RadNet Inc (RDNT) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to today's RadNet, Incorporated fourth quarter 2012 financial results conference. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to your host for today, Mr. Mark Stolper, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's fourth quarter and full-year 2012 results.

Before we begin, we'd like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Specifically, statements concerning anticipated future financial and operating performance, RadNet's ability to continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining radiologists and technologists, receiving third-party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations, as estimated, among others, are forward-looking statements within the meaning of the Safe Harbor. Forward-looking statements are based upon management's current preliminary expectations and are subject to risks and uncertainties which may cause RadNet's actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth in RadNet's reports filed with the SEC from time to time, including RadNet's annual report on Form 10-K for the year ended December 31, 2012, to be filed shortly. Undue reliance should not be placed on forward-looking statements, especially guidance on future financial performance which speaks only as of the date it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the day they were made or to reflect the occurrence of unanticipated events.

And with that, I'd like to turn the call over to Dr. Berger, President and Chief Executive Officer of RadNet.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. On today's call, Mark Stolper and I plan to provide you with highlights from our fourth quarter and full-year 2012 results, give you more insight into factors which affected this performance, and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our Company and for dedicating a portion of your day to participate in our conference call this morning.

Despite our performance in the fourth quarter, which we will discuss in significant detail on this call, I am very pleased with what we accomplished in 2012 and how it positions us for the future. In my discussion, I'll divide these accomplishments into three main areas, all of which will have impacts in shaping 2013 and beyond. These three categories of accomplishments I'll touch upon include one, important strategic acquisitions and partnerships; two, ongoing information technology initiatives; and three, private payor reimbursement initiatives.

Let's begin with acquisitions. As some of you may have seen, on December 31 we acquired Lenox Hill Radiology, which is the largest non-hospital-based outpatient imaging center company in Manhattan. Lenox Hill has been an operator in the New York City market for 25 years. The cluster of centers includes its flagship Lenox Hill Radiology multi-modality facility, at 61 East 77th Street, between Park and Madison avenues. Lenox Hill also owns and operates multi-modality facilities at 2002 East 70th Street, Regency Medical Imaging, and 240 Madison Avenue, Madison Avenue Medical Imaging, as well as several satellite routine imaging facilities throughout Manhattan. In addition to its wholly-owned facilities, Lenox Hill has an interest in Park West Radiology, at 315 West 57th Street, near Columbus Circle, and several outsourced businesses and professional reading arrangements in Staten Island, the Bronx, and Long Beach, New York. We've subsequently purchased a controlling interest in Park West Radiology, and additionally acquired the assets of a multi-modality center in Manhattan, to be branded Lenox Hill Radiology, at 130 West 79th Street. The Lenox Hill operations should add approximately $40 million of revenue to RadNet in 2013.

After spending significant time doing due diligence with these assets and having a couple of months of operating in this market behind us, we are extremely excited about the Manhattan marketplace. We believe there are numerous other expansion opportunities within Manhattan that will make RadNet the formidable outpatient alternative to the big, expensive hospital systems that exist in Manhattan. The talent and reputation of the operating team and physician group associated with Lenox Hill gives us great confidence that we chose the right platform from which to grow this new core market. Establishing a powerful presence in Manhattan also fills a hole in our New York tri-state area geographically, which will allow us to service a larger portion of the patients associated with the regional payors with whom we currently do business.

Also during 2012, we furthered our relationship with the Barnabas Health System. The joint ventures will contribute financially to RadNet in 2013 on several fronts. We opened our first joint venture owned facility with Barnabas in Cedar Knolls, New Jersey. It became operational with most of its -- with the larger New Jersey insurance networks in February. We are also constructing a second joint venture location in Randolph, New Jersey, which should come online at the end of the second quarter of 2013. We will also be commencing in 2013 a management contract with the Progressive Imaging Center at Barnabas' Clara Maass Medical Center in Bellevue, New Jersey. Lastly, we will be performing utilization management services for Barnabas Health's approximately 28,000 employees and dependents, with respect to their diagnostic imaging needs and providing these employees with a network of facilities in New Jersey and the greater tri-state area which they may visit.

Also during 2012, we acquired West Coast Radiology, one of the largest diagnostic imaging groups in Orange County, California. The five West Coast Radiology centers significantly strengthened our position in Orange County, California. Not only did the West Coast Radiology sites broaden our footprint in Orange County, but it also enhanced our physician capabilities in that region. West Coast Radiology has successfully nurtured close relationships with several independent practice associations and other medical groups with whom they contract in Orange County, representing future expansion opportunities for RadNet.

Market expanding acquisitions such as Lenox Hill Radiology and West Coast Radiology, and the Barnabas partnership, will continue to be an important part of RadNet's strategy in 2013 and beyond. Acquisitions in health system partnerships serve several purposes. First, these expansions give us a larger leverage with respect to private payor pricing negotiations. Second, they bring unique contracting opportunities with payors, capitated medical groups and other network contractors. And finally, these acquisitions and partnerships bring both growth and cost savings, important features within an industry whose utilization is being impacted by a weak broader economy, and where Medicare and private payor pricing continues under pressure.

The second accomplishments in 2012 I will discuss in our continuing efforts and progress on the information technology side of our business. We have begun to roll out our voice recognition transcription solution to our facilities across our networks. We expect to have most, if not all, of our regional operations using voice recognition by the end of the second quarter of 2013. We have seen both significant productivity gains and faster turnaround times for reports in the regions and centers that have already adopted this technology. As a result, we've been able to reduce internal transcription costs and the amount of work we currently send to externally outsourced transcription companies, both domestic and offshore; thus, we expect to continue to reduce costs from this integration throughout the year.

