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Merge Reports Third Quarter Financial Results Merge generates record cash from business operations in quarter

Merge Reports Third Quarter Financial Results

Merge generates record cash from business operations in quarter

Merge Healthcare Incorporated (NASDAQ: MRGE), a leading provider of clinical systems and innovations that seek to transform healthcare, today announced its financial and business results for the third quarter of 2013.

“Even though overall third quarter sales were down compared to the prior year, we made tangible progress. We realized a record-breaking quarter in cash collections, voluntarily repaid a portion of our debt, streamlined our business operations, grew our subscription-based backlog and implemented a company-wide strategy for ICD-10 across all applicable solutions. Add the launch of the new iConnect® Network for MU Stage 2, our recent award for ‘Best in Interoperability’ by Frost & Sullivan and our leadership standings in MU for radiology and vendor neutral archiving (VNA) and we’re very well positioned for 2014,” said Justin Dearborn, CEO of Merge Healthcare. “Further, while the debt refinancing last quarter resulted in $24 million of one-time expenses and $20 million of cash expenditures, we are seeing the positive impacts this quarter with lower interest, which will continue to decrease as we make voluntary repayments.” 

Financial Highlights:

  • Sales decreased to $57.2 million ($57.7 million on a pro forma basis) in the third quarter of 2013, from $60.4 million ($61.0 million on a pro forma basis) in the third quarter of 2012;
  • Subscription backlog grew 73% since the third quarter of 2012, with growth in both Merge Healthcare and DNA segments;
  • Adjusted EBITDA for the third quarter of 2013 was $7.2 million, representing 13% of pro forma revenue for the quarter, compared to $12.5 million and 21% in the third quarter of 2012 with the change primarily a result of an unusually high mix of hardware sales (with lower margins) and $2.3 of non-cash charges in the third quarter of 2013;
  • Strong cash collections in the quarter drove an increase in cash generated from business operations to $15.3 million in the third quarter of 2013 from $9.2 million in the third quarter of 2012; and
  • Utilized excess cash to voluntarily repay $6 million of debt principal that resulted in a leverage ratio of 5.1 : 1, well within the 5.5 : 1 loan agreement limit. 

Business Highlights:
  • Increased Merge Hemo™ record station sales by 40% year-to-date in 2013 compared to 2012;
  • Targeted a new white-space market opportunity for advanced interoperability with the iConnect Network executing 15 early adopter agreements, including two beta site customers, Radiology Ltd. (Tucson, AZ) and Long Island Radiology Associates;
  • Saw eClinical backlog increase $29.5 million (127%) to $52.8 million in the third quarter of 2013, from $23.3 million in the third quarter of 2012;
  • Accepted the 2013 North America Frost & Sullivan Award for Product Leadership in Interoperability Solutions for the iConnect Enterprise Clinical Platform;
  • Received recognition from IHS for the second year in a row that Merge, through its iConnect Enterprise Archive, is the leading provider for vendor-neutral archive (VNA) solutions in both the world and in the Americas; and
  • Was acknowledged, according to data compiled by the U.S. Department of Health and Human Services (HHS), as being the provider of the most widely used Certified Electronic Health Record Technology (CEHRT) by radiologists.

Quarter Results:
Results compared to the same quarter in the prior year on a GAAP basis are as follows (in millions, except per share data):
  Q3 2013 Q3 2012
Net sales $57.2 $60.4
Operating income (loss) (0.5) 6.0
Net loss (4.1) (3.8)
Net loss per diluted share ($0.04) ($0.04)
     
Cash balance at period end $20.3 $42.2
Cash from business operations* 15.3 9.2

*See table at the back of this earnings release.   

Pro forma results and other, non-GAAP measures compared to the same quarter in the prior year are as follows (in millions, except percentages and per share data):
  Q3 2013 Q3 2012
Pro forma results    
Net sales $57.7 $61.0
Adjusted net income 1.7 0.9
Adjusted EBITDA  7.2 12.5
     
Adjusted net income per diluted share $0.02 $0.01
Adjusted EBITDA per diluted share $0.07 $0.13
     
Non-GAAP and other measures    
Subscription, maintenance & EDI revenue as % of net sales 64.1% 61.0%
Subscription and non-recurring backlog at period end $91.9 $71.4
Days sales outstanding 104 106
    
A reconciliation of GAAP net income (loss) to adjusted net income and adjusted EBITDA is included here.

Pro Forma Operating Group Results:
Results (in millions) for our operating groups are as follows:


