RadNet, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are to the same 2010 periods. Amounts are in U.S. dollars. RadNet operated 206 diagnostic imaging facilities in six states and reported one operating segment.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $155.6M | $139.0M | $301.8M | $263.1M |
| Operating income | $14.8M | $9.9M | $23.0M | $14.3M |
| Net income (loss) attributable to RadNet common stockholders | $3.5M | ($11.8M) | $2.6M | ($15.9M) |
| Basic and diluted EPS | $0.09 | ($0.32) | $0.07 | ($0.43) |
| Adjusted EBITDA | $30.5M | $27.4M | $56.2M | $48.0M |
Revenue increased 12.0% in Q2 and 14.7% year to date. At centers operating throughout both comparable periods, revenue grew 2.7% in Q2 and 2.5% for the first half, primarily reflecting procedure-volume growth; acquisitions and other changes contributed materially to reported growth. Operating margin was 9.5% in Q2 versus 7.1%, and 7.6% for the first half versus 5.4%. Reported net margin attributable to common stockholders was 2.3% in Q2 and 0.9% year to date, compared with losses in 2010.
Operating expenses rose with revenue, including salaries and professional reading fees, rent, and other operating costs. Bad-debt provision was $8.7M in Q2 and $16.7M year to date, respectively 5.6% and 5.5% of revenue, down from 6.1% in both 2010 comparisons. Interest expense was $13.2M in Q2 and $26.1M for the first half.
Cash, liquidity and debt
- Six-month operating cash flow was $22.9M, compared with $22.5M in 2010. A $36.5M increase in accounts receivable was a significant operating cash-flow use.
- Investing cash outflow was $35.2M, including $24.9M in property and equipment purchases and $11.5M for imaging-facility acquisitions. Financing cash inflow was $11.8M, including $25.7M net borrowing under the revolving facility.
- Cash fell from $0.6M at year-end 2010 to $0.2M at June 30, 2011. Working capital was $20.5M, up from $5.8M; the company also reported a $77.1M equity deficit.
- At June 30, debt included $200.0M of 10⅜% senior notes due 2018, $281.4M of secured term-loan debt, and $25.7M drawn on a $100M revolving facility. The secured term loan and revolver carry variable rates; the company reported $307.1M outstanding under its credit facilities and compliance with debt covenants.
- Management said operating cash flow, available cash and borrowing capacity were expected to meet liquidity needs, while noting that future requirements and access to financing depend on economic and other factors outside its control.
Changes, outlook and risks
- RadNet acquired Imaging On Call, Team Radiology, an Oakland practice, and five Maryland imaging centers during the period. Acquisition costs included $5.5M cash plus a potential earn-out of up to $2.5M for Imaging On Call, and $5.2M cash plus assumed liabilities for the Maryland centers.
- Q2 results included a $1.9M net gain on equipment disposal, primarily associated with insurance proceeds for equipment damaged in a fire. First-half other income included a $2.1M fair-value gain on interest-rate swaps; the swaps had an $8.4M liability at June 30.
- The year-ago periods included a $9.9M debt-extinguishment loss from the 2010 refinancing, affecting the reported improvement in earnings. First-half interest expense increased, primarily due to additional borrowings following that refinancing.
- No numerical revenue or earnings guidance was provided. Management’s stated operating priorities were improving existing-center performance and efficiency, profitable contracting, expanding MRI/CT/PET applications, and expanding its networks.
- Key risks include high leverage and capital needs, changes to Medicare and other reimbursement rates, competition, access to capital, debt-covenant compliance, and successfully integrating acquisitions. Management cited the scheduled 2.2% Medicare physician-fee-schedule update through December 31, 2011, while warning that future congressional action to prevent formula-driven reductions was not assured. Ordinary-course litigation was disclosed; management did not expect current matters to have a material adverse impact.
Investor verification points
- Review accounts-receivable growth, collections and bad-debt assumptions, given low reported cash and the receivables-related operating cash use.
- Confirm debt pricing, maturity and covenant terms, available revolver capacity and the company’s ability to fund capital expenditures and debt service.
- Separate comparable-center performance from acquisition-driven revenue growth and assess the integration and returns of the acquired businesses.
- Assess sustainability of earnings and Adjusted EBITDA, including the effects of the equipment-fire gain, swap fair-value changes, and the prior-year refinancing charge.
- Monitor Medicare reimbursement policy and other payor-rate changes; the filing identifies no specific forward numerical guidance.