RadNet looking to delever in 2009 after lowering capital spending, interest expense

By Jennifer Lanning Drey

Portland, Ore., March 16 - RadNet, Inc. expects to able to use free cash flow to delever its balance sheet in 2009 as a result of lower projected capital spending and reduced interest expense achieved through swap modifications made on two of its three interest rate hedges, Mark Stopler, chief financial officer of the company, said Monday.

RadNet expects to reduce net debt to less than $448 million by the end of 2009 from $466.3 million at the start of the year, Stopler said during the company's fourth-quarter earnings conference call.

The company plans to spend $15 million to $20 million less on capital spending than was spent in both 2007 and 2008 and to save between $6 million and $8 million of interest expense through the swap modifications.

The modifications extended the maturity of and repriced two interest rate hedges for an additional 36 months.

"These swap modifications are extremely important to our capital structure. We have evaluated various debt refinancing opportunities over the last two years to lower our interest payments, and none of those options ultimately would have been as attractive as the amount of savings we have locked in with these new swaps and through benefiting from today's low Libor rates," Stopler said.

The transactions also allowed the company to avoid the expense and uncertainty likely to have surrounded a potential refinancing, he said.

"Our hope is that the reduction in cash interest expense will allow us to deleverage the company more rapidly and reach GAAP profitability," he said.

Q4 debt reduction

During the fourth quarter, RadNet reduced outstanding debt by $13.8 million by repaying most of the outstanding balance on its $55 million revolving credit facility and through other reductions in capital lease and first-lien debt. The revolver had $1.7 million drawn on it at year-end.

RadNet chief executive officer Howard Burger noted during the call that the challenged credit markets may bring opportunities to repurchase debt from some of its lenders at attractive discounts to par.

Stopler said the company's capital structure remains secure, and it expects to remain in compliance with its debt covenants in the future.

"We believe that our current capital structure provides us sufficient financial flexibility to effectively execute our growth plans in the near term," he said.

Adjusted EBITDA falls short

For full-year 2008, RadNet posted adjusted EBITDA of $98.4 million. The figure represented a 15.4% increase over 2007 adjusted EBITDA but fell short of the company's guidance range of $100 million to $115 million.

Stopler said the figure was negatively impacted during the fourth quarter by a $2.3 million increase to contractual allowance reserves against 2007 and prior-year receivables.

RadNet is looking for significant improvement in adjusted EBITDA margins in 2009, Burger said. The company believes it can improve adjusted EBITDA margins by 1% to 2% by the end of the year.

Guidance provided for full-year 2009 includes adjusted EBITDA of $105 million to $115 million, which assumes revenue and adjusted EBITDA growth despite the challenging economy.

Free cash flow is expected to be between $25 million and $35 million for 2009.

RadNet posted fourth-quarter revenue of $128.3 million, representing a 25.2% increase over the same period in the prior year.

RadNet is a Los Angeles-based provider of diagnostic imaging services through a network of fully owned and operated outpatient imaging centers.

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