RadNet, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are to the corresponding 2014 periods. Financial amounts below are in U.S. dollars. The company operated 280 imaging centers across seven states and reported one operating segment.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total net revenue | $208.4 million | $184.1 million | $593.9 million | $532.0 million |
| Income from operations | $17.2 million | $15.2 million | $28.7 million | $38.4 million |
| Net income (loss) attributable to RadNet common stockholders | $8.0 million | $4.5 million | $6.8 million | $(2.8) million |
| Diluted EPS | $0.18 | $0.10 | $0.15 | $(0.07) |
| Adjusted EBITDA | $35.3 million | $33.4 million | $89.1 million | $94.5 million |
- Q3 revenue increased 13.2%; nine-month revenue rose 11.6%. Same-center service fee revenue grew 4.0% in Q3 and 3.8% for nine months. Management attributed growth to higher procedure volumes and acquisitions; nine-month procedures increased to 4.18 million from 3.57 million.
- Capitation revenue rose 21.5% in Q3 and 31.5% for nine months, with same-center growth attributed mainly to expanded private-insurer contracts.
- Operating margin was approximately 8.3% in Q3 versus 8.3% a year earlier, and 4.8% for nine months versus 7.2%. Nine-month Adjusted EBITDA declined despite higher revenue.
- Bad-debt provision increased to $9.4 million in Q3 from $7.5 million and to $25.3 million for nine months from $21.9 million. It represented 4.9% and 4.6% of service fee revenue, respectively, versus 4.4% in both comparable periods.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $40.1 million, up from $34.0 million. Investing activities used $43.6 million; financing activities provided $39.4 million. Cash at September 30 was $36.1 million, compared with $0.3 million at year-end 2014.
- Working capital was $119.8 million, up from $58.7 million at December 31, 2014. Accounts receivable were $159.2 million.
- Carrying value of senior secured term loans was $626.9 million, net of $10.3 million in discounts; reported notes payable, including current portion, totaled approximately $630.1 million. The $101.25 million revolver had no borrowings outstanding. The company reported compliance with financial covenants.
- First-lien term loans generally bear interest at Eurodollar plus 3.25% (with a 1% floor); second-lien loans bear Eurodollar plus 7% (also with a 1% floor). The disclosed second-lien rate was 8%. Nine-month interest expense was $31.0 million, down from $32.5 million.
- Management said operating cash flow, available cash and credit-facility borrowings should meet liquidity needs. It also noted increased scheduled first-lien amortization: approximately $20.8 million more annually than pre-amendment terms, partly offset by estimated annual interest savings of $5.0 million.
Material changes, unusual items and outlook
- Q3 included a $4.8 million gain from selling 10 New Jersey imaging centers to a 49%-owned joint venture for $35.5 million. The gain contributed to reported income and should be distinguished from recurring operating performance.
- Other nine-month non-operating income included $3.3 million of Medicare meaningful-use incentives, versus $1.8 million in 2014. Equity earnings from joint ventures increased to $6.3 million from $4.7 million.
- Q3 and nine-month results included acquisitions, including 11 New York Radiology Partners centers acquired in April for $29.8 million cash plus a $1.5 million seller note. Other 2015 acquisitions included six California centers and individual centers in New York and California.
- After quarter-end, on October 16, RadNet acquired substantially all assets of Diagnostic Imaging Group for approximately $56.7 million cash and 1.5 million shares, with potential revenue-based earn-outs; the deal added 17 New York City-area locations.
- No numerical earnings or revenue guidance was provided in the supplied filing text. Management cited a capital-intensive, high-fixed-cost business, reliance on external financing for some capital needs, and uncertainty around future economic and financing conditions. It also described first-quarter seasonality from winter weather and high-deductible plan resets.
- Other risks include variable-rate debt exposure, restrictive debt covenants, payer and patient collection trends, and integration and funding needs associated with acquisitions. A hypothetical 1% rise in borrowing rates was estimated to increase annual interest expense by $6.4 million on first- and second-lien term loans. Management reported no material expected adverse impact from current litigation and stated disclosure controls were effective.
Investor verification points
- Separate organic growth from acquisition and divestiture effects; verify same-center procedure volume, revenue, and cost trends.
- Assess the quality and collectability of receivables, given the rising bad-debt provision and patient copayment and deductible exposure.
- Review cash generation against capital spending, scheduled debt amortization, interest costs, and the post-quarter Diagnostic Imaging Group acquisition consideration and earn-outs.
- Evaluate recurring earnings apart from the New Jersey sale gain and meaningful-use incentives, and reconcile GAAP results with Adjusted EBITDA.
- Confirm debt covenant headroom, refinancing and rate exposure, and the assumptions underlying management’s liquidity assessment.