RadNet, Inc. (RDNT) Q4 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the RadNet, Inc. Full Year And Fourth Quarter Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that today's conference is being recorded. And now your host for today's call, Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet Inc. Mr. Stolper, 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 2011 financial 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 U.S. 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 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 on management's current preliminary expectations and are subject to risks and uncertainties, which may cause RadNet's actual results to differ materially from 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, 2011, 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 and I plan to provide you with highlights from our fourth quarter and full year 2011 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. 2011 was an excellent year for RadNet. We had strong operational and financial performance, driving record procedural volumes, revenue, EBITDA and net income. We drove positive same-center volumes each of the 4 quarters of 2011, while the overall imaging industry suffered from lower exam volumes caused by a myriad of economic factors, negative utilization trends within health care and other industry-specific issues. Revenue for the year increased more than 12% from 2012. EBITDA increased approximately 9%. We reversed a significant loss in 2010 into $7.7 million of net income in 2011 and procedural volumes increased over 13%. What gives me encouragement as I look to the future was that we ended 2011 with the best quarter in our company's history. We had record quarterly revenue, EBITDA, net income and procedural volumes. During the fourth quarter, we reached the 1 million quarterly procedure milestone for the first time in our history and drove 4.6% same-center procedural growth. This gives us great confidence going into 2012 where we expect to benefit from the full year contribution from the CML acquisition completed in November of 2011 from capital investments we made throughout 2011 and from operational efficiencies resulting from cost-saving measures implemented in 2011. I'm often asked why we fare better than most in our industry, especially during these difficult economic times. I think there are several reasons for this. First, we have singularly focused on the same operating model for over a decade. Although our strategy is not new, it is these uncertain times in healthcare and within our industry that are only now magnifying the benefits of our long-term operational model. Our model is defined by our multi-modality approach, concentration of our centers in regional clusters, where we are or can become the largest provider of imaging services and our focus on providing high-quality medicine and exceptional service to our referring physicians and patients. Second, we have expanded a lot of energy on attracting the best talents to run our centers, manage our leaders and operations and populate our senior management team. I am very proud of the breadth of knowledge and experience we've assembled at RadNet over the years and attribute much of the success to our people. Third, our regional radiology partners are the premier practices in their areas, attracting physician referrals and delivering high-quality medical services. I've always said that good medicine makes good business. And lastly, we have been strategic in identifying and executing on attractive opportunities for growth and expansion. This includes making strategic acquisitions that coordinate with our core operating tenets and culture as well as expanding the products and services we provide, which tie in with or enhance our core business. Examples of these are our Breastlink, eRAD and Imaging On Call initiatives. We have been very mindful during the integration of these operations to objectively identify and adopt best practices and disseminate them throughout the whole of our company. As a result, we have gotten better at running our business through time. But with 2011 already a couple of months behind us, we are focused on the present and the future, not the past. 2012 will continue our exciting journey. We have many objectives for 2012. First, 2012 being an important year for us from a Information Technology perspective. We are beginning to integrate our eRAD RIS and PACS into the 233 RadNet facilities. As you might recall, RIS and PACS are the 2 electronic systems used to manage radiology practices. We hope to have the systems in most or all of our centers by year end. These systems will give us new capabilities to not only improve our visibility of and controls on our business but to provide new features and services to our patients and referring physicians. As an aside, our eRAD solutions has been recently been approved 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 avoid future economic sanctions several years from now. 2012 will also be a year of targeted acquisitions and partnerships. We will continue to acquire facility operators in our core markets of California, Maryland, Delaware, New York, New Jersey and Rhode Island. We will also expand our relationships with health systems and hospitals interested in further involvement with our outpatient imaging or interested in other services we offer such as inpatient staffing, teleradiology and information technology. 2012 will also be a year of integration. As many of you know, we completed a substantial acquisition of the CML U.S. operations about 120 days ago and began an operational turnaround at that time, affectionately called by us, RadNet-ization. This means where needed, we are bringing operational efficiencies, cost savings, appropriate staffing levels and overall RadNet cultural indoctrination to the operations. We are committed to enhancing the contribution margin of the CML acquired assets to be on par with the rest of our East Coast clusters of centers. We have already made great strides to the extent [ph] expect to benefit from their EBITDA contribution as early from the first quarter of 2012. Another initiative in 2012 is focused on our relationships and pricing with commercial payors in our regions, which together represent approximately 55% of our revenue mix. In the last 5 years, we have worked very hard to establish large and capable service networks in our core markets. We believe that our regional networks offer to patients substantial access to high-quality, multi-modality diagnostic services and subspecialty radiology interpretations. During 2012, we are determined to assure that the pricing we are receiving and will receive in the future from commercial payors is commensurate with the indispensable medical services we are providing to their insured population. To this end, we are currently having direct discussions with a number of large, national