Aug 13, 2015
Executives
Jonathan Foster - Chief Financial Officer Eric Steen - Chief Executive Officer Jan Skonieczny - Chief Operating Officer
Analysts
Chris Sampson - Samson Advisors Doug Weiss - DSW Investments
Operator
Good morning, everyone and welcome to InfuSystem Holdings’ Second Quarter Earnings 2015 Conference Call. This is your operator, Eric.
Let me first give you to Mr. Jonathan P.
Foster, Chief Financial Officer.
Jonathan Foster
Thank you, Eric. Good afternoon.
First of all, let me get some administrative matters out of the way. The company issued a press release today.
The release is available on most financial websites. Additionally, a web replay will be available on the company’s website for 30 days.
Both the press release and Form 8-K and the company’s Form 10-Q for the second quarter of 2015 were filed with the SEC today as well. Except for the historical information contained herein, the matters discussed on the conference call are forward-looking statements that involve risks and uncertainties.
Such risks and uncertainties could cause actual results to differ materially from those predicted by such forward-looking statements. The words believe, expect, anticipate, and estimate or other similar statements or expectations identify forward-looking statements.
These risks and uncertainties include general, economic conditions as well as other risks detailed from time-to-time in InfuSystem’s publicly filed documents with the Securities and Exchange Commission. Specifically, information about risks and uncertainties that could cause the company’s actual results and financial conditions to differ from those predicted by forward-looking statements are disclosed in the company’s yearend report on Form 10-K for the year ended December 31, 2014 under the heading Risk Factors and elsewhere in the report and in other filings made by the company from time-to-time with the SEC including subsequent quarterly reports on our Form 10-Q.
Forward-looking statements reflect management’s analysis only as of today. The company has no obligations to update the forward-looking information contained in this conference call.
While discussing the company’s performance, the company will refer to certain non-GAAP measures, such as adjusted EBITDA and adjusted net income, which are not measures of the financial performance under Generally Accepted Accounting Principles. A reconciliation of the differences between non-GAAP financial measures and those measures such as adjusted EBITDA and adjusted net income and the most comparable GAAP measures are contained in today’s press release.
And with that, I would like to turn the call over to Mr. Eric Steen, our Chief Executive Officer.
Eric Steen
Good afternoon, everyone and thank you for joining the InfuSystem Holdings Inc. second quarter 2015 earnings call.
Joining me today are Jan Skonieczny, Chief Operating Officer and Jon Foster, Chief Financial Officer. There are three things that I want to talk about today.
The integration of the Ciscura assets, that we acquired our progress on our electronic connectivity strategy and the associated market share gains, and the organization’s allocation to capital. But first, let’s go to the numbers.
In the second quarter, revenue was $17.2 million, an increase of 5% versus the second quarter of prior year. Our net collected revenue was $16.1 million, up 8% over prior as we continue to reduce bad debt through our new payer contracts.
At the core, we are a rental company. And our net collected rental revenue was $14.5 million, up 8% over the second quarter of 2014.
Direct sales were basically flat as we have grown both our sales of disposable products and our service and repair business. However, we have yet to have that big capital equipment pump sales so far in 2015.
As I have stated previously, we are preparing for some large pump sales in the second half of the year and our guidance remains double-digit net collected revenue for 2015. Operating income was $1.3 million and net income was $783,000, down $103,000 versus the same period prior year.
Adjusted earnings before taxes interest depreciation and amortization was $3.9 million, a decrease of 2% versus prior year. Adjusted earnings per share, was $0.05 per diluted share compared to $0.04 per diluted share for the second quarter of the prior year.
As we look at 2015 year-to-date through June, revenue is up 1%, bad debt is down 34%. So, net collected revenue is up 5%.
Our recurring net collected rental revenue is up 8%. We’ve had some non-recurring charges for extinguishment of debt and our integration of the Ciscura assets.
After adjusting for integration cost, interest expense and other income and expenses, our year-to-date net income is $1.8 million, up 20% over prior. And year-to-date adjusted EBITDA is $7.8 million or an increase of 1%.
Our integration of the Ciscura asset is going well. There is a number of pumps obtained was at the high-end of our estimates.
That is good news. Our sales team did an excellent job in transitioning the fleet of pumps and we have added over 1,800 ambulatory infusion pumps that are being well utilized by over 100 oncology infusion practice sites.
On our last earnings call, I estimated we would account for over 1,600 pumps at a final acquisition price of $5 million. Now that we know we’ll be over 1,800 pumps, all being well utilized and with that we’re estimating an approximate purchase price of $5.4 million.
