RadNet, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparison is Q1 2021 unless stated otherwise. RadNet operated 351 outpatient imaging centers across seven states and reported Imaging Centers and Artificial Intelligence (AI) segments. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Total service revenue | $341.8 million | $315.3 million | Up 8.4% |
| Provider relief funding | — | $6.2 million | No funding recognized in Q1 2022 |
| Operating income (loss) | $(1.7) million | $17.7 million | Operating margin: (0.5)% vs. 5.6% |
| Net income | $8.4 million | $13.8 million | Includes noncontrolling interests |
| Net income attributable to RadNet common stockholders | $3.0 million | $9.5 million | Diluted EPS: $0.05 vs. $0.18 |
| Cash provided by operating activities | $0.9 million | $28.1 million | Lower year over year |
| Cash and cash equivalents | $70.7 million | $134.6 million at Dec. 31, 2021 | Quarter-end balance |
| Term debt, face value | $764.6 million | $767.9 million at Dec. 31, 2021 | Carrying value was $751.9 million after debt discount |
Revenue growth reflected a 6.2% increase in same-center procedure volumes; same-center revenue rose 2.9%. Routine imaging procedures increased 5.6%, while MRI, PET and CT volumes together rose 7.9%. The company attributed higher salary and professional reading costs to increased staffing for patient volumes and labor-cost inflation. Operating expenses grew faster than revenue; cost of operations rose 11.6% to $315.0 million. Depreciation and amortization increased to $27.1 million from $22.7 million.
Other income included a $20.8 million noncash gain from the fair-value change in interest-rate swaps, compared with an $11.2 million gain in Q1 2021. This materially affected reported earnings and should not be confused with operating cash generation. Interest expense was $11.6 million versus $12.8 million. The company’s non-GAAP Adjusted EBITDA, excluding AI losses and provider relief funding, was $41.7 million versus $40.1 million; the filing cautions that this company-defined measure is not GAAP and may not be comparable with other companies.
Liquidity, debt and investment
Cash declined by $63.9 million during the quarter. Investing activities used $61.6 million, including $36.6 million for property and equipment and $25.1 million for acquisitions. Financing activities used $3.3 million, principally for term-loan payments. Accounts receivable increased to $159.7 million from $135.1 million at year-end. Working capital, excluding current operating lease liabilities, was negative $27.7 million, versus positive $14.9 million at December 31, 2021.
At March 31, 2022, RadNet had no borrowings on its Barclays or SunTrust revolvers. After letters of credit, $187.2 million was available under the $195.0 million Barclays facility, with another $30.0 million available under the SunTrust facility. The company reported compliance with all credit covenants. Its SunTrust term loan matures in August 2023 and its $725 million senior secured first-lien term loan matures in April 2028.
Material developments and outlook
- RadNet acquired AI companies Aidence, focused on lung cancer screening, and Quantib, focused on prostate cancer screening, on January 20, 2022. Reported purchase considerations were approximately $45.2 million and $42.3 million, respectively; acquisition accounting remained preliminary and could be adjusted during the measurement period.
- Imaging-center acquisitions in Maryland had total consideration of $13.0 million. The company also reported opening five centers through acquisition and internal development.
- Acquisitions increased goodwill to $570.2 million and other intangible assets to $99.3 million at quarter-end. RadNet issued shares for the AI acquisitions, increasing shares outstanding to 56.2 million from 53.5 million at year-end.
- Management said procedure volumes remained strong and expected existing capital resources, anticipated operating cash flow and borrowing capacity to be sufficient for operations for the next 12 months and foreseeable future. No specific revenue or earnings guidance was provided.
- Management expected interest costs to rise near term as market rates increased. Its sensitivity analysis estimated that a 1% increase in the adjusted Eurodollar rate on first-lien term loans could add approximately $7.2 million in annual interest expense, before considering other effects and hedges.
Risks, contingencies and unusual items
Key disclosed risks include wage and operating-cost inflation, reimbursement and payer-contract changes, the capital-intensive nature of imaging operations, debt service and covenant compliance, acquisitions and integration, and exposure to rising interest rates. The company uses interest-rate swaps, but some swaps were not effective cash-flow hedges and fair-value changes were recognized in earnings. Foreign-currency exposure relates principally to AI operations; RadNet did not have foreign-currency contracts to mitigate it.
RadNet described ordinary-course legal proceedings and inquiries, but said it did not expect pending matters to have a material adverse effect; outcomes remain uncertain. Provider Relief Fund amounts may be audited and could be recouped if requirements are not met. A one-time telecom contract settlement contributed to higher other operating expense; the filing did not give a separate amount. Management also included legal settlements of $2.2 million and non-operational rent expense of $0.9 million as Adjusted EBITDA adjustments. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether procedure-volume growth and same-center revenue trends continue, and whether labor and other costs remain elevated.
- Operating cash flow, receivables and working capital conversion, given the sharp year-over-year decline in quarterly operating cash flow and the quarter-end working-capital deficit.
- Interest-rate exposure, swap accounting and the effect of further rate changes on cash interest and reported earnings.
- Integration and commercialization progress for Aidence and Quantib, including final purchase-price allocations, acquired intangible values and any milestone or contingent consideration.
- Liquidity and covenant headroom, including the 2023 SunTrust term-loan maturity and availability under revolving facilities.
- Potential Provider Relief Fund recoupment, legal contingencies, and the nature and recurrence of one-time costs excluded from Adjusted EBITDA.