RadNet, Inc. — FY 2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; it is an annual report, not a standalone quarterly filing. RadNet operates outpatient diagnostic imaging centers and related radiology software and teleradiology businesses. At year-end it operated 344 centers in six states. The financial statements are audited under U.S. GAAP; Ernst & Young issued unqualified opinions on the statements and internal controls.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $975.1 million | $922.2 million |
| Income from operations | $30.9 million | $50.1 million |
| Income before taxes | $38.5 million | $26.4 million |
| Net income attributable to RadNet common stockholders | $32.2 million; $0.67 basic EPS | $53,000; less than $0.01 per share as presented |
| Net cash provided by operating activities | $116.8 million | $142.2 million |
| Adjusted EBITDA, non-GAAP | $143.5 million | $142.5 million |
| Free cash flow, non-GAAP | $36.9 million | $50.8 million |
Revenue increased 5.7%; revenue from centers operating throughout both years rose 1.8%. Operating expenses grew faster than revenue, and operating income fell about 38%. FY 2018 income included a $39.5 million non-cash gain from remeasuring RadNet’s previously held interest when it took control of New Jersey Imaging Network (NJIN). The company also recorded a $3.9 million impairment, principally goodwill, for Imaging On Call.
The reported tax provision fell to $394,000 from $24.3 million in 2017, when the Tax Cuts and Jobs Act caused a $13.6 million tax charge. Net income attributable to RadNet therefore rose sharply, but the NJIN remeasurement gain and lower tax expense are important to interpreting the increase. Interest expense rose 7% to $43.5 million.
Fourth-quarter detail: unaudited Q4 2018 revenue was $257.2 million and net income attributable to RadNet common stockholders was $29.1 million, or $0.60 diluted EPS. Q4 2017 revenue was $235.6 million and the company reported a $7.3 million attributable loss.
Liquidity, cash flow and debt
- Cash was $10.4 million at year-end, down from $51.3 million. Working capital was negative $30.8 million, compared with positive $43.7 million in 2017.
- Operating cash flow was $116.8 million. Investing activities used $146.7 million, including $72.2 million of property and equipment purchases and $73.2 million for imaging facility acquisitions. Financing activities used $10.9 million.
- Management said operating cash flow, available cash and borrowing availability were expected to cover short-term needs over the next 12 months, while noting that future financing may be needed if requirements are not met.
- Combined indebtedness of term loans, capital leases, notes payable and revolving borrowings was approximately $687.4 million, excluding the term-loan discount. This included $646.4 million of term loans and $28.0 million drawn on the $117.5 million Barclays revolver; $83.2 million remained available on that facility. The $30.0 million SunTrust revolver was undrawn. The company reported compliance with credit-facility covenants.
- Debt is substantially variable-rate. Interest-rate caps mitigate some exposure, but a hypothetical 1% increase in specified rates would raise annual interest expense by approximately $1.8 million in total, based on the filing’s sensitivity estimates.
Material changes, outlook and risks
- RadNet expanded through acquisitions and partnerships, including acquiring Medical Arts Radiology’s 10 centers and consolidating NJIN’s 18 centers. Year-end center count rose from 297 to 344. Goodwill increased to $418.1 million from $256.8 million.
- Management reported same-center revenue growth of 1.8%, while staffing and other operating costs increased. Adjusted EBITDA was nearly flat year over year, but free cash flow declined. The filing provides no specific quantified forward earnings or revenue guidance.
- Management cited reimbursement-rate pressure, referral dependence, competition, capitation utilization risk, difficulty recruiting radiologists, and the high fixed-cost nature of imaging operations. Healthcare regulation, billing and physician credentialing, and corporate-practice-of-medicine and fee-splitting rules also pose risks.
- Substantial debt, variable interest rates, negative working capital, and significant lease commitments constrain flexibility. The company disclosed approximately $512.0 million of operating lease payments over stated lease terms and said adopting the new lease standard would materially affect the balance sheet.
- Imaging On Call lost professional-group clients and a contract with a major local health provider during 2018, contributing to its impairment. The company also disclosed uncertainty over whether the liquidation estate of former malpractice insurer Fairway can pay covered claims.
- The company said ordinary-course litigation was not expected to have a material adverse effect. It adopted ASC 606 in 2018; management said the principal effect was presentation of certain bad-debt amounts as revenue reductions, with no material effect on consolidated results. The 2018 filing states disclosure controls and internal control over financial reporting were effective; management described improvements to controls associated with a previously identified weakness.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the $39.5 million NJIN remeasurement gain and the unusually low 2018 tax provision.
- Whether same-center growth and cost control can improve operating income and free cash flow, given the decline in both operating cash flow and free cash flow.
- Debt-service capacity, revolver availability, covenant headroom, and sensitivity to variable interest rates and refinancing needs.
- Integration and performance of acquired centers and joint ventures, and the assumptions supporting $418.1 million of goodwill and future impairment assessments.
- Potential financial exposure from radiologist relationships, reimbursement and regulatory changes, malpractice claims involving Fairway, and implementation of the lease-accounting standard.