RadNet, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 16, 2018. This is an annual report, not a standalone fourth-quarter filing. Dollar amounts below are U.S. dollars.
Business context
RadNet operated 297 outpatient diagnostic imaging centers in six states and performed approximately 6.20 million procedures. It also provides imaging software through eRAD and teleradiology through Imaging On Call. Revenue is primarily generated by imaging services; commercial insurance was the largest payor category.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenue | $922.2 million | $884.5 million |
| Income from operations | $50.1 million | $38.5 million |
| Income before income taxes | $26.4 million | $12.4 million |
| Net income attributable to RadNet common stockholders | $53,000 ($0.00 per share) | $7.2 million ($0.16 basic EPS) |
| Adjusted EBITDA (non-GAAP) | $142.5 million | $133.0 million |
| Cash from operating activities | $142.2 million | $91.6 million |
| Free cash flow (non-GAAP) | $50.8 million | $35.5 million |
Revenue grew 4.3%; procedure volume increased about 1.4%. For centers operating throughout both years, service-fee revenue rose 5.3%, reflecting higher advanced-imaging volumes and reimbursement rates. Operating expenses totaled $872.1 million, up from $846.1 million. The filing reports operating income at 5.2% of net revenue before bad-debt provision, versus 4.1% in 2016.
Cash and cash equivalents were $51.3 million, accounts receivable net was $155.5 million, working capital was $43.7 million, and total equity was $69.9 million at year-end. Gross combined term loans, capital leases and notes payable were reported as $627.6 million, excluding term-loan discount; first-lien term loans were $620.3 million. The $117.5 million revolver was undrawn and available, subject to customary conditions. The company reported covenant compliance and believed available cash, operating cash flow and facility borrowings would meet short-term liquidity needs.
Changes, unusual items and management commentary
- Income attributable to common stockholders fell sharply despite higher operating income. The 2017 tax provision was $24.3 million, including a provisional $13.6 million charge related to the Tax Cuts and Jobs Act; the reported effective tax rate was 92.1%. Management said tax accounting remained incomplete and estimates could change.
- In August 2017, RadNet borrowed $170 million under an amendment to its first-lien facility and used the proceeds to repay its second-lien debt. The amendment increased quarterly principal payments to about $8.3 million and set variable interest margins according to leverage. Interest expense declined 6.5% to $40.6 million.
- FY2017 included $3.1 million of gains on center and medical-practice sales, $1.8 million in severance costs, and $13.6 million in equity-method earnings from joint ventures. RadNet acquired several centers and RadSite, formed or expanded hospital joint ventures, sold five Rhode Island centers and divested its Breastlink practice.
- Fourth-quarter 2017 net revenue was $235.6 million; net loss attributable to common stockholders was $7.3 million, including a $20.1 million quarterly tax provision.
- Management cited seasonal first-quarter softness from winter weather and patient cost sensitivity under high-deductible plans. It emphasized growth in established markets, acquisitions and joint ventures, operating efficiency, and utilization management. No specific forward financial guidance was provided.
Risks, contingencies and controls
- Material weakness: Revenue and accounts-receivable controls dependent on information technology were not performed, reviewed or documented with sufficient timeliness, accuracy or precision. Management said the weakness, first identified in 2015, remained unremediated at December 31, 2017. Ernst & Young issued an adverse opinion on internal control over financial reporting, while giving an unqualified opinion on the financial statements.
- Debt and cash demands: High indebtedness, variable rates, scheduled principal payments, substantial lease commitments and credit-agreement covenants may constrain investment and flexibility. A 1% increase in adjusted Eurodollar rates, after interest-rate caps, was estimated to increase annual interest expense by $4.0 million.
- Healthcare regulation and reimbursement: Medicare/Medicaid rate changes, payor cost controls, credentialing delays, and rules governing referrals, fee-splitting and the corporate practice of medicine could affect collections and operations. Capitation arrangements transfer utilization risk to RadNet and contracted practices.
- Physician relationships and insurance: RadNet depends on referrals and contracted radiology groups, including BRMG, which provides services at most California facilities and is indirectly 99% owned by CEO Howard Berger. Its prior malpractice insurer, Fairway, was found insolvent and ordered into liquidation; recovery of covered claims was uncertain.
- Other disclosed risks include cybersecurity and privacy incidents, competition, acquisition integration, equipment uptime, high fixed costs, and exposure to severe weather and earthquakes. Ordinary-course litigation was not believed by management to have a material adverse effect.
Important facts for investors to verify
- Progress and independent testing of the revenue and receivables control remediation; whether any restatement or additional audit findings arise.
- Underlying cash generation, working-capital and receivables quality, including the allowance for doubtful accounts, which increased to $34.6 million from $20.7 million.
- Debt amortization, leverage-based interest margins, access to the revolver, and compliance with credit covenants.
- Final tax effects of the Tax Act and the resulting cash-tax outlook; the $13.6 million 2017 charge was provisional.
- Resolution and recoveries, if any, from the Fairway liquidation, and adequacy of ongoing malpractice coverage.
- Whether same-center volume and revenue growth can continue while reimbursement, staffing, referral and capitation risks remain manageable.