RadNet, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial statements are unaudited; dollar amounts below are in millions unless noted. RadNet operated 251 diagnostic imaging centers across seven states and reported one operating segment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total net revenue | $179.1 | $176.5 | $348.0 | $349.5 |
| Operating income | $15.6 | $13.0 | $23.2 | $21.3 |
| Net income (loss) attributable to RadNet common stockholders | $5.1 | $2.7 | $(7.3) | $1.3 |
| Diluted EPS | $0.12 | $0.07 | $(0.18) | $0.03 |
| Adjusted EBITDA (non-GAAP) | $33.4 | $30.0 | $61.1 | $55.6 |
- Q2 operating margin was approximately 8.7%, versus 7.4% a year earlier; six-month operating margin was 6.7%, versus 6.1%.
- Q2 revenue increased 1.5%, while six-month revenue declined 0.4%. Same-center service fee revenue fell 2.5% in both comparisons, reflecting lower procedure volumes and weaker collections. Procedure count for the first half rose to 2.38 million from 2.26 million.
- Capitation revenue increased 10.9% in Q2 and 8.5% for the first half, primarily due to new private-insurer contracts. Bad-debt provision increased to $7.5 million in Q2 and $14.4 million for the first half.
- First-half net loss principally reflects a $15.9 million loss on early extinguishment of senior notes. The period also included $1.8 million of meaningful-use incentive income.
Cash flow, liquidity, and debt
- First-half operating cash flow was $19.7 million, down from $28.8 million. Investing cash outflow was $29.5 million, including $26.8 million of property and equipment purchases; cash declined $7.6 million to $0.8 million.
- Working capital was $60.7 million at June 30, compared with $58.0 million at year-end. Accounts receivable rose to $147.0 million from $133.6 million. Stockholders’ deficit was $2.8 million.
- At June 30, senior secured term loans had carrying value of $576.7 million and the revolving credit facility had $19.0 million outstanding. The filing also reports capital-lease obligations of $15.1 million. The $200 million of 10⅜% senior notes was retired in April through a tender offer and redemption.
- The refinancing increased first-lien scheduled amortization from 1% to 5% annually; management estimated the added amortization at $16.8 million, partly offset by about $5.0 million of annual interest savings, for an approximately $11.8 million net increase in annual cash obligations. The second-lien loans bear a higher rate and mature in 2021; first-lien quarterly payments increased to about $5.2 million. The company said it was in covenant compliance at June 30.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided. Management believed operating cash flow, available cash, and facility borrowings would meet liquidity needs, but noted that financing access and debt-service capacity depend on conditions and factors outside its control.
- Key operating pressures include lower same-center service revenue and collections, higher bad-debt provisions, and Medicare sequestration cuts of 2% extended through 2015. The business is capital-intensive and seasonal; first-quarter volumes are typically weakest.
- Variable-rate debt creates interest-rate exposure. Management estimated that a 1% increase in relevant borrowing rates could add approximately $5.8 million in annual interest expense on Eurodollar borrowings, subject to rate floors and the filing’s assumptions.
- Disclosure controls and internal control over financial reporting remained ineffective at June 30, 2014 because of a material weakness in income-tax accounting. Management described remediation efforts, including stronger review of outside tax work and improved controls over uncertain tax positions.
- The company reported ordinary-course litigation and believed current matters would not materially adversely affect it. It also disclosed potential support needs for certain consolidated physician-group entities if their operating expenses exceed revenues.
Important facts for investors to verify
- Whether same-center procedure volumes and collections stabilize, and whether the rise in accounts receivable and bad-debt provisions continues.
- Cash generation after capital spending and the company’s ability to meet higher scheduled debt amortization while maintaining liquidity and covenant compliance.
- The effects of the refinancing, including actual interest costs, second-lien terms, and any further debt or capital-lease additions.
- Progress in remediating the tax-accounting material weakness and whether disclosure and financial-reporting controls become effective.
- Actual impact of Medicare reimbursement policy, payer mix, and new capitation contracts on revenue and margins.