In the second quarter, we got one full month of billing from the new Ciscura accounts, as we transition close to 1,500 plus patients to our service. Since the acquisition of the assets we are now servicing over 100 new clinic relationship which supports approximately $3.2 million in annual revenue of insurance billings, and add to that another estimated $500,000 in annual revenue through our expanded offering of catheter care kits, purchase of pumps, infusion disposables and pump preventive maintenance and service, I estimate the acquisition at roughly 3.5 times EBITDA.
The next step in the plan is to shift our InfuSystem customers in Georgia and the surrounding states to be serviced from the former Ciscura facility now for rent. Our electronic connectivity initiatives continue to fuel our growth.
In the second quarter, we added another 15 sites on our total electronic medical records integration, InfuConnect. We now have a total of 54 sites with $5 million in revenue coming from our full EMR integration.
We are the only company in our market that has full integration with every data element, except for patient signature coming from the electronic medical record. This saves our customer’s valuable nursing time in order entry, and is one of reasons we are able to take customers from our competitors.
A record number of new oncology infusion accounts started in Q2, in addition to the 100 new Ciscura sites we have added a net of 92 new oncology infusion practice sites in 2015 through June. Many of these are larger accounts, who are attracted to the time savings efficiencies of eliminating order entry through our InfuConnect.
I’m pleased to announce an EMR agreement with [indiscernible] for full EMR integration. Our full EMR integration partners now include Varian, Altos Epic and Mosaic platform, with several new EMR integration projects in progress including Cerner General Strips.
Regarding allocation capital, in past calls I have mentioned that our priorities for capital allocation is to, number one, buy pumps, when we have the business lined up to implement them quickly. Number two, invest in IT.
And now after two years of IT investment, an organization that was running on fax machines, received some light at the end of the tunnel where we can start scaling back our IT investment. And number three: begin to pay-down debt.
As I mentioned in our last call, the savings and interest from our new credit facility has increased our ability to pay down debt. We have made a first prepayment to begin our efforts to pay down debt.
I see our new low-interest rate loan not to be an opportunity to spend more but an opportunity to significantly de-leveraging the organization at a time of increasing future cash flows. We have lowered our interest rate to save $1 million in the interest expense this year, plus, we recently lowered our tax rate by recognizing the benefit of approximately $300,000 for research and development credits and adjustments to our foreign income tax liability for 2014 tax return filings.
I am expecting cash flows to further increase as a direct result of our IT investment. And we will be consistently paying down debt while continuing to invest in our growing pump fleet and completing our major IT projects in 2016.
Now, I’d like Jon Foster to take us through the numbers in a bit more detail.
Jonathan Foster
Thank you, Eric. I’ll highlight some of the key second quarter financial results.
Our net revenue for the quarter ended June 30, 2015 was $17.2 million, an increase of $0.8 million or 5%, compared to $16.4 million for the quarter ended June 30, 2014. During the period, net revenues from rentals of $15.6 million increased $0.8 million or 6% compared to the same prior year period.
This is the second straight quarter of record rental revenue. Net revenues from product sales for the quarter remained consistent over the same period in 2016.
As Eric mentioned, this quarter included additional revenue of approximately $0.4 million from our Ciscura acquisition, about one month’s revenue. In the ordinary course of business, the company has unbilled rental revenue which remains at fairly consistent levels from quarter-to-quarter.
Unbilled rental revenue represents revenue where we do not have all the necessary information to complete the billing, which is required by our revenue recognition policy. During the period, unbilled revenue increased by approximately $0.3 million due to a delay in receiving paperwork from the facilities necessary to complete billing in the revenue cycle.
We expect this increase in unbilled rental revenue to decrease to consistent levels during the second half of 2015, thereby flowing through the P&L, primarily in the third quarter. Our net revenue for the six months ended June 30, 2015 was $33.9 million, an increase of $0.3 million over the same prior year period, which included a large capital sale during the first quarter of the prior year, of approximately $0.9 million.
As we stated previously, the payer mix and the impact of the Affordable Care Act for ACA, our payer environment is continuing to change. Consequently, we continue to focus on net revenue less bad debt or as we call it net collected revenues.
This focuses on what matters in the end, while we get paid for our services. Looking at just rental revenues, net collected rental revenues in the second quarter of ‘15 as Eric mentioned increased 8% to $14.5 million versus $13.4 million.
