RadNet, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Dollar amounts are in millions unless stated otherwise.
Business context
RadNet operates outpatient diagnostic imaging centers and an Artificial Intelligence (AI) business. At September 30, 2023, it operated 366 centers across seven states, compared with 349 a year earlier. Imaging Centers generated most revenue; AI products focus on assisting interpretation of breast, lung, prostate and other medical images.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $402.0 | $350.0 | $1,196.2 | $1,046.2 |
| Operating income | $43.3 | $6.9 | $74.4 | $24.8 |
| Net income | $24.1 | $6.4 | $24.3 | $28.6 |
| Net income attributable to RadNet common stockholders | $17.5 | $0.7 | $4.9 | $11.6 |
| Diluted earnings per share | $0.25 | $0.01 | $0.08 | $0.19 |
| Adjusted EBITDA, including AI losses | $57.9 | $45.8 | $166.5 | $135.2 |
Revenue increased 14.8% in Q3 and 14.3% year to date. Q3 operating margin was 10.8%, versus 2.0% in 2022; nine-month operating margin was 6.2%, versus 2.4%. The filing reports adjusted EBITDA, a non-GAAP measure; it was $60.4 million for Q3 and $176.8 million year to date excluding AI-segment EBITDA losses.
Imaging Center revenue grew 14.3% in Q3 and 14.0% for the nine months. Same-center revenue rose 7.7% and 7.5%, respectively, supported by same-center procedure-volume growth of 3.4% and 6.1%. AI revenue increased 220.8% in Q3 and 142.0% for the nine months, from a smaller base.
Operating cash flow was $131.9 million for the first nine months, compared with $92.8 million in 2022. Investing activities used $152.8 million, including $136.5 million of property and equipment purchases. Financing activities provided $231.1 million, principally reflecting $245.8 million of net proceeds from a June stock offering. Cash at period-end was $337.9 million, versus $127.8 million at December 31, 2022; reported working capital, excluding current operating lease liabilities, was $230.9 million.
Total debt obligations carried at $860.3 million included $853.1 million face value of term loans and $17.9 million of equipment notes, before applicable discounts. No amounts were drawn on the $195 million Barclays or $50 million Truist revolvers; availability was $187.4 million and $50.0 million, respectively. The company reported compliance with all credit covenants. Operating lease liabilities totaled approximately $673.4 million.
Material changes and unusual items
- Q3 operating results included a $16.8 million gain from contributing imaging centers to a joint venture. The transaction increased RadNet’s interest in Santa Monica Imaging Group to 49%; RadNet also retained 65% of the newly formed Los Angeles Imaging Group.
- Management reversed $7.2 million of Aidence contingent consideration after determining contractual FDA-clearance milestones could not be achieved under the original terms. Separately, a $3.9 million impairment was recorded for Aidence lung AI research and development assets after the company concluded a new FDA submission and additional rework would be needed.
- Interest expense rose 29.8% in Q3 and 35.3% for the nine months, reflecting higher borrowing balances and rates. Nine-month common-stockholder income declined despite higher operating income; other expense included a $0.9 million non-cash hedge fair-value loss in 2023, compared with a $39.6 million non-cash gain in 2022.
- Shares issued and outstanding increased to 67.8 million at September 30, from 57.7 million at year-end, largely following the public offering. Weighted-average shares also increased, affecting per-share comparisons.
- Joint-venture equity earnings declined to $3.9 million for the nine months from $8.4 million, which management primarily attributed to lower earnings from an Arizona joint venture.
Outlook, risks and contingencies
Management expects existing resources, operating cash flow and available revolver capacity to be sufficient for operations over the next 12 months and the foreseeable future. It also expects higher effective rates on senior credit facilities and related interest expense to continue in the near term. The filing provides no specific numerical revenue or earnings guidance.
Management expects the AI segment to continue generating losses in the near term as it commercializes products and expands cancer-detection programs. The East Coast Enhanced Breast Cancer Detection service had close to 35% adoption, and Quantib received FDA clearance for a prostate imaging tool in May 2023. The Aidence lung products’ US regulatory setback highlights approval, commercialization and execution risks. Other risks include reimbursement and collection estimates, labor and operating-cost inflation, capital-intensive operations, variable-rate debt, and acquisition and joint-venture execution. The company said pending legal matters were not expected to have a material adverse effect based on current information, while noting outcomes are uncertain.
Key facts for investors to verify
- How much of reported operating income and adjusted EBITDA depends on the joint-venture gain and contingent-consideration reversal, and what are the comparable recurring results?
- Whether AI products obtain required regulatory clearances, sustain adoption and ultimately reduce segment losses.
- Whether operating cash flow can continue to fund substantial capital expenditures and growth investment without additional borrowing or equity issuance.
- How higher interest rates affect cash interest, earnings and covenant headroom as swap arrangements mature.
- Whether same-center revenue and procedure-volume growth persists, and how staffing, supply and other inflationary costs affect margins.