CML HealthCare Inc.
TSX : CLC

CML HealthCare Inc.

August 09, 2013 06:00 ET

CML HealthCare Inc. Reports 2013 Second Quarter Financial Results

MISSISSAUGA, ONTARIO--(Marketwired - Aug. 9, 2013) - CML HealthCare Inc. (the "Company" or "CML") (TSX:CLC) today reported results for the three and six month periods ended June 30, 2013. All financial results reflect the reclassification of CML's British Columbia and Ontario imaging operations, with the exception of two Ontario MRI/CT locations, as discontinued operations. The Company announced its intention to divest its imaging operation in January 2013. To date, the Company has entered into sales agreements for 45 of its 80 available imaging locations and 32 inactive Ontario imaging licenses for total gross proceeds of $65.3 million. The sales process is expected to be completed by the end of 2013.

Highlights - For the three month period ended June 30:

  • Revenue of $63.1 million compares to $62.7 million in 2012
  • EBITDA of $17.5 million compares to $24.6 million in 2012
  • Net earnings of $3.5 million, which includes pre-tax restructuring and other charges of $7.2 million, compares to $14.5 million in 2012
  • Normalized AFFO2 totaled $14.0 million and dividends declared were $11.9 million, resulting in a payout ratio of 85.2%
  • CML to host investor call today, August 9, 2013 at 10:00 am (ET). Call-in number: 416-644-3417 or 877-974-0446

"Our second quarter revenue reflects contributions from previously announced new private pay businesses (including the acquisition of Hemostasis Reference Laboratory ("HRL") - specialized in coagulation testing, and Rocky Mountain Analytical ("RMA") - focused in naturopathic holistic testing, and strong uptake of the new COLOGIC - a simple blood test for colon cancer screening), which was partially offset by a reduction in Performance-Based and Program funding for laboratory services since the criteria for these two programs are still being negotiated with the Ontario Ministry of Health and Long Term Care (MOH). The negotiations are proceeding well, and we anticipate a final agreement in the coming months," said Thomas Wellner, President and CEO of CML.

"On June 25, 2013, we announced that the Company had entered into an Arrangement Agreement with LifeLabs Medical Laboratory Services to acquire all issued and outstanding shares of CML. This transaction has the full support of both management and the board of directors of CML, and I encourage all eligible shareholders to vote by phone, fax, or on-line before August 30, 2013, or in person at the Special Meeting of Shareholders to be held on September 3, 2013 at 333 Bay Street, Suite 3400 at 2:00 p.m. (Toronto time). The Notice of Meeting and Management Information Circular have been mailed to shareholders of record on the record date, July 26, 2013 and are also available on-line at www.SEDAR.com, as well as on CML's website at www.cmlhealthcare.com. Filings and discussions have occurred with key regulatory authorities, and we will announce decisions when available," continued Mr. Wellner. "While this transaction is a transformational event for CML, we continue to focus on running the business and implementing our strategy focused on quality and service delivery to clients and referring physicians who depend on us daily for essential medical diagnostic services."

"During the second quarter, preparation work started for the new Kiestra microbiology platform installation and we are on target to go-live by the end of September 2013. We are also continuing with our LEAN operational improvements and will be implementing several initiatives at Client Services to improve efficiency in our interaction with clients. As well, we on-boarded two new hospital partners and established CML HealthCare Bioanalytics ("CML Bioanalytics") for clinical trial testing. The first clinical trial began in July 2013 with two more scheduled in August 2013, and a further two in September 2013," said Mr. Wellner.

"With respect to the Company's diagnostic imaging divestiture, we have entered into several sales agreements for 45 of our 80 imaging locations, and for 32 inactive Ontario imaging licenses for total gross proceeds of $65.3 million. The sales process is expected to be completed by the end of 2013 with gross proceeds in the $80 to $100 million range."

