Radnet, Inc. annual report, FY2013

Business context and reporting period

RadNet, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. The company operates outpatient diagnostic imaging centers and related imaging software and teleradiology businesses. At year-end, it operated 250 centers across seven states and performed approximately 4.53 million imaging procedures.

The filing is an annual report, not a standalone quarterly filing; it includes unaudited results for the fourth quarter of 2013.

Financial results and liquidity

Revenue rose 8.6%, while operating income declined. Operating expenses increased 9.5% to $659.4 million. Reported 2012 net income included a $55.2 million income-tax benefit, primarily from reversing a valuation allowance on deferred tax assets; 2013 included $3.5 million of tax expense.

Fourth-quarter 2013 net service fee revenue was $178.3 million versus $159.3 million in fourth-quarter 2012. Quarterly operating expenses were $164.6 million versus $152.7 million, and net income attributable to common stockholders was $1.2 million versus $51.9 million. The prior-year quarter included a substantial tax benefit; quarterly total net revenue is not clearly presented in the filing’s quarterly summary.

At December 31, 2013, cash was $8.4 million, accounts receivable $133.6 million, working capital $58.0 million, total assets $722.6 million, and total liabilities $720.4 million. Stockholders’ equity was $2.2 million. Total indebtedness was approximately $581.6 million, including $385.3 million of secured term debt and $200.0 million of senior notes; no revolver borrowings were outstanding. Interest expense was $45.8 million. Capital expenditures were approximately $48.6 million.

Material changes versus prior period

• Procedure volume increased from 4.14 million to 4.53 million, while revenue growth reflected acquisition contributions. At centers operating in both years, service fee revenue declined 6.6%, principally due to lower procedure volumes and collection rates.
• Capitation revenue increased 19.1% to $65.6 million, or 9% of net revenue, partly due to new contracts.
• Interest expense fell approximately 14.9%, reflecting lower borrowing spreads after the April 2013 credit amendment and the expiration of interest-rate swaps.
• Adjusted EBITDA was nearly flat year over year, despite higher reported revenue. The Northfield, New Jersey center sale generated a $2.1 million gain in 2013.
• The company completed acquisitions and ownership changes during 2013, including imaging centers in California and New York, and ended the year with 250 centers.

Outlook, commentary, risks and unusual items

Management stated that operating cash flow, available cash and availability under secured credit facilities were expected to meet short- and long-term liquidity needs, while cautioning that future financing is not assured. The filing provides no quantified earnings or revenue guidance. Management cited a strategy of improving existing-center performance, pursuing selective acquisitions, managing costs and expanding capitation business.

• RadNet is highly leveraged, with substantial debt service, restrictive covenants, variable-rate exposure and a significant concentration of scheduled debt maturities in 2018. The company was pursuing a possible refinancing of its 10.375% senior notes, but gave no assurance it would be completed on favorable terms or at all.
• Medicare reimbursement faced pressure, including a 2% sequestration reduction that began in April 2013 and a higher assumed utilization factor for advanced imaging equipment effective in 2014. The filing also describes uncertainty in future reimbursement policy.
• Business risks include reliance on physician referrals and contracted radiology groups, capitation utilization risk, competition, equipment and technology needs, adverse weather, and compliance with healthcare, privacy and corporate-practice-of-medicine rules.
• Management and the auditor identified a material weakness in income-tax accounting controls. Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end; Ernst & Young issued an adverse opinion on internal control but an unqualified opinion on the financial statements.
• Seasonality is typical: first-quarter volumes and revenue are generally lowest, due to winter weather in northeastern markets and patient cost sensitivity after deductible resets.

Important facts for investors to verify

• Whether same-center scan volumes, collections and revenue stabilize or continue to decline, and how much reported growth depends on acquisitions.
• Debt refinancing progress, 2018 maturity obligations, covenant headroom and cash available after capital spending and debt service.
• Whether the tax-accounting material weakness is remediated and internal controls become effective.
• Effects of Medicare and commercial reimbursement changes, physician credentialing delays and capitation utilization on margins and cash collection.
• Underlying comparability of 2012 earnings, including the large tax benefit, with 2013 results.