As important as the cost savings are with the benefits of voice recognition, our ability to give access to our radiology reports more quickly, while referring physician communities, also is paramount. In centers where we've successfully integrated voice recognition transcription, we've reduced report turnaround time by as much as 6 to 12 hours. The result is that our referrers receive better service and are likely to use RadNet as it imaging provider in the future. These type of initiatives differentiate us from our competition.

On the eRAD RIS and PACS side of our IT initiatives, we continue to roll out these systems across our networks. We have completed the integration of these systems throughout a significant number of our Maryland centers, which particularly related to the American Radiology subsidiary of the CML acquisition, which we acquired towards the end of 2011. Like voice-recognition transcription, one of the key motivators of installing these systems at our locations is cost savings. Because the eRAD RIS and PACS have efficient outpatient workflow capabilities, we are able to operate our centers with greater efficiency and precision. By adopting our own eRAD solutions, we also discontinue payments that we make to several current third-party vendors who currently provide us with similar solutions. Furthermore, we are integrating our Radar critical test reporting solution, which will greatly improve our communication with our referring physicians and patients, particularly around critical radiology findings that warrant immediate attention.

Finally, many of you recall that our eRAD RIS system was certified by the appropriate designated body to qualify for meaningful use standards, which bring with it opportunities for eRAD users, including RadNet, to qualify for federal stimulus money and/or to avoid future economic sanctions several years from now. One of our subsidiaries has already received meaningful use money, and we expect to enjoy more stimulus money over the next several years as we integrate our systems and qualify our physicians under that program. Thus, all of the IT initiatives will have significant impact on our business and our service offerings in 2013 and beyond.

The last accomplishment I'd like to discuss is our private payor pricing initiatives. During 2012, we managed to improve our reimbursement profile with several private payors, which was made possible by our geographic clustering approach. We received rate increases as a result of negotiations we initiated with several significant East Coast private health plans. These rate increases will mitigate the effects of Medicare cuts that went into place on January 1, as part of the 2013 Medicare fee schedule final rule passed in November of last year. Although we do not comment publicly on the names of these specific payors with whom we are in negotiations, we can tell you that the successful rate increases are the result of our dense market concentration strategy and the importance we had to regional players relative to other imaging players in our markets. This is the first time in our Company's history that we have been successful in negotiating well-deserved increases for the important role we play in the healthcare delivery system. We believe that payors are beginning to recognize the value we bring, particularly as it relates to our significant cost and service advantage relative to outpatient hospital imaging departments.

Although we have yet to achieve the geographic concentration and presence we desire in all our core markets, these recent rate increases are illustrative of the wisdom of our overall strategy. Still, we have challenges in front of us, as we must overcome reimbursement obstacles from government and private payors, utilization pressure, and uncertain health reform. However, we continue to believe these challenges create further opportunities for RadNet to separate itself from other industry competitors and participants. Although it hasn't been easy, we've adopted what many believe to be the most important strategy that works in our industry. We remain committed to our focus on scale, geographic clustering and multi-modality approach. The dislocation in our industry has provided us a runway to grow our business, consolidate weaker industry players, and partner with large health systems and other healthcare institutions in the future.

At this time. I'd like to turn the call back over to Mark to discuss some of the highlights of our fourth quarter and full-year 2012 performance. When he is finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our fourth quarter and full-year 2012 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements, as well as provide some insights into some of the metrics that drove our fourth quarter and full-year performance. Lastly, I will provide 2013 financial guidance levels.

In my discussion, I will use the term adjusted EBITDA, which is a non-GAAP financial measure. The Company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations, and excludes losses or gains on the sale of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains, and non-cash equity compensation. Adjusted EBITDA includes equity and earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries, and is adjusted for non-cash or extraordinary and one-time events taken place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet and common shareholders is included in our earnings release.

With that said, I'd now like to review our fourth quarter and full-year 2012 results. I'll begin with the 2012 fourth quarter results. For the three months ended December 31, 2012, RadNet reported revenue and adjusted EBITDA of $165.8 million and $24.5 million, respectively. Revenue increased $4.4 million, or 2.7%, over the prior year same quarter; and adjusted EBITDA decreased $7.8 million, or 24.2%, over the prior year same quarter.

Our fourth quarter performance was significantly hampered by non-recurring events. First, we estimate that we incurred approximately a $3.5 million negative impact from downtime of our Northeastern facilities and loss of business from Hurricane Sandy. We had numerous site closures, most of which were the result of lost electrical power in the tri-state New York area. Although we were successful in getting many of these sites online quickly, our normal referral patterns were impacted for days and weeks afterwards, depending upon the center. Many of our patients faced loss of power at their homes or workplaces. Gasoline was being rationed or conserved, and there was a general reprioritization away from non-emergent medical procedures, such as imaging, during the aftermath of the storm. The result was that available scanning slots were simply lost during the quarter. We are happy to report that all of our facilities in the Northeast are in full operational condition and all damage or other issues we faced have been repaired.

Second, during the quarter, we estimate that we incurred a negative impact of approximately $1.5 million from two additional work days affected by Christmas and New Year's holidays in this year's fourth quarter relative to the same quarter in 2011. Christmas and New Year's fell on Tuesday in this year's fourth quarter. As a result, in addition to our sites being closed on those Tuesdays, the preceding two Mondays were effectively lost to vacations and extraordinary light scheduling. The corresponding quarter in 2011 contained both these holidays on Sunday, rendering only the subsequent Mondays to be lost.