Q2 2013 consolidated revenue from continuing operations was $63.1 million compared to $62.7 million for the same period in 2012. The increase reflects $1.5 million in new revenue from the acquisitions of RMA (acquired in May 2013) and HRL (acquired in October 2012), as well as $0.2 million from COLOGIC (launched in October 2012). The revenue increase was partially offset by a $0.9 million decrease in revenue from Performance Based Funding and a $0.2 million decrease in Program funding for laboratory services since the criteria for eligibility for both funding programs for 2013 have not yet been agreed to with the MOH.

Cost of Services for Q2 2013 increased $2.0 million to $32.2 million compared to the same period in 2012. The majority of this increase was attributable to the costs associated with the newly acquired RMA and HRL, and the startup of CML Bioanalytics.

General and Administrative ("G&A") expenses totaled $16.2 million compared to $10.0 million in the same period in 2012. $3.5 million of the increase reflects increased stock based compensation for executives and members of the board of directors, as a result of stock price appreciation and accelerated vesting, resulting from the Arrangement with LifeLabs. A further $1.4 million increase reflects costs associated with acquisition of RMA and HRL, and the startup of CML Bioanalytics. The balance of the increase in G&A expenses was associated with higher staffing costs, repair and maintenance costs, and depreciation and amortization.

Net earnings from continuing operations were $2.9 million (or $0.03 per share) compared to $13.4 (or $0.15 per share) in the prior year. The decrease primarily reflects the above noted increase in G&A expenses and Cost of Services, as well as a $7.2 million charge for restructuring and other expenses in Q2 2013 not applicable in the same period in 2012, related to the divestiture of diagnostic imaging assets, restructuring of laboratory operations, and costs incurred related to the Arrangement Agreement with LifeLabs.

Normalized Adjusted Funds From Operations2 ("AFFO2") and dividends declared were $14.0 million and $11.9 million respectively in Q2 2013, resulting in a payout ratio of 85.2%.

Highlights - For the six month (H1) period ended June 30:

Revenue for H1 2013 totaled $125.3 million compared to $127.6 million for the same period in 2012. The decrease was primarily due to the net effect of $0.7 million in OHIP reimbursement rate cuts effective April 1, 2012; $2.5 million in reduction in Performance-Based and Program funding from the MOH due to the ongoing negotiations; and $1.2 million decrease in other non-cap revenues. The aforementioned was partially offset by new revenue totaling $2.1 million from the acquisition of HRL and RMA, and contribution from COLOGIC.

H1 2013 Cost of Services of $60.6 million were 6.7% higher than the prior year of $60.3 million, reflecting $2.8 million of additional costs associated with the acquired businesses, HRL and RMA, the startup of CML Bioanalytics, as well as new growth initiatives. This was partially offset by a $2.5 million decrease in supplies, medical professional fees, and other variable costs, in line with decreased billings.

G&A expenses for H1 2013 totaled $27.8 million compared to $19.3 million. The increase was due primarily to $3.6 million increase in executive and board of directors' stock based compensation due to the stock price appreciation and accelerated vesting resulting from the Arrangement Agreement with LifeLabs; $1.7 million increase in staffing costs; $1.8 million in costs associated with the acquisition of RMA, HRL and CML Bioanalytics; $0.5 million increase in repair and maintenance costs; and an increase in depreciation and amortization due to the purchase of additional property and equipment and intangible assets.

Net earnings from continuing operations of $15.0 million were lower than $30.4 million in 2012, reflecting primarily a $10.3 million of restructuring and other expenses related to the sale of the Company's diagnostic imaging operations, the restructuring of the laboratory operations, as well as costs incurred related to the Arrangement Agreement with LifeLabs. These additional costs were partially offset by a $6.5 million decline in income taxes in 2013 compared to 2012, reflecting lower earnings before income taxes.