payors and will have more of these conversations throughout the year. In some cases, these discussions may be confrontational or may require us to terminate preferred provider relationships. More so than ever before, our scale is affording us the ability to work only with health plans that pay us fairly and recognize the value that we are providing to the health care delivery system in our core regions. We are showing willingness to become out-of-network providers to health plans if necessary and are confident that long-term we will be better positioned when we work with the health plans that recognize, appreciate and value of the services we provide. Lastly, and perhaps more importantly, 2012 will be a year of deleveraging. As many of you know, we have been aggressive in consummating acquisitions and invested heavily in equipment, facilities and new initiatives. We are beginning to see the fruits of many of these activities and investments, including gaining market share in our region of operations. During 2012, we plan to utilize a portion of our substantial free cash flow, aided by all of our past investments, acquisitions and initiatives to repay portions of our senior credit facilities. This should serve to reduce balance sheet risk, assure we remain in compliance with our debt agreements and position ourselves with more financial flexibility to execute on opportunities that might present themselves in the future. As a result of all these activities, we expect 2012 to be another record year for us as evidenced by our guidance we released this morning in our financial results press release. We have challenges in front of us as we must overcome reimbursement obstacles from government and private payors and expect the economy to remain challenged during 2012. However, we continue to believe these challenges create further opportunities for RadNet that arise from adverse conditions affecting us, excuse me, affording us the ability to continue to separate us from other industry competitors and participants. At this time, I'd like to turn the call over to Mark Stolper, our Executive Vice President and Chief Financial Officer, to discuss some of the highlights of our fourth quarter 2011 performance. When he's finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our fourth quarter and full year 2011 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 performance. Lastly, I will provide 2012 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 disposal of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and nonequity cash compensation. Or I should say, noncash equity compensation, excuse me. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for noncash or extraordinary and onetime events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet, Inc. common shareholders is included in our earnings release. With that said, I'd now like to review our fourth quarter and full year 2011 results. For the 3 months ended December 31, 2011, RadNet reported revenue and adjusted EBITDA of $164.8 million and $32.3 million, respectively. Revenue increased $18.6 million or 12.8% over the prior year's same quarter and adjusted EBITDA increased $2.1 million or 7% over the prior year's same quarter. The increase in revenue and adjusted EBITDA from the fourth quarter of last year was both the result of procedural volume increases from acquired entities as well as same-center procedural volumes. Fourth quarter 2011 same-center procedural volumes increased 4.6% as compared with the fourth quarter of 2010 and we benefited from the contribution of the CML acquired operations, which we purchased in November of 2011. It contributed approximately $11 million of revenue and over $1 million of EBITDA for the quarter. For the fourth quarter of 2011, as compared with the prior year's fourth quarter, aggregate MRI volume increased 19.7%, CT volume increased 18.8% and PET/CT volume increased 7.6%. Overall volume, taking into account routine imaging exams inclusive of x-ray, Ultrasound, Mammography and other exams increased 18.2% over the prior year's fourth quarter. In the fourth quarter of 2011, we performed 1,020,129 total procedures, the first time in our company's history we exceeded 1 million procedures in any quarter. The procedures were consistent with our multi-modality approach whereby 77.9% of all the work we did by volume was from routine imaging. Our procedures in the fourth quarter of 2011 were as follows: 125,675 MRIs as compared with 105,022 MRIs in the fourth quarter of 2010; 94,374 CT's as compared with 79,448 CTs in the fourth quarter of 2010; 5,490 PET/CTs as compared with 5,101 PET/CTs in the fourth quarter of 2010; and 794,590 routine imaging exams, which include nuclear medicine, ultrasound, Mammography, x-ray and other exams as compared with 673,209 all those exams in the fourth quarter of 2010. Net income for the fourth quarter of 2011 was $4.5 million or 12%, excuse me, $0.12 per share compared to net income of $3.3 million or $0.09 per share reported for the 3-month period ended December 31, 2010, based upon a weighted average number of shares outstanding of 38.1 million and 37.8 million for these periods in 2011 and 2010, respectively. This represents an improvement in net income for the quarter of approximately $1.2 million. Excluding non-cash gains from the mark-to-market of our interest rate swaps of $1.7 million, a $306,000 noncash charge to interest expense related to the amortization of accumulated unrealized losses on interest rate swaps, gains from the disposal or sale of equipment of $312,000 and noncash stock compensation of $611,000, RadNet would have reported net income of $3.5 million or $0.09 per share, per fully diluted share for the fourth quarter of 2011, compared with net income of $3.2 million or $0.08 per share for the fourth quarter of 2010, excluding those same noncash losses and expenses. Also affecting net income in the fourth quarter of 2011 were certain other noncash expenses and nonrecurring items, including $421,000 of severance paid in connection with employee reductions related to cost savings initiatives and $754,000 of noncash deferred financing expense related to the amortization of financing fees paid as part of our new credit facilities and senior unsecured notes. With regards to some specific income statement accounts, overall GAAP interest expense for the fourth quarter of 2011 was $13.5 million. This compares with GAAP interest expense in the fourth quarter of 2010 of $12.9 million. The increase is attributable to increased borrowings we had under the revolver in 2011, which was primarily the result of our purchase of the CML assets in November. The fourth quarter of 2011 bad debt expense was 5.7% of our revenue compared with 5.9% for the fourth quarter of 2010. I'll now discuss full year results. For the full year of 2011, RadNet reported revenue and adjusted EBITDA of $619.8 million and $115.5 million, respectively. Revenue