Net collected rental revenues for the six months of 2015 increased 8% to $28.4 million versus $26.2 million. These increases occurred mainly as a direct result of our focus on contractual insurance changes.
Gross profit was $11.9 million and $23.9 million, respectively for the three and six months ended June 30, 2015. This was consistent with the same prior year periods.
Net income for the three and six months ended June 30, was $0.8 million and $0.4 million respectively compared to $0.9 million and $1.5 million for the same prior year period. Adjusted net income excluding the non-recurring items related to the closing and integration cost associated with acquisition of Ciscura and are refinanced with JPMorgan Chase in the first quarter was $1.1 million and $1.8 million compared to $0.9 million and $1.5 million for the same three and six months 2014.
On an earnings per share basis, looking at adjusted net income, it was at $0.05 for the quarter, $0.08 year-to-date. This is ahead of the same period for last year at $0.04 for the quarter and $0.07 for the year respectively.
Included in the Ciscura asset integration cost at $0.4 million and $0.6 million for the three and six months ended June 30, 2015 were legal, professional and transitional cost. We expect these costs to basically level out and total less than $700,000 for all of 2015.
Adjusted EBITDA for the three and six months of 2015 was $3.9 million and $7.8 million, compared to $4 million and $7.3 million for the same prior year period. This is despite the increased cost in IT and pain management initiatives.
Year-to-date these totaled $0.7 million. As of June 30, 2015, we had cash or cash equivalents of $0.8 million and $9.9 million of net availability underneath the revolver compared to $0.5 million of cash and $6.6 million of availability under our prior revolver as of December 31, 2014.
Additionally, term loan B, as of June 30, 2015 had a balance of $3.8 million which was drawn for the company’s purchase of Ciscura, with an additional $4.2 million available to be drawn. During the period ended June 30, 2015, the company made an optional prepayment of $1 million on its term loan A, which the company can apply against the future mandatory payment.
The first payment on term loan A would have been due on September 30, 2015. In ending, I think it’s important to point out this is the third time InfuSystem has hit $17.2 million in total revenue, first time was in the fourth quarter of ‘13 and then in the first quarter of ‘14.
However, these previous instances had large equipment sales in the quarter. Since then our recurring rental revenue is much, much stronger.
And we did not have a large equipment sale in the quarter. Taking net collected rental revenue for the second quarter of 2015, this is approximately 13% and 15% higher than those two quarters.
Recall the pending rental revenue I just mentioned of $300,000 this quarter. If you had taken this pending revenue increase and added it to this quarter’s rental revenue, net collected rental revenue over the prior year period we would have achieved double-digit growth.
These trends plus our sales pipeline for the second half of the year supports our double-digit outlook for growth on a net collected revenue basis for 2015. Eric?
Eric Steen
Thank you, Jon. In conclusion, we’re growing our business and expanding our market share which gives us confidence in forecasting record financial results for 2015.
Our investment in IT and electronic connectivity is attracting new customers at a record rate. And we will see significant improvement in our internal operations.
The improvements in managed care contracting will continue to generate the cash necessary to invest in new revenue opportunities and to pay down debt. I’m reaffirming our guidance of double-digit net collected revenue in 2015.
Now, I’d like to ask the operator to open this up for questions.
Operator
[Operator Instructions]. Okay.
And our first question comes from Chris Sampson from Sampson Advisors. Chris, please go ahead.
Chris Sampson
Hi guys, great quarter.
Eric Steen
Hi, Chris.
Chris Sampson
Few questions for you, if you don’t mind, could you give us any general color on what the environment looks like to you guys for continuous infusion, it sounds like in your commentary that you continue to have pretty bullish expectations for the business going forward. So, I hope to hear what you’re seeing generally speaking in continuous infusion?
Secondly, could you give us your take on reimbursement rate and what new information there might be in the second quarter? And I guess, lastly you paid down some debt in the quarter which is great.
What do you think is the optimal or ideal debt level that you would like to achieve looking out? Thanks.
Eric Steen
Okay, thanks Chris. Good questions.
So, it was infusion drugs, reimbursement and debt level, great questions. First of all, in the infusion marketplace, we are seeing the introduction of several new important infusion pharmaceutical drugs I mentioned I think a couple of calls ago about two new drugs that CMS had approved for Medicare patients, like Blincyto.
And there are some other new drugs that we are actually working with, some bit name pharmaceutical companies as they bring these drugs to the marketplace for a pump service. So, one good thing as I look about our business, and Chris when I first met you, we were so dependent on just colorectal cancer.
