RadNet, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. RadNet operated 334 outpatient imaging centers in seven states. The filing reports one operating segment.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total service revenue | $291.8m | $292.7m | $763.9m | $853.3m |
| Provider relief funding revenue | $0.2m | — | $25.7m | — |
| Income from operations | $23.4m | $16.9m | $14.8m | $46.1m |
| Net income (loss) attributable to RadNet common stockholders | $6.2m | $3.2m | $(20.8)m | $4.4m |
| Diluted earnings (loss) per share | $0.12 | $0.06 | $(0.41) | $0.09 |
| Adjusted EBITDA, non-GAAP | $45.8m | $41.0m | $88.8m | $117.2m |
- Operating margin was 8.0% in Q3 2020 versus 5.8% a year earlier; for the nine-month period it was 1.9% versus 5.4%. These percentages use total service revenue as the denominator.
- Cash and equivalents were $89.7m at September 30, up from $40.2m at year-end 2019. Operating cash flow was $170.3m for the first nine months, versus $82.6m; the increase included government and insurer advances and changes in working capital.
- Investing cash use was $88.3m, including $77.3m of property and equipment purchases. Financing cash use was $32.5m.
- Total term-loan face value was $673.2m ($662.6m carrying value after unamortized discount). No revolving credit borrowings were outstanding. Available capacity was $188.7m on the Barclays facility and $30.0m on the NJIN facility; RadNet reported compliance with credit covenants.
- Working capital, excluding current operating lease liabilities, was negative $47.3m. Current assets were $259.1m and current liabilities were $373.8m.
Changes versus the prior comparable periods
- Q3 service revenue was nearly flat year over year. Same-center procedure volumes were approximately 5% lower, while same-center revenue was essentially flat, supported partly by a 14% rise in capitation revenue.
- For the first nine months, service revenue declined 10.5%; reported total revenue including $25.7m of provider relief funding declined 7.5%. Same-center procedure volumes fell approximately 17%.
- Management attributed lower salary costs to furloughs, salary reductions, workflow changes and staffing adjustments. Q3 total operating expenses fell 2.6%; nine-month operating expenses fell 4.0%.
- Interest expense, excluding derivatives and amortization, declined 24.7% in Q3 and 22.0% for the nine months, largely reflecting lower variable rates. Conversely, the nine-month results included a $4.5m non-cash loss on an interest-rate hedge that no longer qualified for hedge accounting.
Outlook, commentary and notable items
- Procedure volumes had recovered from a low of 28% of pre-pandemic levels in April to approximately the pre-COVID pace by the filing’s discussion. Management cautioned that lost imaging appointments were not made up in later periods and that future pandemic effects remained uncertain. No specific financial guidance was provided.
- RadNet received $39.4m of accelerated Medicare payments and $5.0m of insurer advances, recorded as deferred revenue and subject to repayment through offsets beginning in 2021. It recognized $25.7m of Provider Relief Fund proceeds as revenue for the nine months, subject to program conditions and possible audit or recoupment. Subsidiaries also received $4.0m of PPP loans, recorded as debt; forgiveness was not assured.
- The company deferred $10.8m of employer Social Security taxes, with payment deferrals due in 2021 and 2022. It also took cost-saving measures, including staff adjustments, vendor and landlord payment negotiations, and concentrating patient traffic at larger centers.
- Acquisitions included DeepHealth, an AI and machine-learning business, for stated consideration of approximately $34.6m, and several imaging-center acquisitions. RadNet sold its Imaging On Call assets and exited teleradiology. A November 2020 subsequent event formed a majority-owned joint venture for three California imaging centers.
- DeepHealth-related contingent consideration and acquired in-process research and development involve estimates. RadNet reported no goodwill impairment indicator through September 30. Pending ordinary-course legal matters were not expected by management to have a material adverse effect, but outcomes remain uncertain.
Important facts for investors to verify
- Whether imaging volumes and revenue sustain recovery, particularly if COVID-19 restrictions or patient behavior again affect procedures.
- The timing and effect of repayment or offsets for Medicare and insurer advances, and whether Provider Relief Fund and PPP requirements are met without recoupment.
- Cash generation excluding temporary advances and relief funding, alongside capital expenditure needs and negative working capital.
- Debt-service capacity, covenant compliance, and the cost or effectiveness of interest-rate hedges as the $500m swaps take effect.
- Integration, milestone outcomes and final purchase accounting for DeepHealth, plus any subsequent changes in goodwill, intangible assets or contingent consideration.