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Press release from CNW Group

CML HealthCare Income Fund Reports 2010 Third Quarter Financial Results

Thursday, November 11, 2010

CML HealthCare Income Fund Reports 2010 Third Quarter Financial Results06:00 EST Thursday, November 11, 2010Toronto Stock Exchange Symbol: CLC.UNMISSISSAUGA, ON, Nov. 11 /CNW/ - CML HealthCare Income Fund (the "Fund" or "CML HealthCare"), (TSX: CLC.UN) today reported its financial results for the three and nine-month periods ended September 30, 2010 (all amounts are in Canadian dollars, unless noted otherwise).Consolidated Financial Highlights:        (C$ millions except percent and per unit amounts)Three- months ended September30, 2010("Q3 2010")Three- months ended September30, 2009("Q3 2009")% Change Nine- months ended September 30, 2010 ("YTD 2010")Nine- monthsended September 30, 2009 ("YTD 2009")% ChangeRevenue$116.8$128.2(8.9%)$361.9$390.5(7.3%)Operating, general, & administration expenses (OG&A)$85.0$92.8(8.4%)$266.7$284.6(6.3%)EBITDA(1)$31.8$35.3(10.1%)$95.1$105.9(10.2%)EBITDA(1) Margin27.2%27.6%(1.4%)26.3%27.1%(3.0%)Net Earnings$20.1$24.0(16.5%)$63.8$73.0(12.6%)Net Earnings per unit$0.22$0.27(18.5%)$0.71$0.81(12.3%)Cash provided by operating activities before changes in non-cash working capital items$28.5$32.7(12.8%)$87.6$96.4(9.1%)Distributable cash(2)$25.8$28.6(10.0%)$77.2$80.5(4.1%)Distributions declared$24.0$24.00$72.0$72.00Payout ratio93.2%83.8%11.2%93.4%89.4%4.5%Operating Highlights:Grew revenue in Canadian operations through increased cap revenue in laboratory services based on the Ontario Ministry of Health (MOH) funding agreement;Continued roll-out of Radiology Information System/Picture Archiving & Communication System (RIS/PACS) with 12 sites now implemented in Canada;Initiated new sales and marketing strategies in the U.S.;Improved Adjusted EBITDA(7) Margin over Q2 2010 in U.S. operations."Our Canadian operations continued to experience revenue growth in the third quarter," said Paul Bristow, President and CEO of CML HealthCare Income Fund. "From an operating perspective, our Canadian EBITDA margins improved marginally during the quarter but due to the new Harmonized Sales Tax ("HST") and one-time costs relating to our corporate conversion, EBITDA margins of 32.0% in Q3 2010 are lower than the same period in 2009 of 33.6%.""While our U.S. operations continue to be challenged by the industry-wide experience of declining patient visits to physician offices, our Q3 2010 U.S. results have shown modest improvement over Q2 2010.  Our Adjusted U.S. EBITDA(7) margins improved from 10.7% in the second quarter to 11.4% in the third quarter of 2010," said Mr. Bristow. "In the face of uncertain conditions, we are working towards enhancing our sales effectiveness and improving operating efficiency in our U.S. operations while maintaining our leadership position in our Canadian operations."Corporate Conversion Management Information Circular The Management Information Circular (the "MIC") associated with the previously announced intention to convert (the "Conversion") from an income trust structure to a corporation (the "Newco") has been mailed and is now available on www.SEDAR.com.  Unitholders of the Fund will be asked to review the proposed Conversion as detailed in the MIC, and vote on the proposal at a special meeting (the "Meeting") to be held at the offices of Goodmans LLP, 333 Bay Street, Suite 3400, Toronto, Ontario M5H 2S7, on December 1, 2010 at 10:00 a.m. (Toronto time).Timing of the December 2010 Distribution If the Arrangement is approved by Unitholders at the Meeting and the Arrangement is implemented, distributions expected to be declared for the months of November, 2010 and December, 2010 are expected to be paid in December, 2010.The record and payment dates for the November, 2010 distribution will be November 30, 2010 and December 20, 2010 respectively. The record and payment dates for the December, 2010 distributions will be announced after voting on the Arrangement has been tabulated, expected in the week of December 6, 2010.Provided the Arrangement is completed as scheduled, the anticipated distribution in respect of the month of December 2010 would be the last distribution paid to Fund Unitholders by the Fund.  Beginning in 2011, investors of Newco will receive monthly dividend payments anticipated to be $0.0629 per share starting with the January 2011 dividend to be paid in February 2011.Financial ResultsThree Months Ended September 30, 2010For the three months ended September 30, 2010 ("Q3 2010"), revenue for the Fund of $116.8 million was 8.9% lower than $128.2 million for the same period in 2009. Decreased revenue in Q3 2010 was largely attributable to:$9.4 million as a result of the change in accounting associated with the new Management Services Agreement (MSA) with the radiologist group, American Radiology Associates, PA (ARA) as announced in Q2 2010;$2.1 million from changes in foreign exchange rates;Decreased reimbursements on certain high-end modality procedures;Lower volumes resulting from impact of difficult market conditions in the U.S.; and$0.7 million in one-time imaging and laboratory services reimbursements in Canada recorded in Q3 2009, not applicable in Q3 2010.The above declines in revenue were partially offset by:$3.3 million in revenue generated from acquisitions in the U.S. completed in the second half of 2009; and$1.0 million increase in cap revenue based on the MOH Funding agreement for laboratory services.Operating, general and administrative ("OG&A") expenses of $85.0 million reflect an 8.4% decrease from the same period last year.  