Third, we were unable to recognize approximately $1.5 million of negotiated future payments from private payors for underpayments on 2012 services. Many of these underpayments relate to the successful retroactive renegotiation of certain procedure codes, most notably our reimbursement related to the CT of the abdomen pelvis bundled code which was introduced in 2011. These retroactive payments will be attached to future services we provide to these payors in 2013. As a result, per Generally Accepted Accounting Principles, we will recognize throughout 2013 this compensation for 2012 services rendered.

Fourth, we elected to incur during the fourth quarter of 2012 approximately $1 million of salary expense paid in lieu of future salary increases. Adjusting for all of these nonrecurring fourth quarter events, adjusted EBITDA would have been $32 million. This would place the quarter in line with our 2011's fourth quarter results.

As one would predict, the effects of Hurricane Sandy and the loss of two additional workdays around the holiday caused same center procedural volumes in the quarter to decline by 4.1%. For the fourth quarter of 2012 as compared with the prior year's fourth quarter, aggregate MRI volume increased 1.5%, CT volume increased 1%, and PET/CT volume increased 8.3%. Overall volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and other exams, decreased 0.5% over the prior year's fourth quarter. In the fourth quarter of 2012, we performed 1,014,556 total procedures. The procedures were consistent with our multi-modality approach, whereby 77.4% of all the work we did by volume was from routine imaging. Our procedures in the fourth quarter of 2012 were as follows. 127,561 MRIs, as compared with 125,675 MRIs in the fourth quarter of 2011; 95,342 CTs, as compared with 94,374 CTs in the fourth quarter of 2011; 5,944 PET/CTs, as compared with 5,101 PET/CTs in the fourth quarter of 2011; and 785,709 routine imaging exams, which include nuclear medicine, ultrasound, mammography, x-ray and all other exams, as compared with 794,590 of all these exams in the fourth quarter of 2011.

Net income for the fourth quarter of 2012 was $56.6 million, or $1.42 per share, compared to net income of $4.5 million, or $0.12 per share, reported for the three-month period ended December 31, 2011. These numbers are based upon a weighted average number of shares outstanding of 39.8 million and 38.1 million for these periods in 2012 and 2011, respectively.

During the year, we recorded an income tax benefit of $59.9 million, primarily related to the reversal of a valuation allowance against our deferred tax assets reported in the fourth quarter. We considered all evidence available when determining whether deferred tax assets, primarily created by our historical net operating losses, or NOLs, are more likely than not to be realized. This evidence included forecasting future taxable income, the future reversal of temporary differences, and tax planning strategies that would be employed to prevent our NOLs from expiring unutilized. As of December 31, 2012, after analyzing all relevant evidence, including our recent historical trend of producing pre-tax income, we determined that it is more likely than not that we will utilize most of our NOLs in the future. As a result, the reversal of the valuation allowance resulted in our recognizing $60.7 million of income tax benefit and a corresponding net deferred tax asset on our balance sheet during the fourth quarter of 2012. Excluding this income tax benefit, our fourth quarter net loss would have been $4 million, or negative $0.11 per share.

Besides the four non-recurring impacts on adjusted EBITDA I spoke about, also affecting net income in the fourth quarter of 2012 were certain non-cash expenses and non-recurring items, including the following. $597,000 of non-cash employee stock compensation expense resulting from the vesting of certain options, warrants and restricted stock; $58,000 of severance paid in connection with headcount reductions related to cost savings initiatives from previously announced acquisitions; $201,000 loss on the disposal of certain capital equipment; $1.1 million of amortization of deferred financing fees and discounts on issuance of debt related to our existing credit facilities and senior unsecured notes; $531,000 of non-capitalized expenses related to a refinancing completed on October 10, 2012; $449,000 of non-recurring items included in other income loss, including legal settlements, purchase gains and certain impairments; and $736,000 fair gain from our interest-rate swaps, net of the amortization of accumulated comprehensive loss existing prior to April 6, 2010.

With regards to some specific income statement accounts, overall GAAP interest expense for the fourth quarter of 2012 was $12.9 million. This compares with GAAP interest expense in the fourth quarter of 2011 of $13.5 million. The decrease is mainly attributable to the expiration of our two interest-rate swaps which expired in November of last year. The expiration of the swaps will result in a cash and GAAP interest expense savings to us in 2013 of approximately $6 million. This additional cash flow will be used for debt repayment or attractive acquisitions in 2013. For the fourth quarter of 2012, bad debt expense was 3.9% of our revenue, compared with 3.8% for the fourth quarter of 2011.

I'll now discuss 2012 full-year results. For full year 2012, RadNet reported revenue and adjusted EBITDA of $673.1 million and $113.6 million, respectively. Revenue increased $65.6 million, or 10.8% over 2011, and adjusted EBITDA decreased $1.9 million, or 1.7% over 2011. For the year ended December 31, 2012 as compared to 2011, MRI volume -- aggregate volume increased 14.7%, CT volume increased 14.3%, and PET/CT volume increased 12.2%. Overall volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and other exams, increased 10.5% for the 12 months of 2012 over 2011.

In 2012, we performed 4,142,267 total procedures. The procedures were consistent with our multi-modality approach, whereby 77.1% of all the work we did by volume was from routine imaging. Our procedures in 2012 were as follows. 527,853 MRIs, as compared with 460,473 MRIs in 2011; 395,446 CTs, as compared with 345,864 CTs in 2011; 24,035 PET/CTs, as compared to 21,427 PET/CTs in 2011; and 3,194,933 routine imaging exams versus 2,921,066 of all these exams in 2011.