increased $68 million or 12.3% over 2010 and adjusted EBITDA increased $9.3 million or 8.8% over 2010. For the year ended December 31, 2011 as compared to 2010, MRI volume increased 17.6%, CT volume increased 11% and PET/CT volume increased 3.2%. Overall volume, taking into account routine imaging exams inclusive of x-ray, ultrasound, Mammography and other exams, increased 13.1% for the 12 months of 2011 over 2010. In 2011, we performed 3,748,830 total procedures. The procedures were consistent with our multi-modality approach, whereby 77.9% of all the work we did by volume was from routine imaging. Our procedures in 2011 were as follows: 460,473 MRIs as compared with 391,566 MRIs in 2010; 345,864 CTs as compared with 311,647 CTs in 2010; 21,427 PET/CTs as compared with 20,769 PET/CTs in 2010; and 2,921,066 routine imaging exams, which include nuclear medicine, ultrasound, Mammography, x-ray and other exams as compared with 2,591,037 of all these exams in 2010. Net income for 2011 was $0.19 per share compared to a net loss of negative $0.35 per share in 2010 based upon a weighted average number of basic -- of diluted shares outstanding of 38.8 million and 36.9 million shares in 2011 and 2010, respectively. Affecting net income in 2011 were certain noncash expenses and nonrecurring items including, noncash gains from the mark-to-market of our interest rate swaps of $5.4 million; $3.1 million of noncash employee stock compensation expense resulting from the vesting of certain options and warrants; $2.9 million of noncash deferred financing expense related to the amortization of financing fees paid as part of our existing credit facilities; $1.4 million of severance paid in connection with the headcount reductions related to cost savings initiatives from previously announced acquisitions; $2.2 million gain on the disposal or sale of certain capital equipment and $1.1 million noncash charge to interest expense related to the amortization of accumulated, unrealized losses on interest rate swaps related to the company's credit facilities. With regards to some specific income statement accounts, overall GAAP interest expense in 2011 was $52.8 million. Adjusting for the noncash impacts from items such as amortization of financing fees, losses or gains related to the fair value adjustments on interest rate hedges and accrued interest, cash interest expense was $47.3 million in 2011. This compares with GAAP interest expense in 2010 of $48.4 million and cash paid for interest of $40.4 million. For 2011, bad debt expense was 5.6% of our revenue compared with an overall blended rate of 6% for the full year of 2010. With regards to our balance sheet, as of December 31, 2011, we had $556.4 million of net debt, which is total debt less our cash balance and we were drawing $58 million on our revolving credit facility of $121 million. This is an increase in our net debt of $52.4 million compared with December 31, 2010. This increase was primarily due to borrowings we made under our revolving credit facility to purchase the U.S. operations of CML HealthCare, which we completed in November 2011. Since December 31, 2010, accounts receivable increased approximately $32.3 million, primarily the result of accounts receivable assumed from acquisitions, increased revenue, credentialing holds and billings we have held back in conjunction with negotiations we had with private payors throughout 2011, some of which were the result of the bundling of CT codes related to the abdomen and pelvis. Our net days sales outstanding or DSOs increased to 62.6 days at December 31, 2011 from 54 days as of that date one year ago. Our accounts payable and accrued expenses increased $20.5 million to $103.1 million during 2011. Much of this increase is attributable to acquired entities and to the increased size of our business. Throughout 2011, we repaid $18.8 million of notes and leases payable, had cash capital expenditures net of asset dispositions of $39.7 million and entered into notes and leases payable of $26,000. I will now discuss how RadNet performed relative to our 2011 guidance, which we released exactly one year ago. With respect to revenue, our guidance level was $575 million to $605 million. Our actual results were $619.8 million, exceeding the high end of the guidance range. For adjusted EBITDA, our guidance was $110 million to $120 million. Our actual results were $115.5 million. For capital expenditures, our guidance range was $35 million to $40 million, our actual results were $39.7 million. For cash interest expense, our guidance range was $45 million to $49 million, our actual results were $47.3 million. And finally, for free cash flow generation, our guidance range was $25 million to $35 million and our actual results were $28.5 million. We are pleased to have met or exceeded each guidance level we set for 2011. We believe these 2011 performance objectives, which were set at levels above 2010 results were accomplished partly through capturing market share from our local competitors, most of which are smaller and less-capitalized, single-center or small group operators. Our size, economies of scale and efficiency have continued to separate us from much of the rest of the industry. At this time, I'd like to review our 2012 fiscal year guidance levels, which we released this morning at our earnings press release. For our 2012 fiscal year, we announced our guidance ranges as follows: for revenue, our 2012 guidance range is $660 million to $700 million. For adjusted EBITDA, our range is $120 million to $130 million. For capital expenditures, our range is $35 million to $40 million. For cash interest expense, our guidance range is $46 million to $51 million and for free cash flow, our guidance range is $25 million to $35 million. As reflected in our guidance, we are optimistic about 2012. Despite our assumption that the operating environment may continue to be affected by a broader -- a difficult, broader economy, we are predicting increasing aggregate procedural volumes, revenue and EBITDA. At the midpoint of our guidance ranges, we are anticipating 9.7% top line growth and 8.2% EBITDA growth. We will benefit in 2012 from the full year contribution of the CML transaction, which we completed in November of 2011 and the numerous capital investments we made and projects we began in 2011. Throughout our 2012 -- though our 2012 guidance incorporates previously discussed reimbursement cuts for Medicare and certain others from private health plans, the midpoint of our guidance reflects only modest volume increases, which result in flat same-center revenue as compared with 2011. We also should benefit from cost savings and productivity measures we implemented throughout 2011 designed to lower salaries, professional fees and information technology expenses. All in all, we're excited about the prospects of 2011. I'd now like to turn the call back to Dr. Berger, who will make some closing remarks.

