RadNet, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. RadNet operated 304 outpatient imaging centers across six states. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $244.4 | $230.0 | $475.8 | $459.0 |
| Income from operations | $15.9 | $14.2 | $15.0 | $20.9 |
| Net income (loss) attributable to RadNet common stockholders | $5.4 | $5.3 | $(1.9) | $4.1 |
| Basic and diluted EPS | $0.11 | $0.11 | $(0.04) | $0.09 |
| Adjusted EBITDA (non-GAAP) | $38.2 | $37.0 | $59.2 | $65.7 |
- Q2 revenue increased 6.3%; comparable-center revenue rose 4.2%. First-half revenue increased 3.7%; comparable-center revenue rose 2.8%.
- Q2 operating income margin was approximately 6.5%, versus 6.2% a year earlier. First-half margin was approximately 3.1%, versus 4.6%.
- First-half operating cash flow was $46.9, down from $50.2. Investing cash use was $61.1, principally including $45.1 of property and equipment purchases and $14.1 for imaging facilities. Financing cash use was $20.8. Cash fell to $16.3 from $51.3 at year-end 2017.
- At June 30, total debt obligations were $594.9, including $603.7 face value of first-lien term loans before discounts. The revolver had no borrowings; $109.3 was available after letters of credit. Working capital was $12.2, versus $43.7 at year-end.
Changes, business activity, and accounting
- Revenue growth reflected acquisitions and expansion, partly offset by weaker capitation revenue. On a comparable-center basis, first-half growth was 2.8%.
- First-half common-stockholder results shifted to a loss, and Adjusted EBITDA declined 9.9%. Management cited severe first-quarter winter weather in the Northeast and Mid-Atlantic, representing slightly over half of revenue; it said lost imaging appointments generally are not recovered in later periods.
- Operating costs increased, notably salaries and professional reading fees, reflecting physician staffing and added non-physician staff in reimbursement and self-pay operations. Medical supplies expense declined, in part due to vendor rebates and reduced pharmaceutical purchases.
- RadNet formed Beach Imaging with MemorialCare, retaining 60% control; acquired several imaging-center assets; and invested $2.0 in Nulogix and Turner Imaging. Four women’s imaging centers were classified as held for sale, with a sale anticipated within 12 months.
- ASC 606 adoption changed presentation: most amounts previously reported as bad-debt provision are treated as implicit price concessions reducing 2018 revenue. The company said adoption did not materially affect results; comparisons with 2017 should account for the presentation difference.
Outlook, risks, and unusual items
- No specific financial guidance was provided. Management said operating cash flow, available cash, and credit-facility availability should meet current liquidity needs, while noting liquidity depends on business and economic conditions.
- RadNet was in compliance with credit covenants. The term loans bear variable rates; two interest-rate caps cover $500 of notional principal through 2020. Management estimated a hypothetical 1% increase in adjusted Eurodollar rates would raise annual interest expense by $1.1 after the caps.
- Disclosure controls and internal control over financial reporting were deemed ineffective at June 30, 2018 due to an unremediated material weakness in IT-dependent manual controls over revenue completeness and accounts-receivable valuation. Remediation was ongoing.
- On June 30, the company factored $10.5 of receivables on a non-recourse basis at an approximate $0.44 cost; proceeds include cash and a 4% note receivable payable through August 2020. Management said factoring is not an integral working-capital financing source.
- Other risks include payer reimbursement and patient collection uncertainty, seasonality, high leverage and interest-rate exposure, and capital-intensive operations. Adoption of the new lease standard was expected to have a significant balance-sheet impact; the amount was still under evaluation. The company reported no litigation it believed would have a material adverse effect.
Key facts for investors to verify
- How much of revenue growth reflects acquisitions versus comparable-center volume, pricing, and payer mix.
- Whether staffing and other cost increases translate into improved collections and operating margins.
- Cash generation, capital spending, acquisition funding, debt reduction, and covenant headroom given the decline in cash and working capital.
- Progress and independent validation of remediation of the material weakness in revenue and receivables controls.
- Effects of variable rates, interest-rate caps, and lease-accounting adoption on future earnings, cash flows, and reported liabilities.