The decrease in OG&A was due primarily to:$9.4 million as a result of the change in accounting associated with the new MSA with ARA as announced in Q2 2010;$1.9 million from changes in foreign exchange rates; andAdditional decreases in operating expenses due to effective cost containment.The above declines in OG&A were partially offset by:$2.5 million in additional costs related to acquired operations in the U.S. completed in the second half of 2009;$1.0 million in HST in two Canadian provinces which took effect July 1, 2010;$0.5 million in costs associated with preparation to convert the Fund into a corporate structure; and$0.7 million in commodity tax refunds received in Q3 2009 not applicable in Q3 2010.Consolidated Financial Summary     (C$ millions, except percent amounts)(unaudited)Three-months ended September 30, 2010Three-months ended September 30, 2009Nine-months ended September 30, 2010Nine-months ended September 30, 2009Net earnings for the period20.124.063.873.0Less: recovery of income taxes(1.5)(0.9)(6.2)(3.5)Add: interest expense3.23.19.310.4Less: loss on sale of property & equipment-0.1-0.2Add: other expense1.8-3.30.4Less: Foreign exchange (gain)/loss-0.5(0.2)(0.2)Add: Amortization8.18.525.125.6EBITDA(1)31.835.395.1105.9Revenue116.8128.2361.9390.5EBITDA(1) margin as a percent of revenue27.2%27.6%26.3%27.1%Q3 2010 EBITDA(1) totaled $31.8 million compared to $35.3 million in Q3 2009.  EBITDA(1) margin of 27.2% in Q3 2010 was slightly lower than Q3 2009 of 27.6%.  Note that EBITDA(1) includes expenses for the Radiology Information System / Picture Archiving and Communications System (RIS/PACS) and Human Resources Information System (HRIS) projects which are expected to generate cost savings once complete.The Fund's net earnings in Q3 2010 of $20.1 million or $0.22 per Fund unit were 16.5% lower than $24.0 million or $0.27 per unit in Q3 2009. The decrease in net earnings was due primarily to Other Expenses of $1.8 million in Q3 2010 which did not exist in the same period in 2009.  Other Expenses comprise of a restructuring charge related to the departure of an executive in Q3 2010 and the charge for professional fees in respect of a potential acquisition that was not completed.Nine Months Ended September 30, 2010For the first nine months of 2010, the Fund reported revenue of $361.9 million, OG&A expenses of $266.7 million, EBITDA(1) of $95.1 million or 26.3% of revenue, and net earnings of $63.8 million or $0.71 per Fund unit, compared to revenue of $390.5 million, OG&A expenses of $284.6 million, EBITDA(1) of $105.9 million or 27.1% of revenue, and net earnings of $73.0 million or $0.81 per Fund unit in the first nine months of 2009.YTD 2010 revenues were negatively impacted by lower U.S. volumes resulting from difficult market conditions, lower reimbursements from Medicare for CT and MRI procedures, a stronger Canadian dollar relative to the US dollar, as well as the impact of the accounting change resulting from the new MSA agreement partially offset by additional revenues related to acquisitions completed in the second half of 2009 and an increase in laboratory capped revenue based on the MOH funding agreement as previously discussed and revenues from the acquisitions completed in the second half of 2009. YTD 2010 OG&A expenses were lower than the same period in 2009 reflecting the impact of the accounting change resulting from the new MSA agreement, impact from a stronger Canadian dollar relative to the US dollar, and effective cost containment, partially offset by additional costs related to acquisitions completed in the second half of 2009, implementation of RIS/PACS and HRIS, and additional taxes incurred when the HST took effect on July 1, 2010 in Ontario and British Columbia. YTD 2010 net earnings reflect restructuring charges related to the departure of executives in our U.S. medical imaging business in Q1 2010, the departure of an executive in Q3 2010, as well as professional fees incurred related to a potential acquisition that was not completed.Distributable Cash(2)For the three month period ended September 30, 2010, the Fund generated distributable cash (2) of $25.8 million and declared distributions totaling $24.0 million, representing a payout ratio of 93.2%.  For the same period in 2009, the Fund generated distributable cash(2) of $28.6 million and declared distributions totaling $24.0 million, representing a payout ratio of 83.8%.  Please refer to Standardized Distributable Cash(2) and Distributable Cash(2) table below.          