Thank you, Mark. The battle lines have never been clearer, the strategy never more compelling, the stakes never higher. Since the Deficit Reduction Act of 2005, imaging has been the target of reimbursement reductions by both CMS and commercial payors. Some of the underlying justifications for this attack may have at one time been based on overutilization and overcapacity. Certainly, self-referral, a cause for some of the overutilization and overcapacity remains an important issue. However, despite the consolidation of imaging providers and the well-documented flattening and perhaps even decreasing utilization, reimbursement remains targeted without justification or concern regarding patients' access to essential imaging services. In fact, by way of example, the reality is there are fewer imaging providers performing Mammography today despite increased demand for procedure, which provides early diagnosis of breast cancer that affects one in every 8 women in our country. Incredibly, 1 national health insurer attempted to reduce reimbursement for digital mammography to the rate paid for the outdated analog Mammography exams. It seems that payors, patients and referring physicians want state-of-the-art technology but no one wants to pay for it. I believe imaging providers should no longer accept changes in reimbursement without being part of the discussion or negotiation. In a time in which health insurance premiums are rising 10% to 30%, with many health insurers enjoying record profits and executives in those companies receiving generous compensation packages amid decline in utilization, imaging providers should no longer be willing to accept payor directed lower reimbursement. Convenient access to high-quality, cost-effective freestanding outpatient imaging is a better solution -- in convenient, and inconvenient and higher-cost hospital alternatives. RadNet and its radiologist partners are prepared to do what is necessary to create a level playing field where we will negotiate with payors for fair pricing instead of simply accepting imposed pricing. If the payors believe they can maintain their increased profits and compensation on the back of imaging, they are mistaken. Imaging has become the backbone of virtually every medical specialty. Nothing less than the welfare of the health care system is at stake. My comments may sound extreme, but the consequences of ignoring what payors are systematically trying to impose are unacceptable. In our core markets, RadNet will assume the leadership position taking the fight to the insurers. Operator, we are now ready for the question-and-answer portion of the call.