Net income for 2012 was $1.64 per share, compared to net income of $0.19 per share in 2011, based upon weighted average number of diluted shares outstanding of 39.2 million and 38.8 million in 2012 and 2011, respectively. Excluding the benefit to income tax expense recognized in the fourth quarter discussed earlier, our net income would have been $3.8 million, or $0.10 per diluted share, in 2012. Also affecting net income in 2012 were certain non-cash expenses and non-recurring items including the following. A $2.8 million gain on the deconsolidation of a joint venture; $2.7 million of non-cash employee stock compensation expense resulting from the vesting of certain options, warrants and restricted stock; $736,000 of severance paid in connection with headcount reductions related to cost savings initiatives from previously announced acquisitions; $456,000 loss on the disposal of certain capital equipment; $3.6 million of amortization of deferred financing fees and discounts on issuance of debt related to our existing credit facilities and senior unsecured notes; $531,000 of non-capitalized expenses related to our refinancing transaction completed in October; $468,000 of non-recurring items included in other income or loss, including legal settlements, purchase gains and certain impairments; and $4.1 million fair value gain from our interest-rate swaps, net of amortization of accumulated comprehensive loss existing prior to April 6, 2010.

With regards to some specific income statement accounts, overall GAAP interest expense in 2012 was $53.8 million. Adjusting for the non-cash impacts from items such as amortization of financing fees, losses or gains related to fair value adjustments on our interest-rate hedges, and accrued interest, cash interest expense was $47.8 million in 2012. This compares with GAAP interest expense in 2011 of $52.8 million and cash paid for interest of $47.3 million. For 2012, bad debt expense was 3.8% of our revenue, compared with an overall blended rate of 3.7% for the full year of 2011.

With regards to our balance sheet, as of December 31, 2012, unadjusted for bond and term loan discounts, we had $582 million of net debt, which is total debt less our cash balance; and we were drawn $33 million on our revolving credit facility of $101 million. This is an increase in our net debt of $25.7 million compared with December 31, 2011. This increase was primarily due to borrowings we made under our revolving credit facility to purchase the West Coast Radiology and Lenox Hill operations during 2012, and fees and expenses related to our senior credit facility financing in October of 2012.

Since December 31, 2011, accounts receivables remained fairly constant, increasing approximately $800,000 during 2012. Our net days sales outstanding, or DSOs, was 63.4 days at December 31, 2012, fairly consistent with 62.6 days as of that date one year ago. Our accounts payable and accrued expenses increased by $2.8 million, to $105.9 million at the end of 2012. Throughout 2012, we repaid $22.2 million of notes and leases payable, had cash capital expenditures, net of asset dispositions and sale of imaging centers, of $40.6 million.

I will now discuss how RadNet performed relative to our to 2012 guidance, which we released one year ago. Our 2012 revenue guidance was $660 million to $700 million, our actual results were $673.1 million. Our adjusted EBITDA range was $120 million to $130 million, our actual EBITDA was $113.6 million. Our cash capital expenditure range was $35 million to $40 million, our actual results were $40.6 million. Our cash interest expense was $46 million to $51 million, our actual results were $47.8 million. Our free cash flow generation guidance range was $30 million to $40 million, our actual results were $25.2 million. Prior to the fourth quarter results, we were within or approaching all of these guidance levels. Unfortunately, the non-recurring impacts caused us to fall short of our adjusted EBITDA and free cash flow guidance levels, metrics that are both interrelated.

At this time, I'd like to review our 2013 fiscal year guidance levels, which we released this morning in our earnings press release. For our 2013 fiscal year, we announced the following guidance ranges. For revenue, $700 million to $730 million. For adjusted EBITDA, $120 million to $130 million. For capital expenditures, $35 million to $40 million. For cash interest expense, $42 million to $47 million. And for free cash flow generation, $35 million to $45 million.

As reflected in our 2013 guidance, we are optimistic about this year. Our 2013 guidance includes benefits we anticipate realizing from the following. First, the acquisition of Lenox Hill Radiology, completed on December 31, 2012. Second, the full-year contribution of West Coast Radiology, which was purchased on April 1 of 2012. Third, increases in private payor contracts we renegotiated towards the end of 2012. Fourth, cost savings and efficiencies we will recognize from our voice-recognition, RIS and PACS integrations. Fifth, contribution from initiatives with the Barnabas Health System in New Jersey. And sixth, savings from the renegotiation of certain purchasing contracts.

Partial mitigants to these benefits, also incorporated into our guidance calculations, include certain negative pricing changes within the 2013 Medicare fee schedule, released in November of last year, and projected effects of sequestration. While the midpoint of our guidance assumes little organic growth in our core business during 2013, small increases in our same center metrics could provide upside to our guidance levels.

I'd now like to turn the call back over to Dr. Berger, who will make some closing remarks.

Thank you, Mark. In summary, we remain optimistic and energized about the path ahead. While our industry will remain under volume and pricing pressure, opportunities will continue to present themselves for us to expand our business, make our operations more efficient and consolidate our regional markets. Imaging will continue to be an indispensable part of healthcare delivery system. Non-hospital outpatient imaging will always be delivered more cost effectively and conveniently than the offerings of hospitals, who lack the domain, expertise, management breadth and operating culture necessary for outpatient success. Like with the Barnabas Health and our numerous other hospital partnerships on the East Coast, we believe that more and more health systems will look to us as a partner, not a competitor.

Finally, having refinanced the senior portion of our capital structure in October of last year, we have the financial flexibility and access to capital to execute our plan. We've enjoyed excellent relationships with our lenders, who have continued to support the capital needs and growth plans of our business. RadNet's access to capital has been a major advantage relative to the rest of the industry, which remains fragmented and comprised of individual and small group operators. At the same time that capital has been available to us, industry pressures have driven acquisition multiples to historic lows. We continue to execute transactions at the three to four times EBITDA multiples which we have previously announced. In the face of all the industry pressures we've discussed this morning, the power of RadNet's model has shown through. As more industry players fall on difficult times, we will continue to distance and distinguish ourselves within the diagnostic imaging marketplace.

