RadNet, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. RadNet operated 335 outpatient imaging centers in six states. The quarter’s results include the initial effects of COVID-19, which began reducing procedure volumes near quarter-end.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $281.6 million | $271.5 million | +3.7% |
| Operating income (loss) | ($8.8 million) | $7.3 million | Declined $16.0 million |
| Net loss attributable to RadNet common stockholders | ($16.4 million) | ($3.7 million) | Loss widened $12.6 million |
| Basic and diluted loss per share | ($0.33) | ($0.08) | — |
| Adjusted EBITDA, non-GAAP | $20.4 million | $33.1 million | Down 38.5% |
| Cash provided by operating activities | $40.9 million | $26.9 million | Up $14.0 million |
| Cash used in investing activities | ($55.1 million) | ($35.2 million) | Higher investment outflow |
Revenue growth reflected acquisitions and capitation revenue growth. Same-center revenue increased 0.4%; same-center procedure volume decreased 3.3%, while the mix shifted toward higher-margin MRI, CT and PET services. Same-center capitation revenue rose 8.5%. Revenue under capitation arrangements was $33.2 million, compared with $28.9 million.
Operating expenses increased 9.9% to $290.3 million, outpacing revenue growth. Cost of operations rose to 95.0% of revenue from 89.5%; operating margin fell to (3.1%) from 2.7%. Net loss attributable to common stockholders was 5.8% of revenue, versus 1.4% in the prior-year quarter. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $94.3 million at March 31, 2020, up from $40.2 million at year-end. The increase included net revolving-credit borrowings.
- Total debt obligations were $762.5 million, including $694.9 million in term-loan face value and an $80.0 million Barclays revolver balance. RadNet reported $50.8 million of remaining Barclays revolver availability after letters of credit; it was in compliance with facility covenants.
- On April 10, 2020, RadNet repaid the $80.0 million revolver balance; as of May 7, it reported no borrowings under revolving facilities. Term loans mature in 2023.
- Working capital, excluding current operating lease liabilities, was $20.3 million, compared with negative $25.0 million at December 31, 2019. Operating lease liabilities totaled $471.9 million.
- Capital spending on property and equipment was $51.5 million, exceeding quarterly operating cash flow. The company also spent $4.3 million on facility acquisitions.
Material changes and notable items
- Revenue rose 3.7%, but total operating expenses grew 9.9%; salaries and professional reading fees, medical supplies, and depreciation and amortization were among the increases.
- Medical-supply costs increased 29.6%, partly due to personal protective equipment purchases in response to COVID-19 and specialized contrast agents for clinical research. Staffing increases and an extra payday contributed to higher compensation expense.
- Interest expense decreased 6.0% to $11.6 million; excluding noncash amortization, it declined 7.7%, which management attributed to lower variable interest rates.
- A $18.5 million after-tax loss on cash-flow hedges was recorded in other comprehensive loss, not as an operating expense. Comprehensive loss attributable to common stockholders was $34.9 million, compared with $4.9 million.
- RadNet acquired two imaging centers for a combined $4.4 million in cash consideration. Its planned DeepHealth acquisition, expected to involve issuing 1.0 million shares, was delayed from an anticipated April 1 closing to June 1, subject to customary closing conditions.
Outlook, risks and contingencies
Management said it could not estimate the full effect of COVID-19 on results, cash flows or financial position. Reduced procedure volumes began near quarter-end and continued afterward; management said lost imaging slots are generally not recovered in later periods. In response, the company concentrated patient traffic at larger centers, negotiated vendor and landlord payment terms, and initiated furloughs, compensation reductions and telecommuting. Management expected the staffing actions to affect the second quarter.
RadNet received approximately $39.0 million in advanced Medicare payments, repayable through offsets against future Medicare claims beginning 120 days after receipt over a three-month period. It also received approximately $14.9 million in CARES Act funding and had applied for additional support. The filing notes that funding compliance guidance was still developing and that noncompliance could create enforcement risk.
The company warned that sustained operating losses could affect borrowing capacity and covenant compliance, potentially requiring additional financing that may not be available on acceptable terms. Other risks include further center closures or disruptions, lower procedure volumes, payor-mix changes, collection risks, workforce or supplier disruptions, and uncertainty around DeepHealth. Ordinary-course legal matters were not expected by management to have a material adverse effect, though outcomes remain uncertain.
Most important facts for investors to verify
- Subsequent-quarter procedure volumes, center closures and the duration and financial effect of COVID-19 disruptions.
- Whether cost reductions offset revenue declines, and how margins and Adjusted EBITDA develop against the Q1 deterioration.
- Cash generation and capital spending needs, including the use of Medicare advances and CARES Act funds and repayment requirements.
- Debt balances, covenant headroom, interest-rate exposure and the availability of revolver capacity after the April repayment.
- Whether the DeepHealth acquisition closed on the revised timetable and on the disclosed terms.
- Potential impairment or credit-loss effects as operating conditions and the value of investments and receivables evolve.