Financial Summary:
(in C$ millions except percent and per share amounts) For three month period ended For six month period ended
30-Jun
-13
30-Jun
-12
%
Change
30-Jun
-13
30-Jun
-12
%
Change
Revenue 63.1 62.7 0.7 % 125.3 127.6 (1.8 %)
Cost of services 32.2 30.2 6.7 % 60.6 60.3 0.6 %
General and administrative 16.2 10.0 60.8 % 27.8 19.3 44.1 %
Add back: Depreciation and amortization 2.7 2.2 27.2 % 5.1 4.2 21.8 %
EBITDA1 17.5 24.6 (28.9 %) 42.0 52.2 (19.5 %)
EBITDA1Margin (%) 27.7 % 39.2 % na 33.5 % 40.9 % na
Depreciation and amortization 2.7 2.2 27.2 % 5.1 4.2 21.8 %
Restructuring and other expenses 7.2 - na 10.3 - na
Interest expense 2.7 2.5 10.9 % 5.2 5.2 na
Interest and other income - (0.4 ) na - (0.5 ) na
Provision for income taxes 2.0 7.0 71.9 % 6.5 13.0 (50.1 %)
Net earnings for the period from continuing operations 2.9 13.4 (78.4 %) 15.0 30.4 (50.7 %)
Earnings from discontinued operations, net of tax 0.7 1.2 (41.7 %) 0.7 2.2 (70.2 %)
Net earnings for the period 3.5 14.5 (75.9 %) 15.6 32.6 (52.0 %)
Basic and diluted earnings per share - continuing operations 0.03 0.15 (80.0 %) 0.17 0.34 (52.0 %)
Basic and diluted earnings per share-discontinued operations 0.01 0.01 na 0.01 0.02 (50.0 %)
Basic and diluted earnings - per share 0.04 0.16 (75.0 %) 0.17 0.36 (52.8 %)
Normalized Adjusted Funds From Operations2(AFFO2):
(in C$ millions except percent amounts) For three month period ended For six month period ended
30-Jun-13 30-Jun-12 % Change 30-Jun-13 30-Jun-12 % Change
Cash provided by operating activities of continuing operations 11.5 20.7 (44.3 %) 13.8 20.2 (31.7 %)
Adjust for net change in working capital (2.2 ) (4.5 ) (52.5 %) 11.2 0.2 na
Adjust for timing of tax payments 2.6 - na 5.2 15.8 (67.2 %)
Restructuring and other expenses 3.9 - na 3.9 - na
Average spending to maintain property and equipment (1.9 ) (0.9 ) 106.4 % (3.8 ) (1.8 ) 106.4 %
Normalized AFFO2 14.0 15.3 (8.4 %) 30.4 34.3 (11.6 %)
Dividends declared 11.9 17.0 (29.8 %) 23.8 33.9 (29.8 %)
Payout Ratio 85.2 % 111.1 % na 78.4 % 98.7 % na

Balance Sheet

As at June 30, 2013, the Company had a cash balance of $1.3 million compared to $3.0 million as at December 31, 2012. Long-term debt including the current portion totaled $271.5 million at the end of Q1 2013 compared to $250.2 million at December 31, 2012. The increase in debt reflects the Company's investment in growth strategies, including the acquisition of RMA and the establishment of CML Bioanalytics. For the period ended June 30, 2013, the Company had approximately $130 million available under its revolving credit facility and a Debt/EBITDA ratio of 2.8 times. This compares to approximately $150 million available in its revolver, and Debt/EBITDA ratio of 2.4 times as at December 31, 2012. Common shares issued and outstanding totaled 89,842,397 as at June 30, 2013 and December 31, 2012.

Notice of Conference Call

Thomas Wellner, President and CEO of CML will be hosting a conference call on Friday, August 9, 2013 at 10:00 am (EST) to discuss the Company's 2013 second quarter financial results. Investors and analysts are invited to join the call by dialing 416-644-3417 or 877-974-0446. Please dial in 15 minutes prior to the call to secure a line. You will be put on hold until the conference call begins.

A live audio webcast of the conference call will be available through www.cmlhealthcare.com. Please connect at least 15 minutes prior to the conference call to allow adequate time for any software download that may be needed to hear the webcast. An archived replay of the webcast will be available for 90 days.

