RDNT

RadNet, Inc. 10-Q Summary: Period Ended September 30, 2009

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for RadNet, Inc., a provider of diagnostic imaging services operating 175 facilities across seven states. The report covers the three and nine-month periods ended September 30, 2009. The company operates as a single segment, offering MRI, CT, PET, and other imaging services. RadNet consolidates the results of Beverly Radiology Medical Group III (BRMG), a variable interest entity owned indirectly by the CEO.

Key Financial Metrics

Note: Debt figures include current and long-term notes payable and obligations under capital leases. Working capital is calculated as Current Assets minus Current Liabilities.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 5.7% year-over-year for the nine-month period, driven by a 2.0% increase in volume at existing centers and $50.2 million in revenue from centers acquired after December 31, 2007.
• Profitability Improvement: The net loss attributable to common shareholders narrowed significantly to $2.9 million for the nine months ended September 30, 2009, compared to a $7.5 million loss in the prior year period. This improvement was aided by a $1.4 million gain on a bargain purchase.
• Bad Debt Provision: The provision for bad debts increased 19.8% to $24.7 million (6.3% of revenue) for the nine-month period, reflecting management's expectation of decreased collections due to the economic slowdown.
• Interest Expense: Interest expense decreased slightly to $37.7 million for the nine-month period, despite the inclusion of $4.9 million in amortization of Other Comprehensive Income related to interest rate swap modifications.

Guidance, Outlook, and Risks

• Strategic Focus: Management continues to focus on maximizing performance at existing facilities, profitable contracting, expanding MRI/CT/PET applications, and optimizing operating efficiencies.
• Liquidity Outlook: The company maintains a working capital balance of $11.1 million. Management believes it will generate sufficient cash to satisfy obligations for the next twelve months through strategic plans and financial restructuring, though no assurance is given.
• Debt Restructuring: In Q1 2009, the company modified two interest rate swaps ("blend and extends"), extending maturities by 36 months and reducing annualized cash interest expense by $2.9 million. However, this resulted in a $6.1 million accumulated other comprehensive loss being amortized into interest expense through November 2009.
• Risks: Key risks include the economic slowdown affecting patient collections, regulatory changes, competition, and the company's high fixed-cost structure requiring significant capital for operations and debt service.
• Unusual Items: A $1.4 million gain on bargain purchase was recorded from the acquisition of nine New Jersey imaging centers from a seller in liquidation. Additionally, $1.2 million of other expense was recorded primarily related to litigation.

Investor Verification Checklist

• Debt Covenants: Verify compliance with minimum fixed charge coverage and leverage ratios given the high debt load ($440M+).
• Bad Debt Trends: Monitor the trend of the provision for bad debts (currently 6.3% of revenue) against actual collection rates in the current economic climate.
• Interest Rate Swap Amortization: Confirm the impact of the remaining $1.2 million unamortized AOCL on future interest expense through November 2009.
• Acquisition Integration: Assess the performance of the nine New Jersey centers acquired in June 2009 and subsequent acquisitions in October 2009 (Chesapeake Urology, Ridgewood Diagnostics, Unity Hospital).
• Related Party Transactions: Review the management fee arrangements with BRMG (owned by the CEO) and the new lease with a facility owned by a Senior Vice President.