Operator, we are now ready for the acquisition -- excuse me, for the acquisition -- for the question-and-answer portion of the call. Or acquisitions, if they come up at the same time. Thank you.

Thank you, Doctor.

(Operator Instructions)

Brian Tanquilut, Jefferies.

Good morning, guys. Dr. Berger, since you started with acquisitions, I'll go right there. So, some --

I knew you might.

(laughter) So, good acquisition with Lenox Hill. How should we think about your strategy today on acquisitions? Because I know, two years ago the goal was to basically cover the Eastern seaboard. And it seems like you're there now. So as we think about acquisitions, would you start considering going to new markets or would it be identification still within the East and the West Coast? How should I think about that?

Thanks, Brian. There's plenty of opportunities within the existing markets that we currently operate in, and won't be a shortage of opportunities for us to continue to avail ourselves of our primary strategy, and that is to bulk up, or continue to bulk up, in the existing marketplaces. It would really take an unusually attractive, or opportunistic, acquisition for us to look outside of the core six markets, or states, that we're in right now. And so I think you can expect us to continue to focus primarily on those markets, with both new opportunities with some of the payors that we're speaking with that might have needs for us to provide more access, or acquisitions that are continuing to be calling in for us to evaluate.

The one exception I will add is that we would go into a new market if there were a unique opportunity with a hospital or a health system, in that we found that when you partner with hospitals or health systems who have a significant presence, or leverage with payors in a particular market, our strategy of geographic concentration, multimodality approach on the outpatient center business is not quite as important, because you can get some of that leverage with a strong, powerful, local hospital or health system. So we have, at times, entertained and had discussions with big health systems and hospitals outside of our geographic markets, and would consider doing that in the future.

Mark, to follow-up on that, a lot of the hospitals have been buying physician practices in the last couple of years. So are you seeing that as an opportunity that's opening up, or is it already accruing to you guys? Or is that a potential threat for those hospital systems that have their own imaging facilities in your markets?

Well, we are seeing that in a number of our markets, Brian. And I think it's a double-edged sword, if you will. On the one hand, when these hospitals buy up medical practices, they do attempt to drive as much of that imaging into their hospital systems as possible, of course, raising an interesting concern about self-referral, which I won't go into too deeply here, but nonetheless, I find it a little bit perverse in some respects. But the number of referring physicians and the amount of imaging that's done out there cannot be managed by hospital system imaging departments. So while it may, in any individual situation, impact RadNet or the other competitors in our marketplace, we don't look at it as enough of a threat to be concerned about. Actually, the double-edged side of that sword which is beneficial is that, again, it affects our competitors, makes them more vulnerable and potentially, better targets for us. So I think that that spectre, which is being seen primarily on the East Coast, more so than in California, is something that can ultimately have benefit.

But I do want to underscore something very important that I do speak to people about, when these topics come up. The amount of imaging done on an outpatient basis, roughly for a metric, is about one imaging procedure per person in the United States. So there's somewhere in the neighborhood of perhaps as much as 325 million to 350 million procedures done annually in the US market. RadNet is in the states that have about 25% of the population. So the amount of imaging that we're currently doing, relative to the total available, is still very small. And again, that amount of business is impossible to be absorbed by hospital health systems, so they will always look to the outpatient sector to have the access and convenience for patients, which has really become the standard in the industry here. So in a way, you could say that the hospitals that buy physician practices and fill more of their capacity with that, may in fact push out other people who want better access and may look at the hospitals as a threat to the practices that aren't purchased and want to move away from hospital systems themselves. So like always, I tend to look at the positives of what's going on in the industry as beneficial for RadNet.

Okay. And then last question for me, Howard. The industry seems to have been under a lot of reimbursement pressure, going back really to 2006 with the DRA. As one of the leaders in the industry, what is the imaging sector doing to fight off incremental rate cuts? Because it seems like you're just getting punches every year.

Well, I think the punches are coming primarily out of Washington, as they continue to target imaging as a place to get savings from. Unfortunately, many of the payors out there that tend to follow Medicare pass those cuts on to the imaging providers. What we're doing, somewhat uniquely I believe, in our strategy is actually uncoupling the Medicare payment system with the private payors, and going in and renegotiating pricing. As Mark mentioned in his remarks, we were particularly successful with that in the Maryland marketplace, which, for the first time, actually resulted in substantial increases in the reimbursement that we got from the major payors in Maryland, who recognize the importance of the RadNet presence in that marketplace, as well as the need for outpatient imaging to long-term survive and provide the access that's necessary.

So while I continue to see these punches and these issues being faced throughout the imaging industry, Brian, I think the RadNet model is the only one that can sustain some kind of successful strategy to fight this. And ultimately, the pendulum will swing the other way. As capacity is wrung out of the system and there are fewer points of access, eventually the reimbursement hits will have to be reversed; otherwise, there will be an enormous shortage in the way of imaging equipment and access, and we could wind up with a system not unlike what goes on in Canada, where if you want a routine MRI today, it is about a six-month wait before you can get one in any one of the Canadian provinces. So, I believe that our model, again, speaks to -- and strategy, speak to this. And while it will provide a tough times for us, it's far more severe for the smaller operators that don't have the resources to withstand these continual punches and declining reimbursement.

Got it. Thanks, Howard. Thanks, Mark.

Thanks, Brian.

Thank you.

Darren Lehrich, Deutsche Bank.

