RadNet, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparative periods are the same periods in 2021. RadNet operated 353 outpatient imaging centers across seven states and reported Imaging Centers and Artificial Intelligence (AI) segments.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Service revenue | $354.4m | $333.9m | $696.1m | $649.2m |
| Operating income | $19.6m | $27.7m | $17.8m | $45.3m |
| Net income attributable to RadNet common stockholders | $7.9m | $2.9m | $10.9m | $12.3m |
| Diluted EPS | $0.13 | $0.05 | $0.18 | $0.23 |
| Operating margin | 5.5% | 8.3% | 2.6% | 7.0% |
For the six months, total net income was $22.2m versus $21.9m, but RadNet-attributable income declined. Q2 operating margin contracted despite revenue growth. Q2 adjusted EBITDA, a non-GAAP measure, was $51.3m; excluding AI segment losses, it was $55.5m. Six-month adjusted EBITDA was $89.5m, or $97.3m excluding AI losses; 2021 comparatives included $6.3m of Provider Relief Funding (PRF).
Cash flow, debt and liquidity: First-half operating cash flow was $65.7m, compared with $58.7m. Investing used $96.0m, including $72.7m of capital expenditures and $26.0m for acquisitions; financing used $6.6m. Cash fell to $99.2m from $134.6m at year-end. At June 30, face-value term debt was $761.3m (carrying value $749.1m); no revolver borrowings were outstanding. Available borrowing capacity was $187.4m on the Barclays facility and $30.0m on the SunTrust facility. Working capital excluding current operating lease liabilities was negative $18.2m.
Changes versus prior periods
- Q2 service revenue rose 6.1%; management cited 4.1% overall procedure-volume growth and 2.3% same-center revenue growth. For the first half, imaging same-center procedure volumes grew 3.7%.
- Operating costs increased faster than revenue: cost of operations rose 7.8% in Q2 and 10.0% in the first half. Salaries and professional reading fees increased 11.0% and 11.1%, respectively, amid labor-market pressure.
- First-half results benefited from a $27.1m non-cash gain from changes in interest-rate swap fair value, compared with an $11.3m gain in 2021. Q2 also had a $6.3m non-cash swap gain. In 2021, debt restructuring and extinguishment costs were $6.0m.
- RadNet acquired AI companies Aidence and Quantib in January for stated total consideration of approximately $45.2m and $42.3m, respectively. The AI segment recorded operating losses of $6.7m in Q2 and $12.3m in the first half.
Outlook, commentary and risks
- Management expects existing resources, operating cash flow and borrowing capacity to be sufficient for operations for the next 12 months and foreseeable future, and reported compliance with credit-facility covenants.
- No specific financial guidance was provided. Management expects AI operating losses to continue for the foreseeable future while pursuing regulatory approvals and market acceptance.
- Management expects higher interest rates to increase borrowing costs in the near term. A hypothetical 1% increase in relevant rates was estimated to raise annual interest expense by about $7.2m on first-lien Eurodollar debt and $0.5m on SunTrust debt. Interest-rate swaps provide partial mitigation, but their fair-value changes can materially affect reported earnings.
- Other identified pressures include labor availability and wage costs, general inflation, acquisition integration and valuation uncertainty, and foreign-exchange exposure from AI operations. The Aidence and Quantib purchase accounting remained preliminary and could be adjusted, potentially materially affecting reported results or financial position.
- Management said pending litigation was not expected to have a material adverse effect based on information then available, while noting outcomes are uncertain. PRF may be subject to government audit and recoupment if conditions are not met. The remaining deferred employer payroll-tax liability was approximately $8.1m, due by December 31, 2022.
Important facts for investors to verify
- Whether procedure growth and revenue gains can outpace wage, operating and capital costs and restore operating margins.
- Cash conversion and working-capital trends, including accounts receivable growth and the sustainability of factoring-related receivable collections.
- Debt service capacity as rates rise, swap effectiveness and the SunTrust term loan’s August 2023 maturity.
- AI revenue growth, operating losses, regulatory progress and market acceptance; also final purchase accounting for Aidence and Quantib and milestone obligations.
- Execution and returns from acquisitions, Maryland expansion and planned capital spending; management reported $72.7m of cash capital expenditures in the first half.