And now as we look at the almost now 50,000 going to 60,000 patients that we serve, there are a lot of new specialty pharmacy drugs that are coming out and many of them are infusion drugs. I attended a specialty pharmacy conference recently and one of the pipelines, one of the presentations was on the pipeline of a lot of these specialty pharmacy drugs that are coming out and many of them are infusions.
So, that’s why I remain bullish on our future for infusion. On our reimbursement rates, the positive thing is we are continuing to get more contracts, more managed care contracts.
And you can see our debt - bad debt was down I think 21% in the quarter and 34% year-to-date. And that’s a result of payers, the commercial payers continuing to see the great value in InfuSystem and the results that we’re getting.
Of course, one payer we spent a lot of time talking about is CMS and Medicare patients, and Jan is an expert in that area, and I’d like Jan to give a brief update in CMS and what we’re going to expect going forward.
Jan Skonieczny
Sure. So, basically, I think we’ve spoken before that we’re expecting CMS to institute some rate cuts beginning 2016.
And although our product category is not included in competitive bidding for the second round of the re-compete, we still expect to receive notification probably somewhere in the fourth quarter from Medicare letting everyone know when these - what the cuts will be. And that’s generally when the post the 2016 fee schedule.
I do believe that as we’ve said before, by the end of - or by 2017 we can expect to see about $3 million in cuts to CMS reimbursement. So, that is exactly the reason why we’re so focused on contracting with all these other commercial payers as well as Medicaid plans and these new Medicaid managed care plans from the exchange.
Eric Steen
Thank you, Jan. And then I’ll make a comment on debt.
Most of the people I talk to say your guys leverage is, just great and now you’re 3%, that’s fine. But I think by nature, I like to keep things tight and keep our leverage low.
And then when an opportunity comes up in the future at some time, and I find myself in the right time, at the right place like being able to acquire those 1,800 pumps at 100 new clinics and get 3.5 multiple on EBITDA for Ciscura, we’ve got the ability to do it with absolutely no problem. And of course Jon, as our financial expert, I’d like to ask him to just make a couple of comments on our debt level as well.
Jonathan Foster
Thanks Eric. With regard to our credit agreement with JPMorgan Chase, our maximum leverage is three times.
We’re well below that on a pro forma basis of the acquisition. And getting down to 1.5 times, I think then you could, we argue that we’re under-levered.
And being at that level allows us to have dry powder for, as Eric mentioned potentials for growth.
Eric Steen
Do we answer that for you Chris, or do you have any follow-up?
Chris Sampson
I do but I’ll get back in queue in case there are other people who want to ask questions. Thank you.
Eric Steen
Okay.
Operator
And our next question comes from Doug Weiss from DSW Investments. Doug, please go ahead.
Doug Weiss
Hi, good afternoon.
Eric Steen
Hi Doug.
Doug Weiss
Just a couple of modeling questions, on service and supply, it looks like, and I know there were comments in the press release on that. But the press release mentioned some additional depreciation.
Would that even include sort of that, it looks like it came up a little bit from prior quarters. Is that a one-quarter event or is there something which is changing there?
Eric Steen
Jon, can you?
Jonathan Foster
What are you referring to specifically?
Doug Weiss
So, the $3.6 million service and supply expense.
Jonathan Foster
That would just be depreciation over the prior year quarter. Can we have your next question?
Another one, I’ll follow-up with you on that.
Doug Weiss
Okay. And then, in terms of the non-recurring expense, is that in the general administrative line?
Jonathan Foster
Yes. Well, for Ciscura, yes, and the debt refi, that’s down in other income and expense, that’s a separate line item.
But G&A is where the Ciscura is.
Doug Weiss
Okay. Ciscura was 351 or that also include the debt refi?
Jonathan Foster
You say, 351?
Doug Weiss
$351,000 was nevertheless shown as non-recurring.
Jonathan Foster
In non-recurring that for the quarter, you’re talking about for the quarter?
Doug Weiss
Yes.
Jonathan Foster
Yes. You’re looking at integration cost, the $351,000, yes that was for Ciscura.
Doug Weiss
Okay.
Jonathan Foster
And there was no loss in early extinguishment of debt that occurred in the first quarter. And total for Ciscura is $600,000 we expect that to total $700,000 for the year.
Eric Steen
Chris, one thing I think I wish talking about some quarter-to-date numbers, then when I was talking about the non-recurring, I went to year-to-date, when I was saying the extinguishment of debt and the integration of Ciscura.