Thanks. Hello, everybody. Just a few things here. I wanted to first ask about some of your managed care payor relationships, and be curious to get your thoughts on where you think you are, if you're moving in a direction where you may start to have some real steerage or, I don't know, maybe even some exclusive arrangements with payors. Just trying to understand where you are in the evolution of managed care, looking at you as a bigger partner in helping to manage their outpatient imaging trend.

Good question, Darren. Good morning. The process of those conversations are a function really of two things. Number one, how large and how important is RadNet in any given market? And then, how much do the payors really want to start looking at different models, other than perhaps traditional fee-for-service, as a way to try to handle the costs -- or the rising costs of healthcare?

In most of the markets that we're in on the East Coast now, and I'm talking about Maryland, Delaware, New Jersey, and more recently, obviously, the New York marketplace, we are starting to get a lot of traction in our conversations. And I think that the long-term prospect, particularly, for example, in a state like New Jersey, where we've partnered with the major health system, Barnabas, in New Jersey, these kind of conversations will take more and more substance as, I think, the market shrinks from the number of providers and somebody, like RadNet, emerges as a company that not only is willing to look at different models that perhaps take risk on, like we do here in California, but has the financial resources and internal management to take those kind of challenges on. I think that something like the RadNet model is absolutely critical to the evolving changes in healthcare that people talk about, almost on a daily basis, whether you're talking about ACOs, accountable care organizations, or some other provider networks that go in and try to manage the healthcare of a group or a population, based on different metrics, such as outcomes, and managing it on perhaps even a disease management basis.

So we are having some of those discussions. I would say that they're very early on in the consideration. But I think ultimately, things like capitation, disease management, risk sharing, are inevitable, not just in imaging but in healthcare; and it will take imaging providers of size, both in terms of their financial resources and their access points, to be a serious player and consideration in these revised paradigms.

Okay. That's really helpful. A few other things here. First, I want to understand a little bit more the salary increase that you front loaded here in the fourth quarter. Can you help us think about what part of your labor cost structure you've brought forward that expense? And then, did you in fact eliminate merit increases for 2013, because of the Medicare pressures, for a population of your employees? Just help us think through that action, please.

Okay. Well, part of our decision-making towards the end of the year had not so much to do with our forecasting for 2013 or Medicare, but really had more to do with the tax law changes that we were seeing. So in answer to one part of your question, there were no merit increases in base salary composition -- compensation, I should say, for 2013. And what we did in order to benefit some of the employees and the management team was accelerate what might have otherwise been some of those increases into 2012, so that there would be a more favorable tax treatment on it.

Okay. That's helpful. And then, I wanted to ask Mark about free cash flow. Are you guys still seeing consolidation and debt reduction as the best use of capital at this point? Anything changed there?

Well, I think the answer is -- has to be, we need to be somewhat opportunistic as to what is the best and most efficient use of our cash flow. So that in the absence of the opportunities to go out and consolidate attractive acquisition targets in our markets that could be bought in the 3 to 4 times range, what we would do with our free cash flow is to repay debt. I think that what we're seeing in our pipeline with respect to acquisition is that there are numerous smaller transactions out there, that we look at and that germinate from our operations teams out in the field, that we'll take action on this year; but there aren't any -- or significantly large transactions here that would be taking up a lot of our capital. So that I think we're seeing for 2013, as of today, a more balanced approach to our free cash flow, dividing it between debt pay down and acquisitions. Now having said that, the caveat here is our acquisition queue changes on a daily basis. Sometimes acquisitions fall out; and then other days, we get a phone call that -- of an opportunity that is of size. So sitting here today, we think it's a balanced approach. But that can change.

And the one other thing I'll add is that, when we look at these acquisitions, part of the reason why our target is at 3 to 4 times EBITDA is because we not only want this to be accretive to the equity, because on a trailing basis we're trading at about 5.5 times trailing EBITDA, but we also want it to be deleveraging. And so we feel a combination of actual debt pay down as well as continuing to acquire and consolidate these small operations, both will provide the objective of deleveraging.

Yes. And a lot less than 5.5 times, if you include the NOL, now that it's obtainable, based on the tax accounting here, I might add. The last thing, Howard, sort of a left field question here. But we noted a transaction in the CRO diagnostic space, and I'm curious if you can update us, briefly, on the CRO capabilities I think you talked about maybe 1 or 1.5 years ago.

Are you talking about a CRO --

You had, I think, been developing a network of imaging capabilities for clinical research. And I'm not sure if that ever got fully off the ground, or where it is. But we did see a transaction that was pretty hefty valuation on that very type of business.

No. I'm not familiar with the transaction that you're talking about, Darren. But internally in RadNet, we did launch two -- actually, three research projects last year. One related to Alzheimer's disease, testing using a new PET isotope. Another related to contrast enhanced mammography to evaluate breast cancer. And a third related to various breast link initiatives that look at different, or new, chemotherapy regimens. So that is an active part of the business which started to take root in late 2012, and which will provide nice additional revenue and visibility for what RadNet's doing.

I would not really categorize what we're doing as being able to evolve these various research programs into a CRO; but clearly, that is something that we're constantly looking at, both that RadNet can do itself uniquely, because of the ownership of imaging centers, as well as potential partnering with other CRO's to help manage, I think far more effectively, the imaging component of their needs in evaluation of other drugs. But I think that represents good upside opportunity for RadNet, but is still somewhat in the early stages of development.

Fair enough. Okay. Thanks, guys.

Miles Highsmith, RBC Capital Markets.

Hello. Good morning, guys. Just a couple others from me. Would it be fair to say that you're continuing to not lose market share? I know you gave some California volume stats. I'm wondering if you can give us volume ex- hurricane and holidays, or something of that nature?