A taped replay of the conference call will also be available until Friday, August 16, 2013 by calling 416-640-1917 or 877-289-8525, reference number 4630488#.

About CML HealthCare Inc.

Based in Mississauga, Ontario, CML HealthCare Inc. is a leading Canadian community-based, medical diagnostic services provider. In addition to its network of 114 Client C.A.R.E. Centres in Ontario and 82 imaging centres in Ontario and British Columbia, CML operates three subsidiaries: 1) Hemostasis Reference Laboratory, focused on specialized coagulation testing and equipment calibration for international customers; 2) CML Bioanalytics, a specialty laboratory providing customized clinical trial testing for the biotechnology and pharmaceutics industries; and 3) Rocky Mountain Analytics, providing specialized testing for naturopaths and physicians practicing integrated medicine in Canada. CML is publicly-traded on the Toronto Stock Exchange under the symbol "CLC" and has approximately 89.8 million common shares outstanding. For more information, please visit www.cmlhealthcare.com or follow CML on Twitter @cmlhealthcare.

1 The Company defines EBITDA as earnings from continuing operations before interest, taxes, depreciation, amortization, impairment of non-financial assets and restructuring and other expense. EBITDA margins are calculated by dividing EBITDA by revenue. EBITDA is not a recognized measure under IFRS. Management believes that, in addition to net earnings, EBITDA is a useful supplemental measure, as it provides investors with an indication of the Company's performance. EBITDA is used by the Company to analyze performance and compare profitability between periods. Investors should be cautioned, however, that EBITDA should not be construed as an alternative to net earnings determined in accordance with IFRS. The Company's method of calculating EBITDA may differ from other companies and, accordingly, EBITDA may not be comparable to measures used by other companies.
2 NormalizedAdjusted funds from continuing operations ("AFFO") and Payout Ratio are not a recognized measures under IFRS. AFFO is defined as cash flows from operating activities of continuing operations adjusted for the net change in non-cash working capital items, restructuring and other expenses, income tax payments, and the average capital spending required to maintain property and equipment. Payout Ratio is defined as the dividends declared divided by Normalized AFFO. The Company uses this as a measure of financial performance, as an indicator of its cash flow strength, its ability to meet future operational and capital expenditure requirements and ability to pay dividends on the Company's common shares.Investors should be cautioned, however that Normalized AFFO and Payout Ratio should not be construed as an alternative to cash provided by operating activities of continuing operations determined in accordance with IFRS. The Company's method of calculating Normalized AFFO and Payout Ratio may differ from other companies and accordingly, Normalized AFFO and Payout Ratio may not be comparable to measures used by other Companies.

Caution concerning forward-looking statements

This document includes forward-looking statements within the meaning of certain securities laws, including the "safe harbour" provisions of the Securities Act (Ontario) and other provincial securities law in Canada. These forward-looking statements include, among others, statements with respect to our objectives, goals and strategies to achieve those objectives and goals, as well as statements with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions. The words "may", "will", "could", "should", "would", "outlook", "believe", "plan", "anticipate", "estimate", "expect", "intend", "forecast", "objective" and "continue" (or the negative thereof), and words and expressions of similar import, are intended to identify forward-looking statements.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. We caution readers not to place undue reliance on these statements, as a number of important factors, many of which are beyond our control, could cause our actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: dependence on government-based revenues in Canada; general economic conditions; pending and proposed legislative or regulatory developments in Canada including the impact of changes in laws, regulations and the enforcement thereof; reliance on funding models in Canada; operational and infrastructure risks including possible equipment failure and performance of information technology systems; intensifying competition resulting from established competitors and new entrants in the businesses in which we operate; disposal of our diagnostic imaging business under acceptable terms and conditions to our Company; our ability to complete strategic acquisitions and to integrate our acquisitions successfully; insurance coverage of sufficient scope to satisfy any liability claims; fluctuations in total patient referrals; technological change and obsolescence; loss of services of key senior management personnel; privacy laws; ability to pay dividends in the future; structural subordination of common shares; leverage and restrictive covenants; fluctuations in cash timing and amount of capital expenditures; tax-related risks; unpredictability and volatility of the price of common shares; dilution; and future sales of common shares. In addition to the above factors, the Company has entered into an Arrangements Agreement dated as of June 24, 2013 with LifeLabs Medical Laboratory Services providing for the purchase of all of the outstanding common shares of the Company by LifeLabs. Completion of the sale is subject to a number of conditions precedent more fully described under Risks and Uncertainties in this MD&A and in an Information Circular mailed to shareholders on August 6, 2013 and available on SEDAR.

