RadNet, Inc. — Q3 2012 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2012. RadNet operated 236 diagnostic imaging centers in seven states, directly or through joint ventures, and reported one operating segment. Unless otherwise stated, figures below are in millions of dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Service fee revenue before bad-debt provision | $167.0 | $148.6 | $507.3 | $446.0 |
| Net service fee revenue | $160.5 | $143.0 | $487.8 | $429.8 |
| Income from operations | $13.8 | $11.0 | $38.6 | $35.5 |
| Net income attributable to RadNet shareholders | $5.1 | $0.04 | $7.9 | $2.7 |
| Diluted earnings per share | $0.13 | $0.00 | $0.20 | $0.07 |
| Adjusted EBITDA (non-GAAP) | $28.6 | $27.0 | $89.1 | $83.2 |
- Revenue increased 12.4% in Q3 and 13.7% year to date. However, comparable centers’ service fee revenue declined 1.1% in Q3 and 0.5% for the nine-month period, primarily reflecting lower procedure volumes. Acquired centers contributed $21.7 million of Q3 and $73.1 million of nine-month 2012 revenue in the company’s stated acquisition-excluded comparisons.
- Operating income was 8.3% of service fee revenue before bad-debt provision in Q3, versus 7.4% a year earlier; for nine months, it was 7.6%, versus 8.0%. Cost of operations rose faster than revenue overall, while the Q3 comparison benefited from a $1.4 million purchase-accounting depreciation reduction.
- Bad-debt provision rose to $6.6 million in Q3 and $19.5 million year to date, equal to 3.9% and 3.8% of service fee revenue, respectively, compared with 3.7% and 3.6% in 2011.
- Operating cash flow was $55.6 million for nine months, up from $34.1 million. Investing cash outflow was $43.7 million and financing cash outflow was $14.0 million. Cash declined by $2.1 million to $0.4 million.
- Working capital was $31.3 million, compared with $30.0 million at December 31, 2011. Total assets were $625.0 million; total liabilities were $684.3 million and equity deficit was $59.2 million.
Debt, liquidity, and material changes
- At September 30, stated debt included $200.0 million of senior notes, $277.9 million of senior secured term loans, and $59.8 million drawn on the revolving facility. RadNet reported $61.45 million of available revolver capacity, subject to borrowing conditions, and compliance with debt covenants at quarter end.
- On October 10, 2012, after quarter end, the company refinanced its secured facilities with a $350 million term loan and a $101.25 million revolving facility. Both are floating-rate; the stated pricing is LIBOR (with a 1.25% floor for the term loan) plus a 4.25% margin. The new facilities are secured by substantially all company and specified affiliate assets. The filing says proceeds repaid prior secured facilities and certain other indebtedness and covered transaction costs.
- RadNet stated that operating cash flow, available cash, and available credit were expected to meet liquidity needs, while noting its capital-intensive business and reliance on external financing. Future liquidity depends on operating conditions and access to financing.
Outlook, risks, and unusual items
- No numerical earnings or revenue guidance is provided. Management’s stated priorities included improving existing-center performance, profitable contracting, expanding MRI, CT and PET applications, operating efficiency, and network growth.
- Congress had frozen Medicare physician payment rates through December 31, 2012. CMS proposed a 27.4% reduction for 2013; the filing cautions that failure of Congress to intervene could adversely affect revenue and results.
- Q3 and nine-month results include a $2.8 million gain from selling a 41% interest in a joint venture and deconsolidating it. Other income primarily reflected fair-value changes in interest-rate swaps; those swaps were no longer designated as cash-flow hedges. These items affect comparability.
- Hurricane Sandy, after quarter end, disrupted East Coast operations, including closures and power outages in Maryland, Delaware, New York and New Jersey. Management said the financial impact was too early to estimate; business-interruption insurance was in place.
- The company identified natural disasters and severe weather as risks, alongside reimbursement, collection, financing, and acquisition-integration risks. It reported ordinary-course litigation and said it did not expect current cases to have a material adverse effect.
- RadNet adopted accounting standards affecting presentation and disclosures; it reported no material effect on financial condition, results, or liquidity. Management concluded disclosure controls were effective and reported no material quarterly change to internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-center procedure volumes and revenue stabilize, and how much reported growth continues to depend on acquisitions.
- The final refinancing terms, borrowing availability, floating-rate exposure, maturities, and ongoing covenant compliance.
- Bad-debt trends, patient collection experience, and exposure to potential Medicare reimbursement changes.
- The realized impact of Hurricane Sandy, including business-interruption insurance recovery and any lingering operational disruption.
- How much reported earnings and EBITDA depend on nonrecurring items, including the joint-venture gain and swap valuation changes.