Yes. I don't think our decline in the fourth quarter in volumes, either on an aggregate basis or same-center basis, has anything to do with market share. We've said throughout 2012 that actually we believed we were picking up market share, because everything that we had heard in our regions, and everything that we had seen when we did due diligence on the acquisition targets in our region, showed declining volumes in 2012, where, up until the fourth quarter, our same-center and our aggregate volumes were either flat to growing. So from a market share perspective, if anything, we think we're picking up market share. I think you can't look at the volumes of the fourth quarter of 2012 and glean any trend from that.

As you said, when we separated out the volumes of the northeastern operations, which were affected by Hurricane Sandy, and looked at our West Coast volumes in the fourth quarter of 2012, our volumes were actually up over 5%. A fair amount of that was same-center volume, because we really didn't -- other than the West Coast acquisition, we didn't have other acquisitions in 2012, relative to 2011. So I think the consolidation we're seeing in the markets, the pressure that the industry has on it, including utilization pressures, as well as pricing pressures, has not only decreased the overall pie, but has put a lot of pressure on small mom-and-pops, many of whom are contracting or going out of business. And if anything, this has helped us gain some market share over the last three years, during this very difficult broader economy. So I think we see this trend continuing in 2013 and beyond, where the industry is going through a transition of small mom-and-pop fragmentation to more scale operators and professional operators, like ourselves. And in our markets, at least, we think we're in the forefront of that change and that transition.

Okay. Great. And then, I just wanted to touch on the Medicare pieces quickly, to make sure we're thinking about this correctly. We've got a sequester small impact for you guys starting here. I think we have the year four of the PE RVU changes started in 2010? And I think you quantified the impact of that in the past. And then, I guess the American Taxpayer Act is going to put the utilization rate at 90%? Have you quantified that, and did I mess anything up in my assessment of the Medicare pieces for 2013?

No. Let me just reiterate what we've said in the past and give you a little bit more information. We quantified last year that the impact in 2013 from the changes in the Medicare fee schedule, which was released as its final rule in November, was going to be a $7 million to $8 million impact to RadNet in 2013. The sequestration adds another 2% impact on our Medicare business and any contracts that might be tied to Medicare, which we are estimating to be another $3 million or so impact in 2013. Beyond 2013, the only thing that we do know is that, as you said, the utilization rate is going to increase from 75% to 90%, which -- and for those who are not familiar with it, the utilization variable is one of many variables in the practice expense portion of the RVU, or relative value unit calculation, which determines Medicare reimbursement. And the impact of that will be another several $1 million for 2014.

Having said that, all bets are off, because we don't know -- in June and July of 2013 Medicare will come out with its proposal for comments dictating 2014 reimbursement. And then at the end of 2013, in November, they'll come out with their final rule. Often what happens, or at least what's happened over the last three years, Medicare makes many other changes to the RVU calculations in the RVU table, such that no one can bet that that several $1 million impact from that utilization rate going from 75% to 90% will be the only impact we'll feel in 2014. There might be mitigating factors which make the impact less than the $3 million or $4 million we think it's going to be, and there may be other changes that could increase that. So that's one of the fun things about being in this business. We don't know until we see the Medicare fee schedule.

And that's also why we've been working extremely hard, as Dr. Berger mentioned earlier, in all of our regions to try to unbundle or unlink our private payor contracts from the Medicare fee schedule, or from floating with the Medicare fee schedule. And we've been very successful in doing that, and we should start seeing a bifurcation of how we get reimbursed from the private payors versus where we're getting reimbursed with Medicare.

Okay. Thanks. Last one for me. If I think about 2013 versus 2012, as it relates to your guidance, I think Howard made the comment that commercial should largely make up the Medicare pressure in 2013; and you've got some acquisitions, especially in New York, that will be fully reflected in '13 and not in 2012. Core market share seems to not be going down, might even potentially go up, and you have kind of a weak comp from Q4 '12 on the weather side. The guidance is kind of flat in 2013. Is it reasonable to say there might be a slight bit of conservatism associated with it? Or is it too early to tell, at this point, or are there some, maybe, other negatives that weren't mentioned that I should be thinking about? Thanks.

Well, I think there is some conservatism in the guidance, particularly because we missed the EBITDA guidance for 2012, with this fourth quarter, which we could not have predicted, sitting here earlier in 2012, would ever happen. So we're trying to give ourselves some leeway, if there should be non-recurring events next year that we don't -- we can't predict right now. But also, it is showing some growth from where we ended up the year of $113 million and change of EBITDA going to somewhere between $120 million and $130 million. But we wanted to be very conservative, with respect to any assumptions we made about same-center growth. Same-center growth has been very challenging over the last three years. And we didn't want to assume that the economy was suddenly going to turnaround or that utilization of healthcare services in general was going to increase in 2013. So our guidance assumes very flat same-center volumes in 2013, and I think that if we start comping positively relative to 2012 on a same-center basis, it could provide some upside in our guidance.

Okay. Thank you very much.

Henry Reukauf, Deutsche Bank.

Good morning, guys. Just some guidance questions. And this is a follow-up to Miles' question. So if we think about the year in your guidance, it's sort of the headwinds from reimbursement in total are $10 million to $11 million. Where are you seeing the price on the HMO side of the business?

Pricing has been somewhat flat, with the exception of some significant pricing concessions or increases that we received from several East Coast payers, especially those where we've been successful in renegotiation the rates on the CT bundling issue, the CT of the abdomen and pelvis. But outside of those increases, we've seen flat to slightly declining reimbursement in our other markets. So overall, we've internally felt here that if we can accomplish stable pricing or flat pricing year-over-year with the private payors, we've done pretty well and we've utilized our leverage.