[Operator Instructions] And for our first question, we go to Henry Reukauf with Deutsche Bank.

Mark, quick question for you. You said the midpoint of your guidance estimates I think it is basically flat volume growth. I think last year, the guidance was 2% down at the bottom on terms of same-store volume and 2% up in terms of same-store volume. Is that sort of the same metric you're using at the high end, 2% up on the high end? Is that same metric that you're using this year?

Henry, let me just correct 1 thing that you said. We expect in 2011 -- in 2012 some pricing declines based upon the Medicare fee schedule which we've already discussed, which is going to be a several million dollar hit to us and some private, some small private pay adjustments. So the midpoint of our guidance this year represents about a 1% same-center increase in volumes to keep same-center -- this is volumes increase, to keep same-center revenue flat. Is that clear? So in terms of what happened -- for us to hit the high end of the range, it's somewhere in the, I'd say, 3% to 4% same-store sales growth in 2012 with that same 3% to 4% decrease in same-store sales growth to the bottom end. I'm sorry, same-store volume growth.

So Essentially pricing down 1%, volumes up 1% on a same-store basis?

Correct, for the midpoint.

And then I guess, Howard, the battle drawns are line -- battle lines are drawn as you said. You know what, what are you seeing? Are you seeing really significant drops from commercial payors that just kind of stimulated you to this battle and why do you think you have a strong enough seat at the table to kind of defeat the RBMs or the commercial payors at this time, versus a year ago?

I don't know if we're in that much stronger a position than we were a year ago. We are in a stronger position given acquisitions as well as improvement just generally in our overall operational efficiencies that give us greater financial strength to go after this fight. These kind of efforts on the part of payors is a annual process here. The way that commercial payors generally operate is that when Medicare lowers reimbursement, they like to follow on. And when they come up with their own ideas of how they want to try to reduce costs, they depart from Medicare and use whatever leverage they think they have in a given market to further lower reimbursement. And I think that, that process has somewhat been more accelerated, in our opinion, in the last year as a result of the federal issues regarding both budget and Medicare, as well as the fact that most of these payors just do it because they think they can. And our strategy has always been to be a dominant player in the markets that we operate in. I think that we have improved our position in virtually every market that we operate in currently. And that at some point, there has to be somebody, if not a company, that pushes back against this because left to I think the inaction and just accepting these imposed pricing, the consequences are unacceptable. So we have begun having more serious conversations. They were engaged last year, throughout the year. They are engaged this year, and if people begin to understand and realize that the services that we provide are so essential, both in terms of what the patients need as well as what the unacceptable options are for not a part of the payor network, I believe that we have and will continue to have success, not only in pushing back but potentially improving our pricing. As I said in my statements, Henry, everybody wants state-of-the-art technology and our industry has always been somewhat handicapped by the enormous amount of capital investment that we're forced to make in order to provide that state-of-the-art equipment. It just can't keep going on that this spiral downward is going to allow patients and physicians to have access not only to the centers but to the level of technology that everybody is demanding. So I think unless there's a time when we draw that line in the sand, which we are prepared to do at this point in time, it is inevitable that the payors will continue to take advantage of what they feel is softness in the marketplace and just be able to dictate pricing. And that paradigm has to change, and we're prepared to, at least in our markets, draw that line in the sand.

So I guess what kind of pressure in terms of reduction in price were you seeing? 1% is kind of a blended. And then I guess, just following to that is, are you worried about somebody, a major insurer dropping you? And how do you -- do you contract locally or is it nationally with the payors?

Generally, it's all locally but a number of the payors do have national programs or policies that they try to push down or implement at the local level. Our policy is not to take any price reduction. And we believe we can be successful and perhaps even improve our pricing. So continued softness or reduction in reimbursement is not acceptable and we are prepared and have threatened to become nonparticipants in some of the provider networks if we can't get what we feel is fair pricing. The payors, on their part are going to have to decide whether or not they can live without the RadNet centers in any particular local market and feel that they can still provide the appropriate access and technology in the areas that we operate in.

