RadNet, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. RadNet operated 310 outpatient diagnostic imaging centers across seven states. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total net revenue | $218.6M | $204.3M | $435.0M | $385.6M |
| Operating income | $8.1M | $13.4M | $11.1M | $11.4M |
| Net income (loss) attributable to RadNet common stockholders | $3.6M | $3.4M | $1.9M | $(1.2)M |
| Basic and diluted EPS | $0.08 | $0.08 | $0.04 | $(0.03) |
| Adjusted EBITDA (non-GAAP) | $35.1M | $33.5M | $62.2M | $53.7M |
| Cash provided by operating activities | Not separately stated | Not separately stated | $51.4M | $28.0M |
- Q2 revenue increased 7.0%; first-half revenue increased 12.8%. Same-center service-fee revenue rose 2.7% in Q2 and 2.8% in the first half, with acquired or divested centers contributing additional revenue.
- Operating income fell 39.6% in Q2 despite higher revenue. The filing reports operating margins of 3.5% for Q2 2016 versus 6.3% in Q2 2015, and 2.4% versus 2.8% for the first half.
- Bad-debt provision rose to $12.3M in Q2 from $8.4M and to $22.6M in the first half from $15.9M. It equaled 6.1% and 5.6% of service-fee revenue, respectively, compared with 4.5% in both prior-year periods.
- Interest expense was $10.7M in Q2 and $21.4M in the first half, up 3.1% and 4.9%, respectively. First-half investing cash outflow was $46.5M, including $40.3M for property and equipment and $6.6M for imaging-facility purchases. Financing cash outflow was $4.9M.
- At June 30, cash was $0.4M, receivables $165.1M, working capital $72.5M, and total equity $37.0M (including $33.2M attributable to RadNet stockholders). Cash was nearly unchanged from year-end.
- Senior secured term loans had a $609.0M carrying value; the $101.25M revolving facility had $13.8M outstanding. The company reported compliance with credit covenants at June 30. The filing does not provide a clear consolidated net-debt or leverage-ratio value in the supplied text.
Material changes and unusual items
- The company reported 3.06M imaging procedures in the first half versus 2.06M a year earlier; growth included acquisitions. A new two-center Astoria, New York acquisition was completed in March for $5.0M.
- In June, sellers of Diagnostic Imaging Group returned 958,536 RadNet shares following errors in pre-acquisition financial information. RadNet recorded a non-cash gain of $5.0M.
- Adjusted EBITDA includes a $6.1M acquisition-related working-capital adjustment in both Q2 and first-half 2016. Investors should consider this adjustment alongside the company’s stated non-GAAP limitations.
- On July 1, 2016, after quarter-end, RadNet refinanced senior secured term loans, borrowed an additional $46.0M, and extended the term to July 2023. The first-lien rate spread increased from 3.25% to 3.75% over LIBOR (with a 1.0% floor); a new five-year $117.5M revolver was also established.
Outlook, risks, and controls
- Management said operating cash flow, available cash, and available senior secured borrowing capacity should meet liquidity needs at current operating levels. It cautioned that debt service and funding needs depend on future economic, financial, and business conditions, and that additional financing may be needed if requirements cannot be met.
- No specific forward revenue or earnings guidance is provided in the supplied filing text. Management describes the business as capital intensive and high fixed-cost; first-quarter activity is typically seasonally weaker, partly due to winter weather and patient deductibles resetting.
- Risks include patient copayment and deductible collections, reimbursement changes, substantial debt and variable-rate exposure, financing availability, and covenant restrictions. A hypothetical 1% increase in borrowing rates was estimated to raise annual interest expense by $6.2M on first- and second-lien term loans.
- Disclosure controls and internal control over financial reporting were assessed as ineffective at June 30 due to a material weakness involving IT general controls and related manual controls for revenue and receivables. Management said it was not aware of a material misstatement and described remediation efforts; successful remediation was not yet established.
- RadNet said ordinary-course litigation was not expected to have a material adverse impact. It also noted that it may need to support certain consolidated physician-group VIEs if their operating expenses exceed revenue.
Investor verification priorities
- Track bad-debt provisions, receivable aging, and collection trends, particularly patient copayments and deductibles.
- Assess whether operating performance and cash generation can support capital spending, debt service, and the substantial debt balance; review the July refinancing’s final terms and resulting leverage.
- Separate same-center growth from acquisition-related growth and evaluate the sustainability of the $6.1M EBITDA adjustment and the $5.0M stock-return gain.
- Check the progress and independent validation of remediation for the revenue and receivables control material weakness.