RadNet, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing. Amounts below are U.S. dollars.
Business context
RadNet operated 246 freestanding outpatient imaging centers in seven states, providing MRI, CT, PET, mammography, ultrasound, X-ray and related services. It performed approximately 4.14 million imaging procedures in 2012. The company also operates eRAD imaging software and Imaging On Call teleradiology businesses. Growth relies on acquisitions, physician referrals and payer contracts.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net service fee revenue | $647.2 million | $585.1 million |
| Income from operations | $45.2 million | $50.7 million |
| Net income attributable to RadNet common stockholders | $64.5 million | $7.2 million |
| Diluted earnings per share | $1.64 | $0.19 |
| Adjusted EBITDA | $113.6 million | $115.5 million |
| Cash from operating activities | $75.3 million | $57.6 million |
| Cash and cash equivalents at year-end | $0.4 million | $2.5 million |
| Working capital at year-end | $37.3 million | $29.9 million |
- Net service fee revenue rose 10.6%; however, revenue at centers operating throughout both years declined 1.1%, primarily reflecting lower procedure volume. Revenue from centers acquired after January 1, 2011 was $98.7 million in 2012.
- Operating income fell about 10.7%; operating margin on net service fee revenue was approximately 7.0%, versus 8.7% in 2011. Cost of operations increased 13.6% to $543.0 million.
- Reported 2012 net income included a $59.9 million income tax benefit, primarily from reversing the valuation allowance on deferred tax assets. The filing’s adjusted EBITDA was lower than 2011 despite higher reported net income.
- Investing activities used $87.0 million, including $44.4 million for property and equipment and $45.5 million for facility acquisitions. Financing activities provided $9.6 million.
- Total indebtedness was reported at approximately $582.4 million, including $551.2 million of senior secured debt; year-end balance-sheet liabilities were $717.1 million and stockholders’ equity was a deficit of $2.0 million. Interest expense was $53.8 million.
Material changes and unusual items
- RadNet refinanced its secured credit facilities in October 2012 with a $350 million term loan and a $101.25 million revolving facility. At year-end, $349.1 million of term debt and $33.0 million of revolver borrowings were outstanding. The company also had $200 million of 10.375% senior notes due 2018. Debt agreements impose leverage, capital expenditure and other covenants; RadNet reported covenant compliance at year-end.
- The 2012 acquisitions included Lenox Hill Radiology for approximately $29.0 million and several smaller imaging businesses. Lenox Hill’s preliminary purchase accounting included $15.7 million of goodwill and was expected to be finalized in early 2013.
- A $2.8 million gain from deconsolidating a joint venture and an $810,000 bargain-purchase gain contributed to 2012 results. Other income included interest-rate-swap fair-value gains, partly offset by a $2.2 million write-off of other non-operating receivables.
- Fourth-quarter 2012 net service fee revenue was $159.3 million and net income attributable to common stockholders was $56.6 million; the quarter included a $60.6 million income tax benefit.
- Subsequent to year-end, RadNet acquired an additional 20.9% interest in a Manhattan joint venture, giving it control, and acquired the remaining interest in a Brooklyn imaging center for approximately $2.7 million.
Outlook, commentary and risks
- Management said operating cash flow, available cash and available secured-credit borrowings were expected to meet short- and long-term liquidity needs, while noting financing needs depend on future conditions and factors outside the company’s control. No specific earnings or revenue guidance is provided in the filing.
- Management’s strategy is to improve existing centers, expand through acquisitions and selected new locations, optimize equipment utilization and costs, and grow related software and teleradiology operations.
- Reimbursement pressure is a key risk: a 2% Medicare payment reduction was scheduled to begin April 1, 2013, and the assumed utilization rate for advanced imaging equipment was set to rise to 90% beginning in 2014. Changes to Medicare and commercial payer rates could pressure revenue and margins.
- Other significant risks include high leverage and interest-rate exposure, low cash balances, capital-intensive operations, acquisition integration, reliance on physician referrals and contracted radiology groups, capitation utilization risk, healthcare regulation and compliance, and collection/credentialing delays. Hurricane Sandy disrupted East Coast operations in late 2012.
- RadNet reported unqualified audit opinions on its financial statements and internal control over financial reporting. It reported no material litigation impact expected from current cases.
Key facts investors should verify
- How much of the 2012 earnings increase is repeatable, given the $59.9 million deferred-tax benefit and other gains; compare GAAP earnings with operating cash flow and Adjusted EBITDA.
- Whether same-center procedure volumes and margins stabilize, and how acquired centers contribute after integration.
- Debt service capacity, revolver availability, covenant headroom, variable-rate exposure and future refinancing requirements, particularly with only $0.4 million of cash at year-end.
- The realized effect of Medicare payment cuts and advanced-imaging utilization assumptions, along with commercial payer pricing and capitation costs.
- Accounts receivable collectability and bad-debt trends, including the $16.7 million allowance, and the timing effects of physician credentialing.
- Acquisition purchase-price allocations and subsequent results for Lenox Hill and other 2012 deals; also review the related-party and governance implications of the BRMG relationship with CEO Howard Berger.