RadNet, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited; dollar amounts below are in millions unless otherwise stated.
Business context
RadNet operated 212 diagnostic imaging facilities in six states and performed approximately 2.73 million imaging procedures during the first nine months of 2011. Services include MRI, CT, PET, mammography, ultrasound, and X-ray. The company reports one operating segment.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $150.8 | $140.1 | $452.7 | $403.2 |
| Income from operations | $10.2 | $11.4 | $33.2 | $25.7 |
| Operating margin | 6.8% | 8.1% | 7.3% | 6.4% |
| Net income (loss) attributable to RadNet common stockholders | $0.04 | ($0.29) | $2.7 | ($16.2) |
| Adjusted EBITDA (non-GAAP) | $27.0 | $28.0 | $83.2 | $76.0 |
Q3 diluted earnings per share were reported as $0.00; nine-month diluted EPS was $0.07, versus a loss of $0.44 in 2010. Nine-month interest expense was $39.3, compared with $35.5. Equity-method earnings from joint ventures were $6.1 for the first nine months, broadly unchanged from 2010.
Operating cash flow was $34.1 for the first nine months, down from $50.2. Investing cash outflow was $46.4, including $34.3 of property and equipment purchases and $13.7 for imaging-facility acquisitions; financing cash inflow was $11.9. Cash at September 30 was $0.254, versus $0.627 at year-end 2010. Working capital was $29.2, compared with $5.8 at year-end.
Total assets were $572.2 and total liabilities were $648.4 at September 30; equity deficit was $76.2. Major debt outstanding included $200.0 of senior notes, $280.7 of secured term-loan debt, and $31.3 drawn on the revolver. The senior notes carry a 10⅜% coupon and mature in 2018. The company reported compliance with debt covenants at quarter-end. It also reported a $6.8 liability for interest-rate swaps.
Material changes and notable items
- Revenue rose 7.7% in Q3 and 12.3% for the nine-month period. Same-center revenue fell 1.5% in Q3, which management attributed mainly to appointment cancellations at some East Coast centers due to Hurricane Irene and the August 23 earthquake; same-center revenue increased 1.5% for the nine-month period.
- Q3 operating income declined despite higher revenue: operating expenses grew faster than revenue, and the operating margin fell to 6.8% from 8.1%. For the nine-month period, operating margin improved to 7.3% from 6.4%.
- Nine-month net income improved against the 2010 loss, which included a $9.9 debt-extinguishment charge related to the April 2010 refinancing. 2011 results also included $3.7 of other income, primarily from fair-value changes in interest-rate swaps; these swaps no longer qualify as cash-flow hedges.
- RadNet completed several acquisitions in 2011, including Imaging On Call, five Maryland centers, and additional California facilities. After quarter-end, it agreed to acquire American Radiology Services and The Imaging Institute for approximately $38.0 in consideration, plus approximately $5.5 of debt obligations within two joint ventures.
- Accounts receivable increased to $122.0 from $96.1 at year-end. The cash-flow statement shows a $49.9 use of cash from receivables during the first nine months.
Outlook, risks, and contingencies
Management said operating cash flow, available cash, and borrowing capacity should be adequate for short- and long-term liquidity needs at current operating levels, while noting that future needs depend on economic and other factors and could require additional financing. No quantified earnings or revenue guidance is provided.
Management cited reimbursement uncertainty, including a projected 29.5% reduction in the 2012 Medicare Physician Fee Schedule absent Congressional action, as a potential risk to revenue and results. Other stated risks include acquisition integration and funding, access to credit, debt service and covenant compliance, competition, radiologist availability, and changes in technology and regulation. Management reported no indicators of goodwill or long-lived-asset impairment at September 30. It believes current litigation will not materially harm the business, but notes that additional lawsuits could arise.
A subsequent revolving-facility amendment increased borrowing capacity and raised the applicable LIBOR margin from 3.75% to 4.25%. The filing gives inconsistent figures for the increase and resulting facility size in different sections. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the post-quarter revolver amendment amount and total capacity: the filing cites both an increase of $21.25 million to $121.25 million and an increase of $21.5 million to $121.5 million.
- Assess whether receivables collection and operating cash flow can support capital spending, acquisitions, and substantial debt service, given the low quarter-end cash balance.
- Review the effect of Medicare reimbursement changes and same-center procedure trends on revenue and margins.
- Evaluate the American Radiology acquisition’s final consideration, funding, integration, and expected contribution; the announced agreement was subsequent to quarter-end.
- Distinguish recurring operating performance from reported results affected by swap fair-value changes and other non-GAAP adjustments, including Adjusted EBITDA.