Doug Weiss
Great, got it. And then you also mentioned you got a bit of tax benefit from some R&D credits.
Is that a one-quarter phenomenon or does that carry through the year?
Jonathan Foster
That was for 2014 as a one-quarter phenomenon. They have not accrued R&D tax credit in Congress for 2015, so we can’t calculate that.
If it’s approved by the end of the year, we should have a credit run through 2015, for the 2015 expenditures.
Doug Weiss
Okay, all right. And how about pain, I didn’t notice too much about that this quarter, is that progressing or anything in that front, pain management?
Eric Steen
It’s progressing. One thing we had comparing second quarter of 2015 to second quarter 2014, we had a 10-fold increase in billings.
And other good news, the - we’re getting paid by the commercial payers at around the same rate now that we get paid by for our oncology business. So, and that’s a 25-year old business.
So, we’re just a few years here. We’ve demonstrated the commercial payers, the benefit of the pain service.
And it’s still, I think as our oncology business was growing 92 new accounts plus Ciscura, I guess I was on this call I was keeping the focus on it. And I think we’ve got a couple of things to do to further increase pain.
And I’ll take this opportunity to just make a clarification because I like to talk about our electronic connectivity and our EMR integration we’re just doing that for our oncology business and I prioritized that. So, for our pain business today, our pain business looks like oncology did a few years ago where there is, paperwork and fax machines involved.
And I need to do when we’re done with these projects, our EMR integration is going very well. And in the past I’ve mentioned we have done IT investment as we’ve completely redoing our workflow for our oncology business which we’re about to implement that investment to reshape our oncology business.
And then as we finish that with a relatively minor IT investment to tweak the oncology platform we’ve created and just make it surgical instead of oncology and we bring our electronic connectivity of the pain market, I think that will bring some of the larger accounts in as well.
Doug Weiss
Okay. And last question, just on the accretion from Ciscura.
If I just kind of used the numbers you gave based on multiple EBITDA, I guess about $0.01 of accretion not per quarter, not including any incremental cost, interest expense. Have you, does this quarter fully reflect the associated interest expense from the acquisition in other words, do you have all the whatever to the extent you took on debt for the acquisition, is that fully reflected for the three months?
Jonathan Foster
We made the payment at the end of April. So, now the interest was, we’re roughly 3%, that was basically month and half roughly of interest on the acquisition.
With regards to EPS, one of the reasons we didn’t state anything, any guidance on EPS for the addition of that, if you go into the depths of the footnote in the Q, which I’m sure you haven’t had time to do with the release, we have not fully allocated the purchase price between goodwill and intangibles. And so depending how the life, once we’re done with our analysis and discussion with experts on allocation the lives of those intangibles would have an impact on EPS, and that’s why we’re - we can talk about EBITDA because that amortization is not included.
Eric Steen
I’ll just make one other comment, for little more clarification. For the revenue we recognized from the 100 new facilities that were formally with Ciscura, we only recognized one month in revenue this last quarter with those 100 facilities.
The reason for that is that although the acquisition happened late in April, insurance companies only pay for one pump rental a month for the patients. And so many of those patients have been in earlier in the month to the facilities and Ciscura did that pump billing.
And so it really wasn’t until May that we were able to start billing those patients for the pumps. The other thing is when you bring in 1,500 new patients into your system, there are some delays in getting everything set up for insurance billings we expected that.
Everything is going according to plan. And that’s one of the reasons our pending payments from insurance companies are up a bit as Jan and her team work through that.
And we will see those billings come through throughout the rest of the year now.
Doug Weiss
Okay. All right, that’s it from me.
Thanks.
Operator
[Operator Instructions]. Your next question comes from Chris Sampson from Sampson Advisors.
Please go ahead, Chris.
Chris Sampson
Hi, just a quick one on CapEx. What do you think maintenance CapEx will be now with the Ciscura acquisition?
Thanks.
Eric Steen
Jon.
Jonathan Foster
For example, Ciscura acquisition, it’s from 1,800 pumps on a fleet of 50,000 pumps. We still estimate our maintenance CapEx to somewhere between $1 million to $2 million range, it depends.
It varies year-by-year depending on most pumps and pumps that are beyond repair.
Chris Sampson
Okay. Thank you very much.
Operator
And we have no further questions at this time. And I’d like to turn the call back over to Eric Steen.
Eric Steen
Okay. Thanks very much everybody.
Thanks for joining our call today. And look forward to talking to you all next quarter.
Operator
Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating.
You may now disconnect.