RadNet, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. RadNet operated 332 outpatient imaging centers in six states. Results were materially affected by COVID-19-related declines in imaging procedures.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue, excluding Provider Relief Fund | $190.6 million | $289.1 million | $472.1 million | $560.6 million |
| Provider Relief Fund recognized separately | $25.5 million | — | $25.5 million | — |
| Operating income (loss) | $0.2 million | $22.0 million | $(8.6) million | $29.3 million |
| Net income (loss) attributable to RadNet shareholders | $(10.6) million | $4.9 million | $(27.0) million | $1.2 million |
| Basic and diluted EPS | $(0.21) | $0.10 | $(0.53) | $0.02 |
| Adjusted EBITDA, non-GAAP | $22.6 million | $43.1 million | $43.0 million | $76.2 million |
Including Provider Relief funding, reported revenue was $216.0 million in Q2, down 25.3% year over year, and $497.6 million for the first half, down 11.2%. Excluding the relief funding, revenue declined 34.1% in Q2 and 15.8% for the first half. The filing reports operating results after adding the relief funding as a separate line; without that funding, the Q2 operating result would have been a loss of approximately $25.3 million.
- Cash flow: Six-month operating cash flow was $131.5 million, versus $44.5 million a year earlier. Investing cash use was $67.6 million, including $64.2 million of property and equipment purchases. Financing cash use was $19.4 million. Cash ended the period at $84.6 million.
- Debt and liquidity: Debt obligations were $676.6 million carrying value, including $684.1 million of term-loan face value less $11.6 million of unamortized discounts, and $4.0 million of PPP loans. The Barclays revolver had $131.2 million available after letters of credit; the $30.0 million SunTrust revolver was undrawn. RadNet reported compliance with credit covenants. Working capital, excluding current operating lease liabilities, was negative $69.5 million, compared with negative $25.0 million at year-end 2019.
- Margins and costs: Q2 operating income was near break-even despite $25.5 million of relief funding. Salaries and professional reading fees fell 28.5% in Q2 as furloughs and salary reductions were implemented. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Changes versus prior period and significant items
- COVID-19 reduced same-center procedure volumes approximately 43% in Q2 and 23% for the first half year over year. Management said volumes had recovered to approximately 90% of the pre-pandemic pace from a low of 28% in April; lost appointments were not expected to be made up later.
- Cash increased from $40.2 million at December 31, 2019 to $84.6 million. Accounts receivable declined from $154.8 million to $125.7 million. Operating cash flow benefited in part from a $44.4 million increase in deferred revenue, including advance payments.
- In April, RadNet received $39.4 million in advance Medicare payments and, in May, $5.0 million from an insurer, both repayable through offsets against future claims. These are recorded as deferred revenue, not revenue earned at receipt. The company also received $25.5 million in Provider Relief Fund assistance, subject to program terms and possible audit or recoupment.
- RadNet acquired DeepHealth, an AI and machine-learning company, on June 1 for stated preliminary consideration of approximately $34.6 million, primarily in stock and contingent share consideration. It also acquired two imaging centers for cash consideration totaling $4.4 million. DeepHealth added $23.4 million of goodwill and $14.8 million of intangible assets, primarily in-process research and development.
- The company exited its teleradiology business through a June 1 asset sale. An August 6 collaboration with Hologic to develop AI tools and upgrade mammography equipment was disclosed as a subsequent event.
- A $3.8 million non-cash charge arose from an interest-rate swap deemed ineffective as a cash-flow hedge after interest rates fell. The change in hedge values also contributed to accumulated other comprehensive loss.
Outlook, risks, and contingencies
The filing provides no specific financial guidance. Management said the pandemic’s duration and ultimate impact remained uncertain and warned of possible continued operating losses. It cited procedure volumes, patient behavior, government restrictions, workforce availability, payor mix, collections, and vendor and partner disruptions as risks. Sustained losses could affect borrowing capacity or covenant compliance and could require additional financing. RadNet reported no material impairment indicators for goodwill through June 30, 2020. Pending ordinary-course legal matters were not expected by management to have a material adverse effect, though outcomes remain uncertain.
Investor verification priorities
- Track procedure volumes against the stated recovery to about 90% of pre-COVID levels and assess whether lower volumes persist.
- Verify repayment or forgiveness treatment for the $39.4 million of Medicare advances, $5.0 million insurer advance, and $4.0 million PPP loans; separately assess any Provider Relief Fund recoupment exposure.
- Monitor liquidity, negative working capital, debt maturities in 2023, covenant headroom, and the availability of the revolver.
- Review the performance and milestone-based share consideration of DeepHealth, as well as the accounting estimates for its acquired intangible assets and goodwill.
- Assess the sustainability of operating cash flow and Adjusted EBITDA, including the effects of deferred-revenue timing, capital spending, and non-GAAP adjustments.