RadNet, Inc. — Q3 2019 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2019. RadNet operates outpatient diagnostic imaging centers; it reported 340 centers across six states, compared with 305 a year earlier. The company attributes growth to both same-center performance and acquisitions.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $292.7 million | $242.1 million | $853.3 million | $717.9 million |
| Income from operations | $16.9 million | $16.4 million | $46.1 million | $31.4 million |
| Net income attributable to RadNet common stockholders | $3.2 million | $5.0 million | $4.4 million | $3.1 million |
| Diluted earnings per share | $0.06 | $0.10 | $0.09 | $0.06 |
| Adjusted EBITDA (non-GAAP) | $41.0 million | $38.1 million | $117.2 million | $97.3 million |
- Revenue and margins: Q3 revenue increased 20.9%; same-center revenue rose 5.0%, primarily on higher advanced-modality procedure volumes. Nine-month revenue grew 18.9%, while same-center revenue rose 3.2%, reflecting procedure volume, equipment utilization, capitation revenue, and more favorable first-quarter weather. Operating margin was 5.8% in Q3 versus 6.8% a year earlier; for nine months it was 5.4% versus 4.4%. Q3 net income attributable to common stockholders fell despite revenue growth; nine-month income increased.
- Costs and interest: Operating expenses rose 22.2% in Q3, faster than revenue, including higher salaries, rent, and other operating costs. Nine-month interest expense increased 16.7% to $36.6 million, reflecting additional term debt and assumed debt. Equity earnings from unconsolidated joint ventures declined as New Jersey Imaging Network became consolidated.
- Cash flow and investment: For the first nine months, operating cash flow was $82.6 million (versus $87.9 million); investing cash use was $94.0 million, including $68.3 million of property and equipment purchases and $27.2 million for imaging facility acquisitions. Financing provided $38.7 million. Cash ended at $37.7 million, up from $10.4 million at year-end 2018.
- Debt and liquidity: Term loan face value was $716.5 million ($702.0 million carrying value after discounts); total debt obligations on the balance sheet were $702.3 million. The Barclays revolver had $131.7 million available after letters of credit, and the separate SunTrust revolver was undrawn. RadNet reported covenant compliance. Working capital excluding current operating lease liabilities was negative $0.5 million.
- Leases: Adoption of lease accounting in 2019 added $480.3 million of operating lease liabilities and $438.6 million of operating-lease right-of-use assets at quarter-end; management said adoption materially affected the balance sheet but not operations or cash flows.
Material changes, outlook, and risks
- Acquisitions and changes in control expanded operations, including Kern Radiology, Zilkha Radiology, HVRA, West Valley Imaging Center, and Nulogix; RadNet also formed a 60%-owned joint venture with Dignity Health. Acquisition activity contributed materially to reported revenue growth.
- RadNet entered into $100 million of incremental term loans in April and extended the Barclays revolver maturity to July 2023. It also entered into $500 million of forward interest-rate swaps effective October 2020. At September 30, the company estimated a 1% rate increase would add about $1.6 million in annual interest expense on First Lien debt after caps, and about $570,000 on the SunTrust loan.
- No specific numerical earnings or revenue guidance is provided. Management said operating cash flow, cash on hand, and available secured borrowings should meet expected liquidity needs, while noting that financing needs depend on economic and other factors and additional financing may be required.
- Key risks include reimbursement and payer-contract changes, high fixed costs and capital requirements, debt service and variable interest rates, and the execution and integration of acquisitions. Management said ordinary-course legal matters were not expected to have a material adverse effect, but outcomes remain uncertain.
- A $2.2 million settlement with the U.S. Attorney’s Office for the Western District of New York was paid in September 2019, resolving allegations concerning physician identification on certain claims; the settlement admitted no wrongdoing. The filing also discloses a $1.3 million other-expense line for the nine-month period, including debt amendment expenses and legal contingency charges.
- After quarter-end, RadNet invested $1.0 million in WhiteRabbit.ai and loaned it $2.5 million. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue and EBITDA growth reflects acquisitions versus organic performance, and whether same-center growth and margins persist.
- The reconciliation of reported debt, lease liabilities, cash, and available revolver capacity, including the impact of scheduled principal payments and lease commitments.
- The sensitivity of earnings and cash flow to reimbursement rates, staffing and other operating costs, and interest-rate changes as hedges and caps approach maturity.
- Acquisition integration, purchase-price allocation, and contingent liabilities, as well as the outcome of remaining legal or regulatory matters.