RadNet, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. RadNet operated 340 outpatient diagnostic imaging centers across six states and reported one operating segment.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $289.1 million | $244.4 million | $560.6 million | $475.8 million |
| Operating income | $22.0 million | $15.9 million | $29.3 million | $15.0 million |
| Operating margin | 7.6% | 6.5% | 5.2% | 3.1% |
| Net income (loss) attributable to RadNet common stockholders | $4.9 million | $5.4 million | $1.2 million | $(1.9) million |
| Diluted earnings (loss) per share | $0.10 | $0.11 | $0.02 | $(0.04) |
| Adjusted EBITDA (non-GAAP) | $43.1 million | $38.2 million | $76.2 million | $59.2 million |
Cash flow: Six-month operating cash flow was $44.5 million, versus $46.9 million a year earlier. Investing cash outflow was $76.8 million, including $50.3 million of property and equipment purchases and $27.1 million for imaging facility acquisitions. Financing provided $52.4 million; cash increased $20.1 million to $30.5 million.
Debt and liquidity: At June 30, cash was $30.5 million and accounts receivable were $159.3 million. Term loans had $727.0 million face value and $711.5 million carrying value after discounts; total debt obligations were reported at $711.9 million. No amounts were drawn on either revolving facility; $131.7 million was available on the Barclays revolver after letters of credit. The company reported compliance with all credit covenants. Working capital, excluding current operating lease liabilities, was $6.7 million.
Leases: Adoption of the new lease standard added $469.9 million of operating lease liabilities and $432.6 million of operating lease right-of-use assets to the June 30 balance sheet. Management said adoption materially affected the balance sheet but did not materially affect operating results or cash flows.
Changes versus the prior comparable period
- Revenue rose 18.3% in Q2 and 17.8% for the first six months. Same-center revenue growth was more modest: 2.1% in Q2 and 2.4% in the first half. Acquired or divested centers contributed $44.6 million of Q2 net service fee revenue and $85.3 million in the first half.
- Management attributed same-center growth to increased MRI and CT volumes, improved equipment utilization, higher capitation revenue, and better first-quarter weather than in 2018. The prior-year first quarter was materially affected by severe winter weather.
- Operating margins improved, but Q2 income attributable to RadNet shareholders declined year over year. For the first half, attributable income turned positive from a year-earlier loss.
- Interest expense increased 16.5% in Q2 and 19.4% for the first half, primarily due to additional term debt and assumed New Jersey Imaging Network debt. Equity earnings from unconsolidated joint ventures declined as New Jersey Imaging Networks became consolidated in October 2018.
Outlook, commentary, and risks
- No quantified forward guidance is provided in the filing. Management said operating cash flow, available cash, and borrowing capacity were expected to meet liquidity needs, while noting financing needs depend on future conditions and could require additional financing.
- RadNet acquired imaging assets in Bakersfield, Islip, and West Hills, and completed the purchase of Hudson Valley Radiology Associates through a consolidated physician-group entity. It also formed Ventura County Imaging Group with Dignity Health. Subsequent to quarter-end, it acquired two New Jersey centers and a controlling interest in Nulogix.
- Debt amendments in April added $100 million of First Lien Term Loans, increased Barclays revolver commitments to $137.5 million, and extended the revolver maturity to July 2023. Scheduled quarterly principal payments on the First Lien Term Loans increased to approximately $9.7 million.
- To manage rate exposure, RadNet had existing interest rate caps and entered into $500 million of forward swaps effective October 2020. The swaps had a reported $8.6 million fair-value liability at June 30; hedge fair-value changes contributed to a $9.2 million six-month loss in other comprehensive income.
- RadNet accrued $2.3 million for allegations by the U.S. Attorney’s Office for the Western District of New York concerning claims that allegedly identified the wrong physician. The company estimated a $2.0–$2.5 million loss range; the matter remained unresolved.
- Other stated risks include the capital-intensive nature of the business, substantial debt and interest-rate exposure, payer reimbursement and collection estimates, acquisition integration, and uncertain outcomes of legal or regulatory matters. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the modest same-center growth rate can be sustained and how much future growth depends on acquisitions and consolidation.
- Debt repayment capacity, interest costs, covenant headroom, and the impact and terms of the new swaps as they become effective.
- Operating cash flow relative to capital spending, acquisition spending, and lease commitments.
- Resolution and final cost of the Western District of New York claims matter, including whether additional legal or regulatory contingencies arise.
- Integration results from recent and subsequent acquisitions, and the comparability of reported results following lease-accounting adoption and consolidation changes.