RadNet, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparison is Q1 2011. Amounts are in U.S. dollars. RadNet operated 232 imaging centers across seven states and performed approximately 1.06 million procedures. The company provides outpatient diagnostic imaging services and reports as one segment.
Key financial results
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Service fee revenue before bad-debt provision | $168.5 million | $144.1 million; up 17.0% |
| Bad-debt provision | $6.5 million; 3.8% of service fee revenue | $5.0 million; 3.5% |
| Net service fee revenue | $162.0 million | $139.1 million; up 16.5% |
| Income from operations | $11.3 million | $8.9 million; filing reports margins of 6.7% and 6.2% of service fee revenue, respectively |
| Net loss attributable to RadNet common stockholders | $0.1 million; loss per share reported as $0.00 | $0.9 million; loss per share $0.02 |
| Adjusted EBITDA (non-GAAP) | $29.1 million | $25.7 million |
| Cash from operating activities | $15.4 million | $15.2 million |
| Cash used in investing activities | $12.8 million | $23.2 million |
| Cash and cash equivalents | $1.8 million | $2.5 million at Dec. 31, 2011 |
| Working capital | $27.5 million | $30.0 million at Dec. 31, 2011 |
| Total equity deficit | $68.5 million | $69.8 million at Dec. 31, 2011 |
Debt, liquidity and cash flow
- At March 31, debt included $200.0 million of senior notes, $279.3 million of senior secured term-loan debt and $60.7 million drawn on the revolving facility. The company reported $60.55 million of available revolver capacity, subject to borrowing conditions.
- Interest expense was $13.6 million, compared with $12.9 million a year earlier. Cash interest paid was $6.8 million.
- Operating cash flow was largely offset by investment spending. Investing uses included $14.0 million for property and equipment and $0.9 million for joint-venture interests; $2.3 million of sale proceeds partly offset these uses. Financing activities used $3.3 million, and cash declined by $0.6 million during the quarter.
- Management said operating cash flow, available cash and borrowing capacity were expected to meet short- and long-term liquidity needs, while noting that future conditions and financing access could affect that ability. The company was in compliance with debt covenants at quarter-end.
Material changes and unusual items
- Reported revenue growth included acquired centers. Revenue from centers operating in both comparison periods rose 1.1%, which management attributed primarily to similar growth in procedure volume; acquired centers contributed $23.1 million of Q1 2012 service fee revenue.
- Two imaging-center acquisitions closed February 29, 2012: one in California for $350,000 plus assumed capital-lease debt, and one in Maryland for $230,000. After quarter-end, RadNet acquired five West Coast Radiology centers for $8.1 million plus approximately $1.4 million of assumed capital-lease debt.
- Other income included approximately $1.2 million of income primarily from interest-rate-swap fair-value changes, versus $1.9 million in Q1 2011, which also included $0.5 million of fire-related insurance proceeds. The swaps were no longer designated as cash-flow hedges after the 2010 refinancing; changes in fair value are recognized in earnings.
- Equity earnings from unconsolidated joint ventures were $1.3 million, down from $1.5 million. Joint ventures reported Q1 net income of $2.5 million versus $3.2 million in Q1 2011.
- The 2011 comparative presentation was adjusted for adoption of a healthcare revenue accounting standard. A historical calculation error increased both reported revenue and bad-debt provision by $2.9 million for Q1 2011, with no effect on net service fee revenue.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management’s operating priorities include improving existing-center performance and efficiency, profitable contracting, expanding MRI, CT and PET applications, and growing the network.
- Management identified the risk that Congress may not continue to prevent formula-driven Medicare Physician Fee Schedule reductions; failure to act could adversely affect revenue and results.
- RadNet operates in a capital-intensive, high-fixed-cost business and has relied on third-party credit to fund capital needs. Risks include debt service and refinancing capacity, interest-rate exposure, acquisition integration, reimbursement changes, and collection estimates for patient deductibles and copayments.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect, while acknowledging that future litigation could be adverse. It reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether same-center procedure and revenue trends continue, separately from the contribution of acquired facilities.
- Bad-debt and accounts-receivable trends, including collection performance on patient copayments and deductibles.
- Available revolver capacity, covenant headroom, debt-service needs and interest-rate sensitivity; Q1 debt included substantial variable-rate borrowing.
- Whether operating cash flow can support ongoing equipment investment, acquisitions and debt obligations, given low cash on hand and the reported equity deficit.
- Medicare reimbursement developments, acquisition integration and the effect of swap-related fair-value changes on reported earnings.
- The related-party arrangement with BRMG: CEO Howard Berger beneficially owned approximately 14.1% of RadNet and indirectly owned 99% of BRMG; RadNet consolidates BRMG and may need to support operating-cost shortfalls.