American Shared Hospital Services — Q2 2018 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. The company leases and operates radiosurgery and radiation-therapy equipment. At quarter-end it reported 15 Gamma Knife units, one proton beam radiation therapy (PBRT) system and one IGRT unit in operation, plus a stand-alone Gamma Knife facility in Peru.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Medical-services revenue | $5.169m | $4.945m | $10.474m | $9.859m |
| Gross margin | $2.081m (40.3%) | $2.251m (45.5%) | $4.287m (40.9%) | $4.597m (46.6%) |
| Net income attributable to company | $287,000 | $113,000 | $677,000 | $406,000 |
| Diluted EPS | $0.05 | $0.02 | $0.12 | $0.07 |
| Interest expense | $406,000 | $444,000 | $831,000 | $897,000 |
- Revenue increased 4.5% in Q2 and 6.2% for the half-year. Gross margin dollars and margin percentage declined in both comparisons.
- Operating cash flow was $5.554m for the first half, versus $4.038m in 2017. Capital expenditures were $792,000; principal payments on debt and capital leases totaled $3.344m.
- At June 30, cash and cash equivalents were $3.493m, with $350,000 restricted cash. Working capital was $960,000; total assets were $58.074m and shareholders’ equity was $31.071m.
- Debt was $4.787m and capital lease obligations were $16.706m, or $21.493m combined. The company reported scheduled debt interest and principal payments of approximately $2.411m and capital lease payments of approximately $4.952m over the next 12 months.
Material changes and management commentary
- PBRT revenue rose to $1.363m in Q2 and $2.582m for the half-year; treatment fractions increased to 1,298 and 2,516, respectively, reflecting greater use at Orlando Health.
- Gamma Knife revenue fell to $3.594m in Q2 and $7.282m for the half-year, primarily after three customer contracts expired. Two new sites partly offset the loss; procedures were also affected by Cobalt-60 reload downtime at two sites.
- IGRT revenue increased to $212,000 in Q2 and $610,000 for the half-year on higher volume. Maintenance and supplies rose $379,000 in Q2 and $773,000 for the half-year, largely due to the PBRT service agreement that began in September 2017.
- Selling and administrative expense declined, and interest expense declined with lower average debt and lease balances. Lower tax expense reflected the Tax Act’s reduction in the federal corporate tax rate. These factors contributed to higher net income attributable to the company despite lower gross margin.
- The company received $22,000 from an equity investment in Q2 after the investment was cancelled; it had written the investment down by $579,000 in 2017 and reported no remaining ownership interest.
Outlook, commitments and risks
- Management believes cash on hand, operating cash flow and other resources will cover scheduled debt and lease obligations for the next 12 months. No formal earnings or revenue guidance is provided.
- The company had $35.208m of equipment and service commitments: $25.8m for two additional MEVION S250 PBRT systems, $3.1m for Gamma Knife equipment/reloads and $6.308m for service contracts. The PBRT systems are expected to be delivered no later than 2019 and 2020. The company was seeking sites and had not secured customer agreements or related financing; it warned deposits could be forfeited if it cannot meet the timetable or obtain an extension.
- On July 28, 2018, after quarter-end, the Orlando PBRT system sustained water damage. The company estimated service would be down for two weeks, anticipated repairs and interruption losses would be insured, and did not expect a significant financial impact.
- Management identified risks including quarterly variability, performance and timing of Gamma Knife and radiation-therapy operations, financing and execution of the proton-therapy expansion, and development of its Operating Room for the 21st Century initiative. It reported no change to the risk factors in its 2017 Form 10-K, no legal proceedings, and effective disclosure controls.
- Adoption of the new revenue standard had no material impact. The company was evaluating the lease accounting standard effective January 1, 2019; it did not expect the expected-credit-loss standard to have a significant impact.
Important facts for investors to verify
- Whether PBRT utilization and revenue growth continue, and whether the service interruption and insurance claims affect Orlando results.
- Progress securing sites and financing for the two PBRT systems, delivery timing, and potential exposure of the $2.0m in non-refundable deposits.
- Gamma Knife contract renewals, replacement of expired customer sites, procedure volumes and reload-related downtime.
- Cash generation and ability to meet debt, lease and service payments while funding equipment commitments; gross-margin pressure from maintenance costs.