RadNet, Inc. — Q3 2017 Form 10-Q
Business context and period. For the quarter and nine months ended September 30, 2017; comparison periods are 2016. RadNet operated 298 outpatient diagnostic imaging centers across six states. The unaudited consolidated statements include certain physician groups treated as variable interest entities.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total net revenue | $227.6 | $224.6 | $686.6 | $659.6 |
| Income from operations | $10.8 | $12.5 | $31.7 | $23.5 |
| Net income attributable to RadNet common stockholders | $3.2 | $1.6 | $7.3 | $3.9 |
| Basic and diluted earnings per share | $0.07 | $0.04 | $0.16 | $0.08 |
| Adjusted EBITDA, non-GAAP | $36.1 | $35.9 | $101.8 | $98.1 |
- Revenue increased 1.3% in Q3 and 4.1% for the nine months. Nine-month imaging procedures rose 0.8%, to 4.62 million. Same-center net service-fee revenue increased 4.0%; management cited higher advanced-modality volumes and reimbursement rates. Capitation revenue rose 4.0% for the nine months.
- Operating income declined 13% in Q3 but increased 35% for the nine months. The filing reports operating margins of 4.5% and 4.4%, respectively, for those periods, using its stated revenue-margin presentation. Cost of operations rose 2.8% in Q3 and 3.1% for the nine months; Q3 rent and salaries increased, while medical-supply expense declined.
- Q3 net income benefited from a one-time $1.1 million tax benefit associated with reversal of a valuation allowance. Nine-month results also included $3.1 million of gains on sales of centers and practices; 2016 included a $5.0 million gain from return of common stock and $2.8 million of meaningful-use incentives, versus $0.25 million in 2017.
- Operating cash flow was $75.6 million, versus $54.7 million, for the nine months. Investing activities used $65.8 million, including $52.8 million of property and equipment purchases and $22.9 million of imaging-facility acquisitions. Cash declined $12.2 million to $8.5 million.
- At September 30, cash was $8.5 million, accounts receivable $168.6 million, and working capital $44.8 million. Total liabilities were $774.0 million. Debt obligations were $617.9 million, including $628.5 million face value of first-lien term loans less discounts; the revolving facility had no balance and $117.5 million was available. Stockholders’ equity was $74.0 million.
Changes, outlook and risks
- In August 2017, RadNet refinanced its second-lien loans with $170 million of incremental first-lien borrowings. The transaction eliminated the second lien but increased quarterly scheduled term-loan principal payments from about $6.1 million to $8.3 million. The amended agreement raised applicable interest margins after an initial period, with later pricing tied to leverage. The company reported compliance with all debt covenants.
- Management believed operating cash flow, available cash and borrowing availability would meet liquidity needs at current operating levels. It cautioned that future requirements depend on economic and other factors and additional financing might be needed. The filing provides no specific revenue or earnings guidance.
- Variable-rate debt creates interest-rate exposure. The company had $628.5 million subject to an adjusted Eurodollar election; interest-rate caps cover $500 million of notional amount through September and October 2020. A hypothetical 1% Eurodollar-rate increase was estimated to raise annual interest expense by $4.3 million after caps.
- Management identified seasonally lower first-quarter volume, partly from winter weather and high-deductible plan resets. Patient copayments and deductibles create collection risk; bad-debt provision was 5.5% of service-fee revenue in Q3.
- Material internal-control weakness: disclosure controls and internal control over financial reporting were deemed ineffective at September 30, 2017. Deficiencies involved revenue and receivables manual controls and IT general controls, including access, program changes and system operations. Management reported remediation efforts and said it was not aware of a material misstatement, but warned deficiencies could lead to future misstatements.
- Subsequent acquisitions included a New York imaging center for $3.9 million and RadSite for $1.0 million in stock plus $0.67 million cash. The company also noted that adoption of lease accounting rules was expected to significantly increase reported lease assets and liabilities.
Investor verification points
- Track remediation and independent testing of the revenue and receivables control weakness.
- Reconcile operating cash flow with receivables growth and assess collection trends, bad-debt estimates and patient-pay exposure.
- Review debt amortization, leverage-based interest margins, covenant headroom and capacity to fund capital spending and acquisitions.
- Separate recurring operating performance from the one-time tax benefit, disposition gains, meaningful-use incentives and non-GAAP Adjusted EBITDA adjustments.
- Assess acquisition integration and the expected balance-sheet impact of lease accounting; review the detailed risk factors and litigation disclosures in the full filing.