And we go next to Bruce Galloway with Galloway Capital.

Looking at all of the cross-currents in the reimbursement arena, how does that affect your strategy for acquisitions? You've been very, very opportunistic in making acquisitions. Is that basically pretty much on hold right now or are you going to look at situations that can enhance your revenues and profit margins?

We're going to continue to look at opportunistic acquisitions. We're finding that more and more of the smaller operators are just not willing to continue the fight, if you will, with all of the factors that are facing them, whether it be reimbursement issues, technology issues, claiming volumes, et cetera. And we find the opportunities and environment for doing accretive acquisitions more plentiful than they probably ever been but we have to be very disciplined and targeted in our approach. Again, we're only really interested in doing acquisitions in the markets that we're currently in that strengthen our market position as far as our leverage with the payors are concerned. So we're looking for high-quality practices, we're looking for accretive acquisitions and we're very disciplined in the way in which we do our valuations in order to make certain all of the acquisitions are accretive.

So with regard to your revolving line of credit, do you have additional buying power and capability? And with that said, do you have anything lined up? Is there any backlog of acquisitions in your pipeline?

Sure. Bruce, as of year end, we were $58 million drawn on our revolving credit facility and our capacity is slightly over $121 million. So we certainly have availability under our revolving credit facility. And as we said in our remarks, we're going to be paying some of that down throughout the year. We also have substantial free cash flow in addition to that, which creates more a capacity and ability to make acquisitions. So we think, particularly a lot of these acquisitions are small, single operators or small group operators, which won't necessarily require a lot of capital. So those are the types of acquisitions that we're seeing as being plentiful.

So like tuck-in acquisitions but nothing significant, nothing major?

Nothing major at the current time and always a lot of incoming calls about acquisitions, opportunities for smaller operators that we're constantly evaluating.

Our next question we go to Omar Wisnabi [ph] with BlueMountain Capital.

2 main questions. First one was on operating leverage. In your guidance, I think you guys said the midpoint was 9.7% on revenue and 8.2% on EBITDA growth. And when you look at the low, mid and high end of your range, doesn't seem to be a lot of operating leverage fall through in the assumptions. Can you guys talk about that a little bit?

Sure. And it's part of the fact of life in the imaging industry. If you go back several years and look at our EBITDA margins, it's hung around sort of the 19%, 20% level now for about 4 years running and that is reflective of 2 things. One is, we've significantly made our business on the cost side more efficiently but that's been mitigated by pricing impacts that we've had to withstand for Medicare and private payors over the years. So we think that, that pattern of being able to continue to make our business more efficient to mitigate pricing pressures in the future will continue. So that we're not confident enough to say that we can increase margins but we are quite confident that we can keep margins relatively stable.

The other question I had was, so you guys obviously had a really good fourth quarter about $32 million of EBITDA, which included $1 million from the CML acquisition and I think you said that worked out to about $11 million of revenue so 9% margin there. I know the fourth quarter had some strong results and you guys are being a little bit more conservative going forward. But if you just annualized the fourth quarter and then included some of the benefits in margin pick-up from the CML acquisition, I get a figure that suggests something even above the high end of your range. Is there any reason that you see in Q1 or other periods that revenue slowdown, or am I incorrect in assuming that Q4 results can continue and that eRAD savings and other things are maybe being built in conservatively for 2012?

Well, I think when we view setting guidance, we'd like to set it in a way that's conservative, that takes into account where we can achieve potentially the high end of the range but also takes into account issues that we might not be projecting that could come about, not sure what those might be that would put us towards the low end of the range. But remember, in addition to those positive things you mentioned in your question, we're also -- have to overcome several million dollars of Medicare reimbursement hits, which we've discussed at length since the final rule was released in November of last year, as well as some small payor -- private payor impacts. So there are pluses and minuses going in and out but we feel extremely confident about the range that we set and of course, we'd love to overperform.

1 last quick question. I think in Q1 last year there might have been some weather issues. So far this year, it looks like the weather's been relatively mild. Can you guys talk briefly about how you are seeing your business so far this year?

At the risk of perhaps angering the weather gods, it has been an incredibly uncharacteristic, mild winter and our volumes in this first quarter for the first 10 weeks of the year have been very strong relative to last year's when we had some severe weather issues. So while the first quarter always tends to be a little bit weaker due to deductible issues or weather-related issues and some holiday ramp up from -- at the beginning of the year, we expect the year -- the first quarter of this year, again, assuming that the uncharacteristically mild winter continues to be a good first quarter relative to last year's first quarter.