Now having said that, the big part of our strategy here is to continue to consolidate our regional marketplaces and become indispensable to the private payors, so that we have a strong leverage position at the table when negotiating for fair and stable long-term pricing. I think we've accomplished that in certain markets, such as Maryland. I think we'll accomplish that pretty quickly here in New Jersey with our partnership with Barnabas Health, who has a very large presence -- or is the largest health system in northern and central New Jersey. I think we've got a ways to go in other markets where we currently operate.

So I think that going forward our outlook on Medicare pricing -- that we think there's going to be continued pricing pressure on the Medicare side of the business, given all of the things that we and all of us hear out of Washington is that things aren't getting any better, and there's going to continue to be budget cuts, and some of that's going to have to come out of Medicare, and imaging is not a non-material piece of the Medicare or the healthcare spend. So we think that there will be continued pricing pressure on the Medicare side. What we're trying to do with our strategy is to get the leverage that we need in our markets on the private payor side, so that we can and stable pricing. But to answer your question directly, in 2013, we've assumed flat pricing on the private pay side.

Okay. So generally, the same-store volume is flat, the pricing's going to be relatively flat on the commercial side, and then you'll have the $10 million to $11 million headwinds on the Medicare side. In the guidance -- and I'm assuming that's correct -- if not --

Yes, with the exception of some private payor price increases that we got on the East Coast that we talked about.

But not really materially moving the needle?

Well, it will materially move the needle in mitigating the Medicare impact for 2013.

Okay. So those particular pricing increases basically cover the $10 million to $11 million decline that you guys cited?

Yes.

Yes? Okay. And then, in the EBITDA calculation with Lenox Hill, I'm thinking that's about $10 million of EBITDA. Should that -- what's built into the guidance, in terms of a pro forma EBITDA coming from acquisitions?

Yes. When we announce acquisitions, we talk about the revenue associated with those acquisitions and we talk generally about margins. As you remember, many of the acquisitions that we do are situations where the assets are underperforming, and we have a very short-term plan to turn those assets around and layer the RadNet cost structure on top of those acquisitions. Lenox Hill was not one of those types of acquisitions. Lenox Hill was performing fairly nicely, and we believe that it will continue to perform well in 2013. Most of the other acquisitions, though, such as the CML acquisition we did at the end of 2011, were turnaround situations. So you can assume for our guidance that for 2013, that the acquisitions that we have layered in there, such as Lenox Hill, the EBITDA contribution of those will be similar to the overall EBITDA margin of the entire Company.

So it sounds like another -- at least another -- at least $10 million of layered in acquisition EBITDA? Just for Lenox Hill alone, with the $40 million purchase price and, say, a 3 or 4 times acquisition, or maybe that was a little bit more? Is that right?

Your number is a little high for Lenox Hill.

Okay. All right. And then, cost savings? What do you think for cost savings for 2013? You mentioned a bunch of initiatives that seem like they're coming into play. How much are they supposed to help you for the year?

Well, I think that's where we're probably being a little bit conservative, or hedging a little bit on this, Henry. Many of the cost initiatives that relate primarily, let's say, to IT meaningful use and some purchasing opportunities that we have to reduce costs are currently underway. And the impact of those throughout the year will vary, depending upon when they get fully implemented. The range we're looking at on these is rather substantial. And how much of that actually is realized in 2013, again, depends upon when they actually get implemented. By 2014, we should be able to give better guidance in the 2014 fiscal year as to what the impact of these actually will be, when we have the hindsight benefit of seeing what they would be on a full-year basis.

Part of the conservatism with the IT is that the amount of savings that we'll achieve in 2013 also is highly dependent upon the rollout schedule of the RIS and the PACs and the voice recognition. And should the rollout schedule slip, it will achieve fewer savings in 2013. We'll still have the same savings in 2014. Should it be accelerated, we'll get more of that savings in 2013. So a part of it is determined by how quickly we can integrate these products. And although we have a schedule, schedules, particularly with IT projects, tend to change.

Just in total, say it all just got implemented at the end of 2013, what would what was the range of savings that you would anticipate getting from all these initiatives, in total? Independent of how they roll in.

I think it's fair to say that we think conservatively there's $5 million to $10 million of additional EBITDA that we can achieve when all of these systems are in place and fully operational.

Okay. And just the last one. Meaningful use, is that going to be a material amount for you guys, or is it just -- do you have a range on that, I guess, and is it this year or next?

Again, that's another one of those, Henry, where we've analyzed it and it depends upon when the radiologists qualify. The range of that potential benefit to the Company is $10 million to $12 million, but it will depend upon when the radiologists qualify, because to the extent that they don't qualify by October of this year, it does drop down. And that would be then the lower range of our expectations, of $10 million. The other side of that, though, is it doesn't get paid out all at one time. There's a schedule of how the meaningful use payments are allocated over about a four-year period of time. And for RadNet, it wouldn't be -- it would probably roll out relatively evenly over that period. So if we hit the lower end of that range of $10 million, it would be about $2.5 million a year for the next four years.

Next four years? And that's separate from the $5 million to $10 million of savings from the IT system that you talked about?

Correct. Yes.

Yes.

All right. Thanks very much.

Thank you, Henry.

It appears that is all the time we have for questions. I would like to turn the conference back over to our speakers for closing remarks.

Okay. Thank you again for joining us. I'll look forward to our next closed call for the first quarter of 2013, and appreciate all of you dedicating a part of your day to listen to Mark and I. Thank you.

Thank you. And again, that does conclude today's conference. We thank you all for joining us.