RadNet, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the same 2021 periods. RadNet operated 349 outpatient imaging centers across seven states and reported Imaging Centers and Artificial Intelligence (AI) segments.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Service revenue | $350.0 million | $332.7 million | $1,046.2 million | $981.9 million |
| Operating income | $6.9 million | $32.6 million | $24.8 million | $77.9 million |
| Net income attributable to RadNet shareholders | $0.7 million | $16.2 million | $11.6 million | $28.6 million |
| Diluted earnings per share | $0.01 | $0.30 | $0.19 | $0.54 |
| Cash from operations | — | $92.8 million | $100.3 million |
- Q3 operating margin fell to 2.0% from 9.8%; nine-month operating margin was 2.4% versus 7.9%. Shareholder net income margin was 0.2% and 1.1%, respectively, compared with 4.9% and 2.9% in 2021.
- Q3 imaging-center revenue rose 5.1%; same-center revenue increased 4.4%, with procedure volumes up 3.6%. For nine months, imaging-center revenue increased 5.6%, while same-center revenue grew 2.4% and same-center procedure volumes rose 3.1%. AI revenue was $0.9 million in Q3 and $3.1 million year to date.
- AI segment operating losses widened to $6.8 million in Q3 and $19.1 million for nine months, compared with $0.9 million and $3.5 million in 2021.
- Operating cash flow was below 2021. Investing used $123.0 million, including $98.6 million for property and equipment and $26.0 million for acquisitions. Cash declined $39.6 million to $95.0 million.
- At September 30, cash was $95.0 million; current assets were $324.5 million and current liabilities $409.2 million. Working capital, excluding current operating lease liabilities, was negative $17.8 million. The company reported $746.3 million carrying value of term debt ($757.9 million face value) and $692.2 million of operating lease liabilities. No revolver borrowings were outstanding; $187.4 million was available under the Barclays facility and $30.0 million under the SunTrust facility. RadNet reported covenant compliance.
Changes and notable items
- Revenue increased, but operating costs rose faster. Q3 cost of operations increased 15.1% to $313.9 million; salaries and professional reading fees excluding stock compensation rose 19.6%, reflecting higher volumes and tight labor markets. Medical supplies also increased, including from higher contrast-agent prices.
- Nine-month reported 2021 results included $6.3 million of Provider Relief Funding; RadNet received none in 2022. Nine-month 2022 revenue growth was partly acquisition-related, and the company reported four fewer centers in operation than a year earlier.
- Interest expense was $12.4 million in Q3 and $35.4 million year to date. Management said adjusted interest costs rose year over year and expected borrowing rates and interest expense to increase near term. A non-cash $39.6 million gain on interest-rate swaps for nine months materially affected reported results; the swaps’ fair value was $23.3 million at quarter-end.
- Adjusted EBITDA, a non-GAAP measure, was $45.8 million in Q3 and $135.2 million for nine months, including AI losses. The nine-month comparison was $164.4 million in 2021, or $158.1 million excluding 2021 Provider Relief Funding. The 2022 reconciliation includes an $8.1 million adjustment for a change in estimate relating to a refund liability; review the filing’s reconciliation and underlying explanation.
- RadNet acquired Aidence and Quantib in January 2022, issuing shares and paying cash as part of the consideration. Goodwill rose to $575.1 million. Shares outstanding increased to 57.3 million from 53.5 million at year-end 2021.
Outlook, risks and subsequent events
- No specific numerical financial guidance is provided. Management expects cash resources, operating cash flow and borrowing capacity to support operations for the next 12 months and foreseeable future. It expects AI losses to continue for the foreseeable future while pursuing regulatory approvals and market acceptance.
- Management cited labor availability and wage inflation, rising interest rates, capital-intensive operations, acquisition integration and reimbursement changes as relevant business considerations. A 1% increase in rates was estimated to add about $7.2 million to annual interest expense on the First Lien Term Loans and $0.4 million on the SunTrust term loan, before considering swaps.
- Subsequent to quarter-end, NJIN refinanced its term loan with a $150 million facility and increased its revolving facility to $50 million. RadNet acquired Montclair Radiological Associates for approximately $112.6 million on October 1, 2022, and acquired a 75% interest in AI company Heart & Lung Imaging Limited on November 1, with consideration including stock and cash up to a potential $27.6 million.
- RadNet stated pending litigation was not expected to have a material adverse effect, while noting outcomes are uncertain. It also disclosed foreign-currency exposure and no currency hedging contracts for its foreign AI and research operations.
Important facts for investors to verify
- Whether labor and medical-supply cost inflation, and the resulting margin pressure, persist or ease.
- How much of revenue and cash generation reflects same-center growth versus acquisitions, and the effect of the discontinued Provider Relief Funding.
- The nature, calculation and potential cash impact of the $8.1 million refund-liability estimate adjustment.
- Debt and interest-rate exposure after the October refinancing, including facility terms, covenant headroom and the effect of swaps.
- Cash needs and returns from recent acquisitions, the AI segment’s path to commercialization, and potential dilution from acquisition-related share issuance and contingent consideration.