor, temporary services and legal costs; reduced vendor rebates also increased medical-supply expense.
- On July 1, RadNet refinanced and amended its first-lien facilities, increasing first-lien term loans to $485 million and the revolver to $117.5 million. Proceeds repaid prior first-lien debt, paid $12 million of second-lien principal, covered transaction costs and provided about $10 million for general purposes. First-lien pricing increased to Eurodollar plus 3.75% or base rate plus 2.75%; second-lien debt carried an 8% rate at quarter-end.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue guidance. Management said operating cash flow, available cash and borrowing availability were expected to cover liquidity needs, while noting that future liquidity and debt service depend on economic and business conditions and that additional financing might be needed.
- RadNet described its business as capital intensive and high fixed cost, and dependent on third-party financing to meet all capital needs. The company had substantial debt, variable-rate exposure and limited cash on hand. A hypothetical 1% borrowing-rate increase, once applicable above contractual floors, was estimated to increase annual interest expense by $4.8 million on first-lien debt and $1.7 million on second-lien debt.
- Disclosure controls and internal control over financial reporting were deemed ineffective at September 30, 2016 because a material weakness remained in revenue and accounts-receivable controls. Deficiencies involved IT access and program-change controls and related manual controls. Management reported no known material misstatement and described remediation efforts, but cautioned that failure to remediate timely could result in future misstatements.
- Unusual items included a $5.0 million non-cash gain in the first half from sellers’ return of 958,536 shares after errors were identified in pre-acquisition information for Diagnostic Imaging Group. Nine-month results also included $2.8 million of meaningful-use incentives; Q3 results included $2.2 million severance. Prior-year Q3 and nine-month comparisons included a $4.8 million gain on sale of imaging centers.
- Other risks noted include uncertainty in patient and insurer collections, reimbursement changes, acquisition integration, and potential seasonal volume weakness in first-quarter periods. The filing says ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the revenue-control material weakness is remediated and whether the remediation is tested and effective.
- Collections, receivables aging and bad-debt trends, given receivables growth and the higher provision rate.
- Same-center operating trends versus growth from acquired centers, and whether operating costs and margins improve.
- Debt-service capacity, revolver availability, covenant compliance and sensitivity to variable rates and refinancing terms.
- The sustainability of cash flow after equipment investment, acquisitions, integration costs and scheduled debt payments.