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Merge Reports First Quarter Financial Results financial results, investor information, 2014 Company reports strong cash flow, overall profitability, growth in adjusted EBITDA and debt refinancing

Merge Reports First Quarter Financial Results

Company reports strong cash flow, overall profitability, growth in adjusted EBITDA and debt refinancing

Merge Healthcare Incorporated (NASDAQ: MRGE), a leading provider of innovative enterprise imaging, interoperability and clinical systems that seek to advance healthcare, today announced its financial and business results for the first quarter of 2014.
 
“In Q1, Merge continued to see positive momentum in our operations. We’ve demonstrated strong cash flow by keeping our expenses under control, achieved positive net income and increased our adjusted EBITDA. We also refinanced our existing credit facility with a new facility with Guggenheim Corporate Funding, LLC as administrative agent, which will provide greater operating flexibility going forward,” said Justin Dearborn, CEO of Merge Healthcare. “In addition, we made forward progress with our subscription-based services. Sales increased for our eClinical OS platform, we saw continued success with iConnect® Network and we are well positioned to launch a new white space opportunity with our retinal screening interoperability solution within our eye care business that complements the population health strategies being pursued by many of our largest customers. We’ve also completed Meaningful Use Stage 2 (MU2) certifications for all of our applicable solutions, enabling customers to receive additional government reimbursements. With this progress, we remain focused on and confident with our 2014 outlook.”
 
Financial Summary:

  • Cash generated from business operations grew to $13.5 million in the first quarter of 2014 from $9.2 million in the prior year (a 47% increase), which compares to net cash provided by operating activities on the statement of cash flows of $9.8 million and $8.7 million in the respective quarters;
  • Net income in the first quarter of 2014 was $0.3 million, or $0.00 per share, compared to a net loss of $6.5 million, or a loss of $0.07 per share, in the first quarter of 2013;
  • Sales decreased to $50.9 million ($51.1 million on a pro forma basis) in the first quarter of 2014 from $63.6 million ($64.0 million on a pro forma basis) in the first quarter of 2013. Adjusted EBITDA was $10.2 million in the first quarter of 2014, representing 20% of pro forma revenue, compared to $12.5 million and 19.5% in the first quarter of 2013;
  • Subscription backlog increased to $54.2 million, a 23% increase over  the first quarter of 2013;
  • Repaid $8.6 million of debt principal in the quarter and achieved a leverage ratio of 5.3:1, within the 5.5:1 leverage covenant of our then existing credit facility; 
  • Subsequent to quarter end we refinanced our debt with a new six-year term loan facility totaling $235 million at a variable interest rate of 7% (currently 1% higher than the debt it replaced). The new facility has no financial covenants for one year and the covenants thereafter provide significant additional operating flexibility. The new facility will permit us to once again consider various strategic, tuck-in acquisitions going forward; and
  • As a result of the debt refinancing, we are updating our prior 2014 guidance to reflect the GAAP charges associated with the transaction as well as the differences in interest rate terms (see table below).  


Business Highlights:
  • Continued momentum for advanced interoperability with iConnect® Network, executing 19 new customer agreements, including Southern Illinois Healthcare, our first hospital customer to join the network. Also, we released the second version of the solution, which now integrates directly with athenahealth’s electronic health record (EHR) solution, so that customers can receive and view exam results, diagnostic quality images and other critical patient information within the athenaClinicals® EHR workflow;
  • Announced availability of iConnect Access v5.0, which now combines universal viewing and image sharing into one, single integrated solution to expand the ability of referring physicians to review patient images from browser-based devices;
  • Developed a new subscription-based product, targeted at a white space opportunity for Merge Interoperability Solutions with iConnect Retinal Screening. This is an eye care screening solution that will enable integrated delivery systems and accountable care organizations to more effectively identify and screen diabetic patients which complements their overall population health strategy. A pilot project for the solution has been launched with Ontario Telemedicine Network;
  • Implemented over 300 active trials on the Merge eClinical OS™ platform, with over 18,500 professionals using the system every day; and
  • Received 2014 certification of all eligible Merge solutions for MU2, empowering customers to meet requirements and earn applicable government reimbursements.

 

Q1 2014

Q1 2013

Net sales

$50.9

$63.6

Operating income

4.4

5.3

Net income (loss)

0.3

(6.5)

Net income (loss) per diluted share

$0.00

($0.07)

 

 

 

Cash balance at period end

$19.8

$44.5

Cash from business operations*

13.5

9.2



*See table at the back of this earnings release for reconciliation.

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):

 

Q1 2014

Q1 2013

Pro forma (Non-GAAP) results

 

 

Net sales

$51.1

$64.0

Adjusted net income (loss)

4.3

(0.5)

Adjusted EBITDA

10.2

12.5

 

 

 

Adjusted net income (loss) per diluted share

$0.04

($0.01)

Adjusted EBITDA per diluted share

$0.11

$0.13

 

 

 

Other operating measures

 

 

Subscription, maintenance & EDI revenue as % of net sales

66%

58%

Subscription and non-recurring backlog at period end

$77.2

$67.9

Days sales outstanding

90

104



A reconciliation of GAAP net income (loss) to adjusted net income and adjusted EBITDA is included after the financial information below. See “Explanation of Non-GAAP Financial Measures” for definitions of each of these non-GAAP measures and the reason the Company’s management believes that the adjustments made to arrive at the non-GAAP financial measures provide useful information to investors regarding the Company.

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





2014 Outlook:
The following table outlines expectations surrounding the various items comprising the difference between GAAP net income and adjusted EBITDA and has been updated to reflect the estimated impact of the refinancing of Merge’s debt. While revenue and adjusted EBITDA remains unchanged, there are GAAP and cash flow expectations that are updated to consider the approximate non-cash extinguishment expense associated with capitalized costs under the prior loan and the estimated change in interest expense and payments as a result of the new loan.


  • 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.  Cash generated from business operations and used to pay restructuring initiatives, acquisition related costs and interest approximates net cash provided by operating activities in the condensed consolidated statement of cash flows.  

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, certain adjustments are described in more detail below:

  • 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 adjusted 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, April 30, 2014. The call will address first quarter financial and business results for 2014.
 
To preregister for this teleconference, go to http://emsp.intellor.com?p=415182&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 innovative enterprise imaging, interoperability and clinical systems that seek to advance healthcare. Merge’s enterprise and cloud-based technologies for image intensive specialties provide access to any image, anywhere, any time. Merge also provides clinical trials software with end-to-end study support in a single platform and other intelligent health data and analytics solutions. With solutions that have been used by providers for more than 25 years, Merge is helping to reduce costs, improve efficiencies and enhance the quality of healthcare worldwide. For more information, visit merge.com and follow us @MergeHealthcare.
 
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, 2013, which is 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. 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
Vice President, Corporate Marketing
312.565.6825
jennifer.jawor@merge.com

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