And we go next to Alan Weber with Robotti & Company.

A bit of a follow-up to the previous question. If you look out to 2013, just curious if you know if everything remains somewhat flat, the additional benefit from the acquisition and eRAD, what does that mean kind of into EBITDA for the company?

When you say eRAD, I assume you're referring to the IT initiative?

Correct.

Yes, well, we will see some of those benefits this year but I think you're correct in your assumption that it won't be for the full year given that it's going to have to ramp up and unfortunately, it's not just a simple plug-and-play. We'll probably be able to give a better assessment of the full benefit of that impact as we get perhaps closer to the end of the year or at least the third, if not, the fourth quarter and the issues there are going to be how quickly we can get some of the benefits, not just from lowering of costs that we had to pay with our outside vendors for some of the licensing and maintenance costs that the eRAD implementation will eliminate but also efficiencies that we hope to create. Although we haven't elaborated on it, we focus mostly on the PACS and RIS side of this but we will also be implementing a rather robust voice recognition solution for our reporting, which should also have some additional benefits. So while I am loath to try to categorize how much that will be, we think it will be significant and I think that will mostly be reflected in a full year's benefit in 2013 but yes, there will be benefit as we go along from that.

And what about expenses from CML, yes?

Yes, Alan, on the CML acquisition, when we announced the transaction, we announced approximately $70 million of additional revenue would be contributed from those assets. And we didn't -- we did not announce an EBITDA number but we said back then and we've said since that our expectation would be through an operational turnaround to have those assets perform at the levels that are our existing Maryland Delaware operations perform at and if you were to make the assumption that, that level would be at or above our post-corporate RadNet EBITDA margin, I think that would be a good assumption for your model.

And how much of that though -- is that going to be -- my question was, how much additional benefit will there be in 2013 from the turnaround? Or do you think it's all going to be done? [indiscernible] Fully be done, that's what I was asking.

We believe that by midyear 2012, most of the impact of our synergies, turnarounds, rightsizing of staffing levels, et cetera, will have been fully completed. So I think the way to look at it is if you were to take kind of the second half of the year and use that as a run rate for 2013, that would probably be a good way to guide your 2013 projections. So we think, we would hope to have the second half of the year more like a normal run rate for the CML acquisition going forward.

And then just as a follow-up, you made a comment that your receivables or days outstanding were higher. Is there anything you are doing or can do or expect improvements in 2012?

Yes. We've ramped up our self-pay collection operation here internally. So we've hired more people to follow-up on the patient portion responsibility. We're also assessing certain front-end systems that could ultimately be built into our RIS product, our radiology information product through eRAD that would allow us to identify more accurately that which will be owed to us for co-pays as well as deductible payments, which tends to be an issue for us and everybody, frankly, in the first quarter in particular, where most patients are not through their deductibles. We firmly believe that if you can collect more money upfront and not have large amounts of money going to the collection process. Obviously, our bad debt will be lower and our collection percentages will be higher. So we're working on a number of things that will help that. But just also, we have -- as of year end, we had a number of billings on hold that related to negotiations that we were having with private payors over the CT abdomen and pelvis as well as other related negotiations. So we expect to be collecting that money naturally throughout the first quarter. So I would hope and expect that by the end of next year, our DSOs would be down to 2010 levels again.

And we go next to Dana Vartabedian with Deutsche Bank.

It's Darren Lehrich. Just a couple of things here. I guess just from a year-end perspective, in 2011, I'd be curious if you have the numbers handy to get a revenue size of your non-facilities service businesses. So I don't know if there's a way to sort of frame up the revenue picture there that would be for eRAD and some of the other professional services just so we can get a sense for what the totality of those revenues look like in 2011.

Sure. I'm going off memory because I don't have the appropriate reports and reserve the right to correct myself, but I shouldn't be too far off. eRAD today remains about a $5 million revenue business. The Imaging On Call, which is our teleradiology group, is roughly about $11 million business and Breastlink which is our oncology operation focused on breast cancer and breast disease is roughly about I'd say a $30 million business. Howard, is that consistent with it?

Well, just the Breastlink portion? All oncology? It's about $25 million.

