RadNet, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are to the corresponding 2013 periods. RadNet operated 263 diagnostic imaging centers across seven states and reported as one segment.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total net revenue | $184.1 million | $175.2 million | $532.0 million | $524.6 million |
| Income from operations | $15.2 million | $8.6 million | $38.4 million | $29.9 million |
| Net income (loss) attributable to RadNet common stockholders | $4.5 million | ($0.5 million) | ($2.8 million) | $0.9 million |
| Diluted EPS | $0.10 | ($0.01) | ($0.07) | $0.02 |
| Adjusted EBITDA (non-GAAP) | $33.4 million | $25.4 million | $94.5 million | $81.0 million |
Q3 operating margin was approximately 8.3% of net revenue, versus 4.9% a year earlier; nine-month operating margin was approximately 7.2%, versus 5.7%. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
- Revenue and activity: Q3 revenue rose 5.1%. Nine-month revenue increased 1.4%, while imaging procedures rose 5.4% to 3.57 million. Same-center service fee revenue declined 1.9% for the nine months, primarily reflecting lower procedure volumes; capitation revenue increased 13.0%, mainly from new private-insurer contracts.
- Costs and margins: Nine-month operating expenses declined slightly to $493.6 million from $494.7 million. Lower other operating costs and rent were partly offset by higher salaries, medical supplies, depreciation, and equipment-disposal losses. Management cited reduced maintenance-contract rates, license fees and insurance costs; equipment leases converted to capital leases also reduced rental expense.
- Cash flow and investment: Nine-month operating cash flow was $34.0 million, down from $42.5 million. Investing cash use was $43.9 million, including $33.9 million of property and equipment purchases and $9.4 million for imaging-facility acquisitions. Ending cash was $0.3 million, versus $8.4 million at year-end 2013.
Liquidity, debt and material changes
- At September 30, 2014, working capital was $65.7 million; current assets were $197.2 million and current liabilities $131.5 million. Accounts receivable increased to $155.0 million from $133.6 million at year-end.
- Carrying value of first- and second-lien term loans was $572.2 million; $25.1 million was drawn on the $101.25 million revolving facility. The $200 million senior notes were retired in April 2014 using proceeds from new first- and second-lien borrowing. Total debt and lease obligations are higher than the term-loan and revolver figures alone.
- Refinancing generated a $15.9 million nine-month loss on early extinguishment, contributing to the reported net loss. The first-lien scheduled amortization increased to $5.2 million quarterly from $975,000; the second-lien loans have no scheduled principal amortization and mature no later than March 2021. The second-lien rate is materially higher than the first-lien rate.
- Management said operating cash flow, available cash and borrowing capacity were expected to meet liquidity needs, while noting that financing needs depend on business and economic conditions. The company estimated the higher amortization, partly offset by interest savings, would increase annual net cash obligations by about $11.8 million.
- Stockholders’ equity was $2.6 million. The filing reports compliance with debt covenants as of September 30, 2014.
Outlook, risks and unusual items
- No specific forward revenue or earnings guidance is provided. Management described liquidity as adequate for current needs but warned that additional financing might be required if cash flows or other conditions deteriorate, with no assurance financing would be available on acceptable terms.
- Key exposures include high leverage and debt-service requirements, capital-intensive operations, payer reimbursement and collection trends, patient copayments and deductibles, and interest-rate changes. Medicare sequestration continued to reduce payments by 2% through 2015. The company estimated a 1% increase in borrowing rates could add approximately $5.8 million in annual interest expense after the applicable rate floors are exceeded.
- Q3 included a $1.3 million equipment-disposal loss, primarily from leasehold improvements at closed centers. Nine-month results included a $1.8 million Medicare meaningful-use incentive and the $15.9 million refinancing loss.
- Disclosure controls remained ineffective due to a material weakness in income-tax accounting. Management continued remediation efforts, including strengthened review and controls over uncertain tax positions.
- Management said current litigation was not expected to have a material adverse effect; future claims could still adversely affect the company. The filing also describes possible support needs for certain consolidated physician-practice entities if their expenses exceed revenues.
Important facts for investors to verify
- Whether operating cash flow and receivables collections can support increased scheduled debt amortization, capital spending and low cash balances.
- Current debt balances, applicable variable-rate elections, covenant headroom, and the terms and capacity available under the revolving facility.
- Whether same-center procedure volumes and service revenue recover, and whether capitation growth offsets weakness in fee-for-service revenue.
- Progress in remediating the income-tax accounting material weakness and the effect of any tax-accounting changes.
- Acquisition integration and returns, ongoing equipment-leasing commitments, and the amount and recurrence of disposal or refinancing-related charges.