We caution that the foregoing list of important factors that may affect future results is not exhaustive. When reviewing our forward-looking statements, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Additional information about factors that may cause actual results to differ materially from expectations, and about material factors or assumptions applied in making forward-looking statements, may be found in the "Risk Factors" section of our Annual Information Form, under "Business Risks" and elsewhere in our Management's Discussion and Analysis of Operating Results and Financial Position ("MD&A") for the year ended December 31, 2012 and elsewhere in our filings with Canadian securities regulators. Except as required by Canadian securities law, we do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf. Such statements speak only as of the date made.

CML HealthCare Inc.
Unaudited Interim Consolidated Balance Sheets
(in thousands of Canadian dollars)
June 30, December 31,
2013 2012
$ $
ASSETS
Current assets
Cash 1,289 3,039
Trade and other receivables 45,192 39,601
Income taxes recoverable 1,522 -
Other current assets 4,370 3,630
Loan receivable 1,795 -
Current assets of discontinued operations 81,810 -
135,978 46,270
Property and equipment 32,637 49,233
Intangible assets 12,729 12,712
Licences 176,013 223,468
Goodwill 16,147 16,900
Investment and other assets 336 362
Total Assets 373,840 348,945
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 33,513 35,729
Dividends payable 11,904 5,651
Other current liabilities 4,716 1,030
Income taxes payable - 3,641
Current portion of long-term debt 1,218 922
Provisions 7,086 4,267
58,437 51,240
Long-term debt 270,294 249,279
Provisions and other long-term liabilities 2,169 2,433
Derivative and other liabilities 6,743 6,258
Deferred tax liabilities 26,100 24,333
Total Liabilities 363,743 333,543
SHAREHOLDERS' EQUITY
Common shares 55,210 55,210
Contributed surplus 420 218
Deficit (43,881 ) (35,711 )
Accumulated other comprehensive loss (1,652 ) (4,315 )
10,097 15,402
Total Liabilities and Shareholders' Equity 373,840 348,945
CML HealthCare Inc.
Unaudited Interim Consolidated Statements of Earnings and Comprehensive Income
(in thousands of Canadian dollars, except share and per share amounts)
Six month period ended Three month period ended
30-Jun 30-Jun 30-Jun 30-Jun
2013 2012 2013 2012
$ $ $ $
Revenue 125,311 127,561 63,113 62,655
Cost of services 60,634 60,272 32,233 30,200
Gross margin 64,677 67,289 30,880 32,455
Expenses
General and administrative 27,822 19,310 16,159 10,048
Restructuring and other expenses 10,288 - 7,189 -
38,110 19,310 23,348 10,048
Earnings from continuing operations before interest and income taxes 26,567 47,979 7,532 22,407
Interest expense 5,187 5,200 2,718 2,450
Interest and other income (56 ) (536 ) (31 ) (389 )
Earnings from continuing operations before income taxes 21,436 43,315 4,845 20,346
Provision for income taxes
Current taxes 6,579 10,547 2,576 4,651
Deferred taxes (114 ) 2,404 (616 ) 2,313
6,465 12,951 1,960 6,964
Net earnings for the period from continuing operations 14,971 30,364 2,885 13,382
Earnings from discontinued operations, net of tax 667 2,241 655 1,167
Net earnings for the period 15,638 32,605 3,540 14,549
Other comprehensive income (loss), net of income taxes