Then just to sort of go back here to Henry's line of questioning but maybe a different question entirely on the managed care renewals. Do you have an expectation built in your guidance for terminations? Is that contemplated or are you just -- are you really just trying to signal to us that, that might be a factor as you move through this process of more heated negotiation? Just want to understand whether that's contemplated anyway in the guidance discreetly.

No, we don't have anything built into the guidance, either in the way of increases, which we expect to get or decreases from those that we might take a more long [ph] position with.

Okay. And I guess, year-to-date, have you terminated any of your major payor relationships?

There are no payor relationships currently that we feel are at risk of being lost.

And then if I could, Howard, just could you maybe talk about just organizationally your managed care team? Obviously, you've got a little bit more of a stronger message that you're trying to deliver. So I just want to understand the talent that you have at RadNet to be able to manage through this process?

We have people on both the East and West Coast that have direct responsibility for payor contracting relationships and negotiations. Those negotiations generally are also overseen by senior management, which would be myself, as well as the 2 Chief Operations Officers on both -- 1 on East Coast and 1 on the West Coast. The discussions that we've had with payors is something that's been an ongoing process for years. This is not something new. I think that there should be no surprise, we always get questions about what we think the potential consequences are of Medicare reimbursement cut follow-on by commercial payors. And so reimbursement has always been an issue and what I'm signaling at this point in time, is that we want to be in a position to have a negotiation, not merely accept pricing and expect to take it. And we've been in this position before. We just feel we're in a stronger position both with our regional presence as well as our financial strength to be more aggressive about notwithstanding. As I mentioned before, if somebody has come to us, which they have and expects us to accept a decrease in Mammography reimbursement down to analog rates, that's unacceptable, it's completely unacceptable. And so at some point, somebody has to push back and say, "I'm sick and tired and I'm not going to take it anymore." And that's what we're prepared to do, we think that there are limited options that some of these payors have, the kind of position we're taking is not unusual with hospitals and other large medical groups and regionally focused conversations, I just think it's become time for imaging as a whole to stand back and be willing to have a word entered into the radiology lexicon that hasn't been there before and that's the word no. We're not going to take it. You can't keep doing this, this downward spiral has to stop. We've been successful in building a business that I think delivers services and quality second to none at the size that we are. And if people want us to continue to invest and increase the quality, service and technology that we offer, you just can't do it on the back of continuing, decreasing reimbursement. So what I'm signaling right now is something that I've spoken to before in front of health care conferences, in front of investors, et cetera, and that is the time has come for this paradigm to change. And while potentially, it could be uncomfortable, we're prepared to risk that as are our radiologists for the sake of maintaining a viable business and an incredibly important resource within the health care industry. So nothing I'm talking about today is new, nothing that should be taken as any more than has been happening over the last 5 years since DRA. But like in that movie Network, and "I'm sick and tired of it and we're not going to take it anymore". At some point you just have to say no, particularly when some of these initiatives are just very egregious.

And we go next to Klaus Van Stutterheim [ph] with Deutsche Bank.

Can you remind me, the CML acquisition, how was that financed? Was that just debt or with an equity component?

There was no debt. Actually, there was no equity. It was 100% financed.

We paid roughly a little over $28 million of cash. The seller, CML, took back a $9 million note and we assumed roughly $3 million of capital lease debt. So the $28 million of cash we pulled down from our revolving credit facility.

And on the plan to -- so you said the net debt was $550 million. So what's is its -- what's the actual debt and what's the cash position?

The cash position was a little over $2 million, roughly $2.5 million.

At the end of the quarter?

Correct.

Okay. So it's all debt, really?

Yes.

So net debt is all, that $550 million you said. How much are you planning to pay down this year?

Well, our guidance suggests the ability to pay -- if you look at our free cash flow of $25 million to $35 million.

Okay. And what's the price on the debt?

Our first lien term loan is LIBOR plus 3.75% with a 2% LIBOR floor. Our revolver is LIBOR plus a 4.25% with a 2% floor and then our $200 million bonds, the unsecured notes, are at 10 3/8% coupon.

And then presumably, can you pay those notes back or do you have to buy them in the open market? How does that work? You have to buy them in the open market, right?

We'd have to buy the bonds in the open market. We have a small basket within our credit facility that would allow us to do that.

And what are those bonds trading at?

I don't have a quote here but I think they're in the mid-90s.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Dr. Berger, I will turn the conference back over to you for any closing remarks.

Thank you. Again I would like to take the opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader that provides great services with an appropriate return on investment for all stakeholders. Thank you for your time today, and I look forward to our next call.

And again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation.