MEDQUIST INC. 
By MOUNT LAUREL, N.J., Aug. 11 /PRNewswire-FirstCall/ -- MedQuist Inc., (Nasdaq: MEDQ), a leading provider of medical transcription services and in the technology-enabled clinical documentation workflow, announced its financial results for the second quarter ended June 30, 2010.
On April 22, 2010, MedQuist and its majority shareholder, CBay Inc. ("CBay"), completed the acquisition of substantially all of the assets of Spheris, Inc. ("Spheris") out of bankruptcy. MedQuist acquired all the U.S. assets and the client base of Spheris. CBay acquired the India-based workforce and facilities of Spheris, so as to avail MedQuist with additional offshore capacity. The benefits of this acquisition are not expected to be fully reflected in results until the fourth quarter of 2010 and into first quarter 2011.
The purchase price for the Spheris assets acquired by the Company was approximately $112.4 million, consisting of approximately $98.8 million in cash, plus a promissory note with a fair value of $13.6 million.
The following results for both the three months and six months ended June 30, 2010 include the Spheris results from the acquisition date.
Net revenues for the three months ended June 30, 2010 increased $20.1 million or 25.9% to $97.5 million compared to $77.5 million for the three months ended June 30, 2009. The acquisition of Spheris contributed $26.4 million in incremental revenue for both the three-months and six-months, offset by value-based price reductions and lower product and field service revenues.
Prior to its acquisition, Spheris had been experiencing significant client defections, in large part, due to the adverse impact of its deteriorating financial condition. The revamped senior executive team has begun to integrate MedQuist methodologies and processes into the Spheris service delivery model to better address client needs and stabilize the risk of future client defections. However, the lag effect of client terminations may negatively impact our post-acquisition revenue through at least the fourth quarter 2010.
Operating income for the second quarter of 2010 improved to $4.6 million when compared to $1.0 million reported for the second quarter of 2009.
Total operating costs and expenses increased by 21.5% to $93.0 million from $76.5 million reported in the prior year second quarter primarily due to the inclusion of Spheris operating costs, and acquisition related costs of $4.8 million. Also included in second quarter costs and expenses were legal proceedings and settlement expenses and restructuring charges in the amount of $1.1 and $0.9 million, respectively.
Net income for the second quarter of 2010 was $0.9 million or $0.02 per diluted share compared to $0.8 million and $0.02 per diluted share reported in the prior year comparable period.
Net revenues for the six months ended June 30, 2010 increased by $15.1 million to $171.5 million compared to $156.4 million for the six months ended June 30, 2009. The $26.4 million of incremental revenue from Spheris since its acquisition was offset by value-based price reductions and lower product and field service revenues. Operating income increased $3.7 million, up 45% over prior year results.
Net income for the six-months was $8.2 million or $0.22 per diluted share compared to $7.7 million and $0.20 per diluted share reported in the prior year comparable period.
Adjusted EBITDA increased $3.1 million to $17.1 million for the second quarter of 2010, compared to $14.0 million for the second quarter of 2009. For the six-month period, Adjusted EBITDA increased $3.9 million to $30.2 million compared to $26.3 million in the comparable period. (For more information regarding the Adjusted EBITDA and our use of this non-GAAP financial measure, see below under the heading "Use of non-GAAP Financial Information")
"We are pleased with our operating performance for the second quarter of 2010; reflecting our ability to provide a value proposition to our clients and our progress to date in the integration of Spheris," said CEO Peter Masanotti.
"We increased Adjusted EBITDA by 22.3% over the prior year same quarter, despite an increasingly competitive market environment, as the Spheris acquisition helped expand our client base and provides us continuing opportunities to realize operating efficiencies through the increased use of technology and an expanded use of offshore labor.
"Integration savings of approximately $7 million, resulting from the scale made available through the Spheris acquisition, are expected to be realized in the fourth quarter of 2010. The Company anticipates that its integration activities will be substantially completed during the first quarter of 2011."
Since CBay became our majority owner in August 2008, we have focused our efforts on stabilizing our existing client base and creating a value proposition for our clients through:
-- increasing use of technology applications in both our processes and
those of our clients - including, tailoring our proprietary clinical
documentation workflow management system for client specific solutions
and increased integration of speech recognition technology
-- increasing use of offshore transcription and editing work
-- delivering unparalleled, high quality services and opportunities to
drive down price for our clients
The size of our global medical transcriptionist and editor pool allows us to quickly and efficiently provide our clients with the labor resources necessary to implement comprehensive, scalable solutions.
We expect that the impact of the above actions and the increased scale from the Spheris acquisition will continue to be reflected in lower operating costs and improved margins; as we continue to share the benefits of a shrinking cost base and enhanced technologies with our clients through profitable, competitive pricing.
Use of non-GAAP Financial Information.
In addition, to the United States generally accepted accounting principles, or GAAP, results provided throughout this document, MedQuist has provided Adjusted EBITDA data that is a non-GAAP financial measurement. Adjusted EBITDA is Net income excluding taxes, interest, equity in income of an affiliated company, depreciation, amortization, cost of legal proceedings and settlements, acquisition and integration related charges, restructuring charges and certain non-recurring accrual reversals.
Management believes that this non-GAAP financial measure used to manage the business may provide our investors with useful information in addition to the GAAP financial measures presented here. The tables attached to this press release include a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure and a description of why we believe the non-GAAP financial measure is useful to investors.
Forward-Looking Statements
This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as "projects," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "should," "would," "could," "will," "opportunity," "potential" or "may," variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are only predictions and, as such, are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. For a discussion of these risks, uncertainties and assumptions, any of which could cause our actual results to differ from those contained in the forward-looking statement, see the section of MedQuist's Annual Report on Form 10-K for the year ended December 31, 2009, entitled "Risk Factors" and discussions of potential risks and uncertainties in MedQuist's subsequent filings with the Securities and Exchange Commission.
MedQuist Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited
Three months
ended Six months ended
June 30, June 30,
-------- --------
2010 2009 2010 2009
---- ---- ---- ----
Net revenues $97,528 $77,471 $171,509 $156,415
------- ------- -------- --------
Operating costs and
expenses:
Cost of revenues 67,090 51,357 116,923 105,225
Selling, general and
administrative 10,020 8,451 18,817 17,889
Research and development 3,312 2,380 5,593 4,796
Depreciation 2,786 2,669 4,696 5,221
Amortization of
intangible assets 3,015 1,504 4,835 3,015
Cost of legal
proceedings and
settlements 1,109 10,134 2,152 12,058
Acquisition and
integration related
charges 4,765 - 5,659 -
Restructuring charges 870 - 930 -
--- --- --- ---
Total operating costs
and expenses 92,967 76,495 159,605 148,204
------ ------ ------- -------
Operating income 4,561 976 11,904 8,211
Equity in income of
affiliated company 32 356 546 428
Interest income
(expense) (3,633) 19 (3,779) 65
------ --- ------ ---
Income before income
taxes 960 1,351 8,671 8,704
Income tax provision 80 515 447 1,014
--- --- --- -----
Net income $880 $836 $8,224 $7,690
==== ==== ====== ======
Net income per share:
Basic $0.02 $0.02 $0.22 $0.20
----- ----- ----- -----
Diluted $0.02 $0.02 $0.22 $0.20
----- ----- ----- -----
Weighted average shares
outstanding:
Basic 37,556 37,556 37,556 37,556
------ ------ ------ ------
Diluted 37,556 37,556 37,556 37,556
------ ------ ------ ------
MedQuist Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
Unaudited
June 30, December 31,
2010 2009
---- ----
Assets
Current assets:
Cash and cash equivalents $17,246 $25,216
Accounts receivable, net of allowance of
$3,495 and $3,159, respectively 62,908 43,627
Income tax receivable 213 772
Other current assets 11,414 4,940
Total current assets 91,781 74,555
Property and equipment, net 16,947 11,772
Goodwill 88,991 40,813
Other intangible assets, net 84,391 36,307
Deferred income taxes 1,295 1,396
Other assets 14,502 9,818
------ -----
Total assets $297,907 $174,661
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $7,425 $8,687
Accrued expenses 25,507 21,490
Accrued compensation 17,663 12,432
Current portion of lease obligations 1,624 -
Current portion of long term debt 30,000 -
Related party payable 5,162 1,362
Deferred revenue 9,584 10,854
Total current liabilities 96,965 54,825
Long term debt, net 73,570 -
Deferred income taxes 3,906 3,240
Other non-current liabilities 910 1,848
--- -----
Commitments and contingencies
Shareholders' equity:
Common stock -no par value; authorized
60,000 shares;
37,556 and 37,556 shares issued and
outstanding, respectively 237,945 237,848
Accumulated deficit (117,630) (125,854)
Accumulated other comprehensive income 2,241 2,754
----- -----
Total shareholders' equity 122,556 114,748
------- -------
Total liabilities and shareholders'
equity $297,907 $174,661
======== ========
MedQuist Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Six months ended
June 30,
--------
2010 2009
---- ----
Operating activities:
Net income $8,224 $7,690
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 9,531 8,236
Equity in income of affiliated company (546) (428)
Deferred income tax provision 669 435
Stock option expense 96 96
Provision for doubtful accounts 1,085 89
Loss on disposal of property and equipment - 26
Changes in operating assets and liabilities:
Accounts receivable 2,027 5,287
Income tax receivable 553 (29)
Other current assets (3,552) 743
Other non-current assets 854 (34)
Accounts payable (1,494) 361
Accrued expenses (1,086) (3,872)
Accrued compensation (1,504) 1,765
Deferred revenue (1,321) (2,045)
Other non-current liabilities (1,044) 112
------ ---
Net cash provided by operating activities 12,492 18,432
------ ------
Investing activities:
Purchase of property and equipment (2,868) (2,135)
Capitalized software (2,613) (1,283)
Investment in A-Life Medical, Inc. - (852)
Acquisitions, net of cash acquired (98,834) -
Net cash used in investing activities (104,315) (4,270)
-------- ------
Financing activities:
Proceeds from debt 100,000 -
Repayment of long term debt (10,000) -
Debt issuance costs (6,070) -
Payments of lease obligations (50) -
--- ---
Net cash provided by financing activities 83,880 -
------ ---
Effect of exchange rate changes (27) 85
Net increase (decrease) in cash and cash
equivalents (7,970) 14,247
------ ------
Cash and cash equivalents - beginning of period 25,216 39,918
------ ------
Cash and cash equivalents - end of period $17,246 $54,165
======= =======
-
Supplemental cash flow information:
Cash (refunded) paid for income taxes $(604) $197
----- ----
Accommodation payments paid with credits $- $82
--- ---
Noncash debt incurred in connection with the
Spheris acquisition $13,570 $-
------- ---
MedQuist Inc. and Subsidiaries
Reconciliation of GAAP financial measures to the non-GAAP measures
Adjusted EBITDA
(In thousands)
Unaudited
Three months
ended Six months ended
June 30, June 30,
-------- --------
2010 2009 2010 2009
---- ---- ---- ----
Net Income $880 $836 $8,224 $7,690
Add: Tax
provision 80 515 447 1,014
Add (Less): Net interest
(income) expense 3,633 (19) 3,779 (65)
Add: Depreciation 2,786 2,669 4,696 5,221
Add: Amortization of
intangible assets 3,015 1,504 4,835 3,015
Add: Restructuring
charges 870 - 930 -
Add: Acquisition and
integration related
charges 4,765 - 5,659 -
Add: Cost of legal
proceedings and
settlements 1,109 10,134 2,152 12,058
Less: Accrual reversals - (1,301) - (2,254)
Less: Equity in income of
affiliated company (32) (356) (546) (428)
Adjusted EBITDA $17,106 $13,982 $30,176 $26,251
======= ======= ======= =======
Adjusted EBITDA is a financial measure not computed in accordance with United States generally accepted accounting principles, or GAAP. The Company believes that this non-GAAP measure, when presented in conjunction with comparable GAAP measures, is useful to both management and investors in analyzing the Company's ongoing business and operating performance. The Company believes that providing the non-GAAP information to investors, in addition to the GAAP presentation, allows investors to view the Company's financial results in the way that management views financial results. Management believes Adjusted EBITDA is useful as supplemental measures of the Company's financial results because it removes costs not related to the Company's operating performance. Management believes that Adjusted EBITDA should be considered in addition to, but not as a substitute for items presented in accordance with GAAP that are presented in this press release. A reconciliation of Net income to Adjusted EBITDA is provided above.
SOURCE MedQuist Inc.