Items that may be subsequently reclassified to net earnings
Gain (loss) on interest rate swap 3,610 (394 ) 5,191 (2,492 )
(Recovery of) provision for income taxes (947 ) 164 (1,375 ) 721
Net 2,663 (230 ) 3,816 (1,771 )
Comprehensive income for the period 18,301 32,375 7,356 12,778
Continuing operations - basic and diluted earnings per share 0.17 0.34 0.03 0.15
Discontinued operations - basic and diluted earnings per share 0.01 0.02 0.01 0.01
Net earnings - basic and diluted earnings per share 0.17 0.36 0.04 0.16
Weighted average number of common shares outstanding - basic 89,842,397 89,842,397 89,842,397 89,842,397
Weighted average number of common shares outstanding - diluted 89,845,099 89,854,901 89,845,583 89,851,165
CML HealthCare Inc.
Unaudited Interim Consolidated Statements of Cash Flows
(in thousands of Canadian dollars)
Six month period ended Three month period ended
30-Jun 30-Jun 30-Jun 30-Jun
2013 2012 2013 2012
$ $ $ $
Cash provided by (used in)
Operating activities
Net earnings for the period from continuing operations 14,971 30,364 2,885 13,382
Items not affecting cash
Depreciation of property and equipment 3,269 3,021 1,717 1,554
Amortization of intangible assets 1,862 1,191 1,031 607
Unrealized foreign exchange gain - 7 - (153 )
Interest expense 5,187 5,200 2,718 2,450
Other non-cash items (377 ) (313 ) (135 ) (278 )
Share based compensation expenses 4,103 (409 ) 3,878 194
Gain on sale of property and equipment and licences - (155 ) - (155 )
Restructuring expenses 6,375 - 3,276 -
Current taxes 6,579 10,547 2,576 4,651
Deferred taxes (114 ) 2,404 (616 ) 2,313
Net change in non-cash working capital items (11,185 ) (151 ) 2,158 4,540
Interest paid (5,088 ) (5,719 ) (2,826 ) (3,052 )
Income taxes paid (11,755 ) (25,751 ) (5,128 ) (5,344 )
Cash provided by operating activities of continuing operations 13,827 20,236 11,534 20,709
Cash provided by operating activities of discontinued operations 2,894 6,608 1,938 3,077
Cash provided by operating activities 16,721 26,844 13,472 23,786
Investing activities
Purchase of property and equipment (5,719 ) (2,599 ) (3,099 ) (1,338 )
Proceeds from sale of property and equipment - 162 - 162
Receipts from notes receivable - 1,039 - 519
Other investing activities (1,745 ) - (1,577 ) (151 )
Business acquisitions (9,022 ) - (9,022 ) -
Acquisition of intangible assets (1,896 ) (879 ) (1,157 ) (240 )
Cash used in investing activities of continuing operations (18,382 ) (2,277 ) (14,855 ) (1,048 )
Transaction costs paid - (1,248 ) - (825 )
Cash used in investing activities of discontinued operations (1,430 ) (1,726 ) (700 ) (132 )
Cash used in investing activities (19,812 ) (5,251 ) (15,555 ) (2,005 )
Financing activities
Principal repayment of long-term debt and obligations under finance leases (1,104 ) (23,431 ) (788 ) (222 )
Proceeds from long-term debt 20,000 - 15,000 -
Dividends paid (17,555 ) (33,902 ) (11,904 ) (16,951 )
Transaction costs incurred on debt refinancing - (1,503 ) - -
Cash Provided by (used in) financing activities of continuing operations 1,341 (58,836 ) 2,308 (17,173 )
(Decrease) increase in cash (1,750 ) (37,243 ) 225 4,608
Cash, beginning of period 3,039 50,640 1,064 8,789
Cash, end of period 1,289 13,397 1,289 13,397

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