RadNet, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; it also includes unaudited quarterly results. RadNet operates outpatient diagnostic imaging centers and related software and teleradiology businesses. At year-end it operated 335 centers in six states.
Financial performance and liquidity
Amounts are in millions except per-share data. Percentage changes compare 2019 with 2018.
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Revenue | $1,154.2 | $975.1 | Up 18.4%; same-center revenue rose 6.1% to $971.6 |
| Operating income | $69.9 | $30.9 | Operating margin 6.1%, versus 3.2% |
| Net income attributable to RadNet common stockholders | $14.8 | $32.2 | Diluted EPS $0.29, versus $0.66 |
| Adjusted EBITDA (non-GAAP) | $164.1 | $141.8 | Up about 15.8% |
| Cash from operating activities | $104.3 | $116.8 | Down about 10.7% |
| Free cash flow (company-defined, non-GAAP) | $47.4 | $35.1 | Up; calculated after cash interest and capital expenditures |
| Cash and cash equivalents at year-end | $40.2 | $10.4 | |
| Debt | $705.7 face value of term loans | $646.4 face value of term loans | 2019 carrying value was $692.1 after discount; no Barclays or SunTrust revolver balance outstanding |
Revenue growth reflected acquisitions and same-center volume growth. Same-center MRI, CT and PET procedures increased 4.7%, 6.2% and 7.8%, respectively. Commercial insurance represented 56% of net service fee revenue, Medicare 21%, capitated payors 11% and Medicaid 2%.
Liquidity included $131.7 million available on the Barclays revolver after letters of credit, plus an undrawn $30.0 million SunTrust revolver. Working capital was negative $23.0 million, excluding current operating lease liabilities. Operating lease liabilities totaled $482.1 million; the filing reports substantial ongoing lease commitments. Management said available cash, operating cash flow and borrowing capacity were expected to meet short-term needs over the next 12 months, subject to business and economic conditions.
Material changes versus the prior year
- Revenue increased 18.4%, including $182.6 million of net service fee revenue from centers acquired or divested after the start of 2018 in the company’s stated comparison. Same-center revenue grew 6.1%.
- Operating margin improved, with cost of operations declining to 86.6% of revenue from 89.0%. Salaries and professional reading fees, rent and medical supplies rose, reflecting higher volume, staffing and expanded operations.
- Net income attributable to common stockholders fell to $14.8 million from $32.2 million. The 2018 result included a $39.5 million noncash gain from remeasuring RadNet’s prior interest when it gained control of New Jersey Imaging Network (NJIN). The 2019 tax provision was $6.2 million (21.0% effective rate), compared with $0.4 million (1.0%) in 2018.
- Operating cash flow decreased, while company-defined free cash flow increased. Cash capital purchases were $74.2 million; acquisitions used $27.2 million in cash. The company said it had invested over $100 million annually in expansion in each of the prior two years and expected similar investment in the foreseeable future.
- RadNet added $100 million of term loans in April 2019 and extended the Barclays revolver maturity to July 2023. It reported compliance with credit-facility covenants at year-end.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management described plans to grow through same-center improvements, acquisitions, joint ventures and imaging technology, while noting that expansion depends on financing and market conditions.
- RadNet acquired or consolidated several operations in 2019, including Kern Radiology, Zilkha Radiology, Hudson Valley Radiology Associates and Nulogix; it also formed a joint venture with Dignity Health. It invested $1.0 million in WhiteRabbit.ai and loaned it $2.5 million.
- After year-end, RadNet announced a definitive agreement to acquire DeepHealth, with closing planned for April 1, 2020 and approximately 1.0 million RadNet shares to be issued. The filing also identified the novel coronavirus outbreak as a potential source of operational disruption; its impact was uncertain at the filing date.
- Key risks include high leverage and variable interest rates; reimbursement and healthcare-policy changes; capitation utilization risk; dependence on physician referrals and contracted radiologists; acquisition integration and goodwill impairment; and healthcare compliance, privacy and cybersecurity risks. A 1% increase in applicable Eurodollar rates was estimated to raise annual interest expense by about $1.5 million after the disclosed Barclays caps; the filing separately estimated about $0.6 million exposure for the SunTrust term loan.
- RadNet accrued and paid a $2.2 million settlement in September 2019 concerning allegations of claims that incorrectly identified the physician furnishing radiology services; the settlement admitted no wrongdoing. The company reported no 2019 impairment charges, compared with $3.9 million in 2018.
- The filing identifies ordinary-course litigation and regulatory matters and says it did not expect them, individually or in aggregate, to have a material adverse effect, while noting outcomes are uncertain. It also discusses uncertainty over recovery of claims under the liquidation of former malpractice insurer Fairway.
Most important facts for investors to verify
- How much of revenue and EBITDA growth reflects acquired centers versus sustainable same-center volume, and whether margins continue to improve.
- Debt-service capacity, refinancing needs around the 2023 term-loan maturity, variable-rate exposure and the effect of interest-rate hedges.
- Cash conversion and capital requirements, including acquisition spending, equipment purchases and lease commitments.
- Reimbursement, payor mix and capitation utilization trends, along with physician referral and radiologist retention.
- Integration and returns from recent acquisitions and AI investments, including the announced DeepHealth transaction; the filing provides no post-acquisition performance evidence.
- Resolution and financial exposure from legal, regulatory, malpractice-insurance and cybersecurity matters.