RadNet, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are included below where disclosed. Amounts are U.S. dollars.
Business context
RadNet operates freestanding outpatient diagnostic imaging centers and related radiology, teleradiology and imaging-software businesses. At year-end it operated 305 centers in seven states. Imaging procedures totaled 6.11 million, up from 5.64 million in 2015. Growth included acquisitions and internal development; same-center service-fee revenue growth was more modest.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net revenue | $884.5 million | $809.6 million |
| Operating income | $38.5 million | $39.1 million |
| Net income attributable to RadNet common stockholders | $7.2 million | $7.7 million |
| Diluted earnings per share | $0.15 | $0.17 |
| Adjusted EBITDA (non-GAAP) | $133.0 million | $121.7 million |
| Cash from operating activities | $91.6 million | $67.0 million |
| Cash and cash equivalents at year-end | $20.6 million | $0.4 million |
| Working capital at year-end | $62.6 million | $72.4 million |
- Net revenue increased 9.2%; procedure volume rose about 8.3%. Same-center service-fee revenue increased 2.6%.
- Operating income declined 1.6%, and income attributable to common stockholders declined 6.2%. Adjusted EBITDA increased 9.3%; it is a company-defined non-GAAP measure.
- Operating cash flow was $91.6 million; investing activities used $65.5 million, including $59.3 million for property and equipment. Cash from operations less property-and-equipment purchases was approximately $32.4 million.
- Year-end accounts receivable, net, was $164.2 million. The provision for bad debts increased 26.0% to $45.4 million, or 4.9% of net revenue, from $36.0 million, or 4.3%, in 2015.
- Term-loan principal was $646.9 million at year-end, before debt discounts; the company also had $7.3 million of capital-lease obligations and other smaller debt. The revolving facility had no balance outstanding and provided up to $117.5 million of borrowing capacity. Total liabilities were $797.4 million.
- Interest expense was $43.5 million, versus $41.7 million. The company reported compliance with its credit-facility covenants at year-end.
- For the fourth quarter, net revenue was $224.9 million versus $215.7 million a year earlier; net income attributable to common stockholders was $3.7 million versus $0.9 million.
Material changes and unusual items
- Growth was supported by acquired centers, including the 2015 Diagnostic Imaging Group acquisition. In 2016, RadNet acquired two Astoria, New York centers for $5.0 million and bought the remaining 47.6% interest in its Park West joint venture for approximately $1.2 million.
- RadNet refinanced its first-lien facilities in July 2016, establishing $485 million of first-lien term loans and a $117.5 million revolver. Proceeds repaid prior first-lien borrowings, paid down $12 million of second-lien debt, covered transaction costs and provided approximately $10 million for general corporate purposes. Second-lien principal was $168 million at year-end and carried an 8% rate.
- A $5.0 million gain was recorded after sellers returned 958,536 shares following discovery of errors in pre-acquisition financial information provided for the Diagnostic Imaging Group acquisition. The filing also reports a $6.1 million acquisition-related working-capital adjustment in its Adjusted EBITDA reconciliation.
- RadNet recognized $2.8 million of meaningful-use incentive income and $9.8 million of equity earnings from unconsolidated joint ventures. These items contributed to reported results and should be considered when assessing recurring performance.
- The company classified five Rhode Island imaging centers as held for sale, with a planned sale within 12 months; the disposition was not treated as discontinued operations.
Outlook, risks and contingencies
- No numerical financial guidance was provided. Management stated that operating cash flow, available cash and available secured borrowing capacity were expected to meet short-term liquidity needs, while noting future requirements for working capital, capital spending and debt service.
- Management described first-quarter seasonality from winter weather in northeastern markets and patient delays when annual high-deductible plan amounts reset.
- Major risks include substantial debt and variable-rate exposure, reimbursement and healthcare-policy changes, dependence on physician referrals and contracted radiology groups, capitation utilization risk, acquisition integration, and the capital-intensive nature of imaging operations. A 1% rate increase was estimated to add approximately $6.5 million to annual interest expense on first- and second-lien term loans before considering hedges.
- RadNet reported a material weakness in revenue and accounts-receivable controls involving information-technology-dependent manual controls and IT general controls. Management was implementing remediation. Ernst & Young issued an adverse opinion on internal control over financial reporting, while issuing an unqualified opinion on the consolidated financial statements.
- Bad-debt estimates and collections warrant attention: management cited exhausted collection efforts for certain accounts, and physician credentialing delays had lengthened billing and collection cycles.
- Subsequent events included two California center acquisitions and a February 2017 credit amendment reducing the first-lien interest-rate margin by 0.50 percentage points, from 3.75% to 3.25%.
Important facts for investors to verify
- Whether remediation of the material weakness is completed and whether revenue recognition and receivable valuation controls operate effectively.
- Collection trends, accounts-receivable aging, bad-debt provisions and the effect of patient deductibles on cash realization.
- Debt maturities, covenant headroom, interest-rate exposure and the terms and availability of revolving-credit capacity.
- How much revenue and Adjusted EBITDA growth is organic versus acquisition-related, and whether acquired centers meet expected performance.
- The outcome and timing of the Rhode Island center sale and the recurring contribution of joint-venture earnings and other unusual items.
- Exposure to reimbursement changes, especially commercial-payor concentration and government-program rates, and the financial risk embedded in capitation contracts.