Explanation of Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles or GAAP. This press release includes certain non-GAAP financial measures to supplement its GAAP information. Non-GAAP measures are not an alternative to GAAP and may be different from non-GAAP measures used by other companies. A quantitative reconciliation of GAAP net income available to common shareholders to adjusted net income and adjusted EBITDA is included after the financial information included in this press release.
Management believes that the presentation of non-GAAP results, when shown in conjunction with corresponding GAAP measures, provides useful information to it and investors regarding financial and business trends related to results of operations, because certain charges, costs and expenses reflect events that are not essential to recurring business operations. In addition, management believes these non-GAAP measures provide investors useful information regarding the underlying performance of the post-acquisition business operations when compared to the pre-acquisition results of Merge and any significant acquired company.  Purchase accounting adjustments made in accordance with GAAP can make it difficult to make meaningful comparisons of the underlying operations of the business without considering the non-GAAP adjustments that are provided and discussed herein. Further, management believes that these non-GAAP measures improve its and investors’ ability to compare Merge’s financial performance with other companies in the technology industry. Management also uses financial statements that exclude these charges, costs and expenses for its internal budgets.  While GAAP results are more complete, these supplemental metrics are offered since, with reconciliations to GAAP, they may provide greater insight into our financial results. Management does not intend the presentation of these non-GAAP financial measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Additional information regarding the non-GAAP financial measures presented is as follows:
  • Pro forma revenue consists of GAAP revenue as reported, adjusted to add back the acquisition related sales adjustments (for all significant acquisitions) recorded for GAAP purposes.
  • Subscription revenue and the related backlog are comprised of software, hardware and professional services (including installation, training, etc.) contracted with and payable by the customer over a number of years.  Generally, these contracts will include a minimum volume / dollar commitment.  As such, the revenue from these transactions is recognized ratably over an extended period of time.  These types of arrangements will include monthly payments (including leases), long-term clinical trials, renewable annual software agreements (with very high renew rate), to specify a few contract methods.
  • Non-recurring revenue and related backlog represents revenue that we anticipate recognizing in future periods from signed customer contracts as of the end of the period presented.  Non-recurring revenue is comprised of perpetual software license sales and includes licenses, hardware and professional services (including installation, training and consultative engineering services). 
  • Adjusted net income consists of GAAP net income available to common stockholders, adjusted to exclude (a) acquisition-related costs, (b) debt extinguishment costs, (c) restructuring and other costs, (d) share-based compensation expense, (e) acquisition-related amortization (f) acquisition-related sales adjustments, and (g) acquisition-related cost of sales adjustments.
  • Adjusted EBITDA adjusts GAAP net income available to common stockholders for the items considered in adjusted net income as well as (a) remaining depreciation and amortization, (b) net interest expense and (c) income tax expense (benefit).
  • Cash from business operations reconciles the cash generated from such operations to the change in GAAP cash balance for the period by reflecting payments of liabilities associated with debt issuance and retirement activities, acquisitions, payments of acquisition related fees, interest payments and other payments and receipts of cash not generated by the business operations.
 
Management has excluded certain items from non-GAAP adjusted net income because it believes (i) the amount of certain expenses in any specific period may not directly correlate to the underlying performance of business operations and (ii) the adjustment facilitates comparisons of pre-acquisition results to post-acquisition results.  In addition, the following adjustments are described in more detail below:
  • Debt extinguishment expense is comprised of both non-cash expenses, such as the remaining unamortized balance of costs associated with the issuance of the old debt and unamortized balance of the discount when the old debt was issued, as well as contractually owed cash charges to the holders of the old debt to allow us to retire it early.  Management excludes this expense from non-GAAP net income because it believes such expense does not directly correlate to the underlying performance of operations, rather is an expense that is specific to a transaction that we would expect to occur infrequently.
  • Acquisition-related amortization expense is a non-cash expense arising from the acquisition of intangible assets in connection with significant acquisitions. Management excludes acquisition-related amortization expense from non-GAAP net income because it believes such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.
  • Share-based compensation expense is a non-cash expense arising from the grant of stock awards to employees and is excluded from non-GAAP net income because management believes such expenses can vary significantly between periods as a result of the timing of grants of new stock-based awards, including grants to new employees resulting from acquisitions.
  • Acquisition-related sales and costs of sales adjustments reflect the fair value adjustment to deferred revenues acquired in connection with significant acquisitions. The fair value of deferred revenue represents an amount equivalent to the estimated cost plus an appropriate profit margin to perform services-related software and product support, which assumes a legal obligation to do so, based on the deferred revenue balances as of the date the acquisition of a significant company was completed. Management adds back this deferred revenue adjustment, net of related costs, for non-GAAP revenue and non-GAAP net income because it believes the inclusion of this amount directly correlates to the underlying performance of operations and facilitates comparisons of pre-acquisition to post-acquisition results.
Notice of Conference Call
Merge will host a conference call at 8:30 AM ET on Wednesday, October 30, 2013. The call will address third quarter results and will provide a business update on the company’s market outlook and strategies for the remainder of 2013.

Participants may preregister for this teleconference at http://emsp.intellor.com?p=413570&do=register&t=8. Upon registration, a confirmation page will display dial-in numbers and a unique PIN, and the participant will also receive an email confirmation with this information.

A replay via the Internet or phone will be available after the call at http://www.merge.com/Company/Investors/Conference-Call-Info.aspx.

About Merge
Merge is a leading provider of clinical systems and innovations that seek to transform healthcare.  Merge’s enterprise and cloud-based solutions for image intensive specialties provide access to any image, anywhere, any time. Merge also provides clinical trials software and other health data and analytics solutions that engage consumers in their personal health. With solutions that are used by providers and consumers and include more than 25 years of innovation, Merge is helping to reduce costs and improve the quality of healthcare worldwide. For more information, visit merge.com.

Cautionary Notice Regarding Forward-Looking Statements
The matters discussed in this press release may include forward-looking statements, which could involve a number of risks and uncertainties. When used in this press release, the words “will,” “believes,” “intends,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied by, such forward-looking statements. The potential risks and uncertainties include those risks and uncertainties included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012 and our most recent Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 which are on file with the SEC and are available on our investor relations website at merge.com and on the SEC website at www.sec.gov. Additional information will also be set forth in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. Except as expressly required by the federal securities laws, Merge undertakes no obligation to update such factors or to publicly announce the results of any of the forward-looking statements.

Contact:
Jennifer Jawor
Director, Corporate Marketing
312.565.6825
jennifer.jawor@merge.com

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