American Shared Hospital Services — Q3 2011 Form 10-Q
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2011. The company provides Gamma Knife and other radiation-therapy equipment and services to hospitals. It reported 18 Gamma Knife units in operation, compared with 19 a year earlier; its Turkey operation began in June 2011, and two other new sites began operating during Q2.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $9.148 million | $4.280 million | $17.721 million | $12.523 million |
| Medical-services revenue | $4.164 million | $4.280 million | $12.737 million | $12.523 million |
| Gross margin | $2.459 million | $1.845 million | $6.219 million | $5.294 million |
| Operating income, as presented | $813,000 | $196,000 | $1.264 million | $517,000 |
| Net income | $534,000 | $204,000 | $1.024 million | $555,000 |
| Net income attributable to ASHS | $220,000 | $6,000 | $262,000 | $17,000 |
| Diluted EPS | $0.05 | $0.00 | $0.06 | $0.00 |
Reported gross margin was 26.9% of revenue in Q3 and 35.1% for the nine-month period; the comparable prior-year ratios were 43.1% and 42.3%. These figures include equipment sales and their associated costs. The Q3 sale of a Perfexion unit contributed $4.984 million of revenue and $4.140 million of cost, or $844,000 before related taxes and non-controlling interests.
Nine-month operating cash flow was $5.556 million, versus $4.727 million in 2010. Investing cash outflow was $2.223 million and financing cash outflow was $4.105 million; cash declined $772,000 to $666,000. At September 30, current assets were $14.828 million, current liabilities $8.986 million, and working capital $5.842 million. Current assets included a $9 million certificate of deposit, earning 0.7% and maturing in August 2012.
Outstanding debt and capital-lease obligations totaled approximately $36.9 million, including $7.5 million drawn on the $9 million bank line of credit. The line was extended to August 1, 2013; the company reported compliance with covenants. Total assets were $66.840 million and shareholders’ equity $24.362 million.
Changes versus prior comparable periods
- Total revenue rose sharply, principally because of the one-time equipment sale; medical-services revenue fell 2.7% in Q3 but increased 1.7% for the nine months.
- Gamma Knife procedures were flat at 497 in Q3 and increased to 1,436 from 1,399 for the nine months. Management cited higher volume at several sites and the new Turkey site, partly offset by lower volume at other locations. Procedures at the customer receiving the sold unit were not recorded after Q1 following the contract amendment.
- Net income attributable to ASHS improved from near break-even, with the company identifying the equipment sale and related tax and non-controlling-interest effects as the principal drivers.
- Interest expense increased to $608,000 for Q3 and $1.754 million for the nine months, largely due to financing for newer equipment. Capital spending was $2.223 million, versus $451,000 in the prior-year period.
Outlook, risks, and unusual items
- Management believed operating cash flow and cash resources would cover scheduled debt and lease obligations over the next 12 months. Scheduled principal and interest payments were approximately $4.258 million and scheduled capital-lease payments approximately $5.039 million.
- Remaining equipment-purchase commitments were approximately $54 million. They include three Mevion proton-beam systems, Gamma Knife and Perfexion units, and radiation-therapy equipment. The company intends to finance these purchases, but warned that financing may be unavailable or unacceptable, particularly for Mevion systems before FDA approval.
- The company had paid $2.5 million in non-refundable deposits toward three Mevion systems. Their commercial viability and FDA approval were uncertain; anticipated delivery dates for the first two were in 2013.
- The $2.617 million Mevion preferred-stock investment had an estimated fair value of $1.120 million. Management estimated an unrealized impairment of approximately $1.5 million but concluded it was not other-than-temporary, citing development progress and its intent and ability to hold the investment. The first system’s installation and FDA review remained subject to delays and uncertainty.
- Other disclosed risks include Gamma Knife and radiation-therapy business risks, development of the Operating Room for the 21st Century program, and investment in Mevion, a development-stage company without a proven product. The company reported no change to risk factors from its 2010 Form 10-K, no legal proceedings, and effective disclosure controls.
Key facts for investors to verify
- How much of reported earnings and revenue growth depends on the non-recurring Perfexion sale, and what ongoing medical-services trends show.
- Whether the company can fund its approximately $54 million purchase commitments and meet scheduled debt and capital-lease payments.
- Mevion’s FDA progress, project timelines, financing needs, and the recoverability of ASHS’s investment and deposits.
- Gamma Knife site utilization and the financial contribution of newer sites, including Turkey, Albuquerque, and Jacksonville.
- The liquidity and availability terms of the certificate of deposit and the bank line, which is secured by cash invested with the bank.