RadNet, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are to the corresponding 2014 periods. RadNet operates diagnostic imaging centers and reported 276 centers across seven states. Amounts below are in millions, except per-share data and percentages.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total net revenue | $204.3 | $179.1 | $385.6 | $348.0 |
| Operating income | $13.4 | $15.6 | $11.4 | $23.2 |
| Operating margin | 6.3% | 8.4% | 2.8% | 6.4% |
| Net income (loss) attributable to RadNet | $3.4 | $5.1 | $(1.2) | $(7.3) |
| Diluted earnings (loss) per share | $0.08 | $0.12 | $(0.03) | $(0.18) |
| Adjusted EBITDA, non-GAAP | $33.5 | $33.4 | $53.7 | $61.1 |
Q2 revenue increased 14.1%; first-half revenue increased 10.8%. For comparable centers, service-fee revenue was nearly flat in Q2 and declined 0.4% for the first half, as lower reimbursement rates offset volume growth. Capitation revenue grew 35.4% in Q2 and 37.4% for the first half, supported by new and expanded private-insurer contracts. First-half procedures rose to 2.60 million from 2.38 million.
Operating costs grew faster than revenue: total operating expenses increased 16.8% in Q2 and 15.2% in the first half. Cost of operations rose 18.9% and 17.7%, respectively. Management attributed increases to acquired centers, higher procedure-related staffing and costs, and expenses supporting capitation growth. First-half interest expense declined to $20.4 million from $22.1 million, while equity earnings from joint ventures increased to $4.3 million from $2.7 million. The first-half 2014 comparison included a $15.9 million loss on extinguishment of senior notes; 2015 included $3.3 million of meaningful-use incentive income versus $1.8 million in 2014.
First-half operating cash flow was $28.0 million, versus $19.7 million. Investing used $66.1 million, including $34.4 million for imaging-facility acquisitions and $31.6 million for property and equipment. Financing provided $43.2 million; cash increased $5.0 million to $5.3 million. Cash paid for interest was $18.3 million.
At June 30, cash was $5.3 million, accounts receivable $156.0 million, and working capital $115.1 million, compared with $0.3 million, $148.2 million, and $58.7 million, respectively, at year-end 2014. Total liabilities were $776.3 million and equity was $12.2 million. Senior secured term debt had a carrying value of $632.3 million ($643.4 million face value); the $101.25 million revolver had no balance outstanding. The company reported compliance with financial covenants. First-lien loans generally carry a 1% Eurodollar floor plus a 3.25% margin; second-lien loans carried an 8% rate at quarter-end.
Material changes and transactions
- April 2015: RadNet borrowed $75.0 million under an incremental first-lien term loan, using proceeds to repay the revolver and pay transaction costs. Scheduled first-lien amortization increased to about $6.2 million quarterly. Management estimated the higher amortization, net of interest savings versus the retired senior notes, would increase annual cash obligations by approximately $15.8 million.
- Acquisitions: RadNet acquired 11 New York Radiology Partners centers for $29.8 million cash and a $1.5 million seller note; six California Radiology centers for $4.2 million; and one Bronx-area center for $0.4 million.
- New Jersey centers: A board-approved sale plan was in place by June 30. On August 7, RadNet announced a proposed sale of its 10 wholly owned New Jersey centers to its NJIN joint venture for $35.5 million, subject to customary conditions and approvals, with closing expected in Q3. The assets were classified as held for sale at June 30.
- Subsequent event: On August 3, RadNet sold a 25% interest in two Maryland centers to LifeBridge Health for approximately $5.0 million, forming a partnership.
Outlook, commentary and risks
Management provided no specific numeric earnings or revenue guidance. It said operating cash flow, available cash and borrowing availability were expected to meet liquidity needs at current operating levels, while noting that future liquidity depends on economic and business conditions and may require additional financing. The business is capital intensive, and operating cash flow has not funded all capital requirements.
Risks and uncertainties include substantial debt and scheduled amortization, variable-rate interest exposure, restrictive debt covenants, payer reimbursement and collection trends, and the integration and performance of acquired centers. Management cited first-quarter seasonality from winter weather and high-deductible plans. A hypothetical 1% increase in borrowing rates was estimated to add about $6.4 million of annual interest expense on first- and second-lien term debt, subject to rate floors. The filing said current litigation was not expected to have a material adverse impact, but acknowledged possible future claims.
Important facts for investors to verify
- Whether the proposed $35.5 million New Jersey sale closed on schedule, and its final proceeds and accounting impact.
- Comparable-center reimbursement, procedure-volume and capitation trends, and whether expense growth moderates.
- Cash generation after capital spending and acquisitions, and the company’s ability to meet higher scheduled debt amortization.
- Debt balances, interest-rate exposure, covenant compliance and remaining revolver availability.
- The final purchase-price allocation for New York Radiology Partners, which was preliminary at filing, and results from acquired centers.