Standardized Distributable Cash(3) & Distributable Cash(2) Table (C$000s)Three-months endedSeptember 30, 2010Three-months endedSeptember 30, 2009Nine-months endedSeptember 30, 2010Nine-months endedSeptember 30, 2009Cash flow from operating activities25,85228,88279,18899,165Less:     Total capital expenditures as per consolidated statement of cash flows(5,727)(9,706)(18,151)(24,998) Expenditure relating to the acquisition of licenses and intangible assets (650)(1,641)(3,920)(2,897)Standardized distributable cash(3)19,47517,53557,11771,270Normalizing adjustments to non-cash working capital items(4)2,9945,7739,613(3,837)Capital Expenditures: Add back:  Intangible asset acquired4-1,659- One time capital expenditures4,0516,93714,41912,163 Changes in capital expenditure notional reserve(1,770)27(6,563)1,017 Capital lease payments (470)(19)(1,105)(57)Sub-total24,28430,25375,14080,556Discretionary/ non-recurring (recovery)/expenses(5)1,472(626)3,180330One-time acquisition of licences & intangible asset-63-1,319Cash available for distribution25,75629,69078,32082,205Non-recurring revenue / expense recoveries/supplier incentive(6)-(1,087)(1,161)(1,700)Distributable cash(2)25,75628,60377,15980,505Distributions to unitholders24,01523,98372,04171,978Total payouts as a percentage of distributable cash(2)93.2%83.8%93.4%89.4%Total payouts as a percentage of standardized distributable cash(2)123.3%136.8%126.1%101.0%Weighted average number of Fund units outstanding in the period 89,842,40489,842,40489,842,40489,842,404Segmented Highlights Canadian Operations     (C$ millions, except percentages)(unaudited)Three-months ended September 30, 2010Three-months ended September 30, 2009Nine-months ended September 30, 2010Nine-months ended September 30, 2009Revenue90.590.1273.9270.1OG&A61.559.9185.4180.1EBITDA(1)29.030.388.590.0EBITDA(1) margin32.0%33.6%32.3%33.3%Net earnings for the period20.922.867.370.4Revenue in Q3 2010 of $90.5 compares with $90.1 million in the corresponding period in 2009. The increase in Q3 2010 reflect $1.0 million in additional revenue received in respect of the laboratory services cap agreement with the MOH, offset by $0.7 million in one-time imaging and laboratory services reimbursements recorded in Q3 2009 not applicable in Q3 2010. The higher OG&A expense in Q3 2010 primarily reflects the $1.0 million impact of HST in Ontario and British Columbia, $0.5 million professional costs related to the 2011 conversion to a corporation, and $0.7 million commodity tax refund in Q3 2009 not applicable in Q3 2010. The decline in EBITDA(1) margins in Q3 2010 compared to the same period in 2009 are the result of the factors previously noted.U.S. Operations     US$ millions, except percentages(unaudited)Three-months ended September 30, 2010Three-months ended September 30, 2009Nine-months ended September 30, 2010Nine-months ended September 30, 2009Revenue25.334.785.0102.9OG&A22.630.078.589.3EBITDA(1)2.74.76.413.6EBITDA(1) margin10.6%13.3%7.6%13.2%Net earnings/(loss) for the period(0.8)1.1(3.4)2.2Both revenue and OG&A expense in Q3 2010 declined by US$9.0 million compared to the same period in 2009 as a result of the change in accounting for the new MSA with ARA. Revenue growth of US$3.2 million in Q3 2010 from acquisitions completed in the second half of 2009 were offset by volume declines resulting from the continued difficult economic environment and healthcare trends including declines in physician office visits, appropriateness controls through pre-authorization for certain high-end modality procedures and radiation exposure concerns from CT scans, as well as lower reimbursement rates for certain high-end modality procedures. The Q3 2010 EBITDA(1) margin of 10.6% was lower than 13.3% in Q3 2009 as a result of the previously noted factors.U.S. Operations - Adjusting for Change in Contractual Allowance Estimate for Q2 & Q3 2010 (7)    US$ millions, except percentages (unaudited)Three-months ended June 30, 2010("Q2 2010")Three-months ended September 30, 2010("Q3 2010")Three-months ended September 30, 2009("Q3 2009")Revenue25.925.334.7Change in contractual allowance estimate (7)(0.1)0.2-Adjusted Revenue25.825.534.7OG&A23.022.630.0Adjusted EBITDA(7)2.82.94.7Adjusted EBITDA(7) margin10.7%11.4%13.3%Net earnings/(loss) for the period(0.1)(0.8)1.1Adjusting for the changes in the contractual allowance estimate as described in Note 7, Adjusted EBITDA margins(7) improved from 10.7% in Q2 2010 to 11.4% in Q3 2010.Balance SheetAs at September 30, 2010, the Fund had working capital of $16.9 million, including cash and cash equivalents of $12.3 million, compared to working capital of $14.8 million, including cash and cash equivalents of $14.0 million as at June 30, 2010. Long-term debt of the Fund, including the current portion, was $327.5 million as at September 30, 2010, compared to $326.7 million as at June 30, 2010. The increase in debt reflect primarily additional borrowings on the revolving credit facility of $5.0 million, partially offset by a decrease of $2.4 million as a result of foreign exchange fluctuations on the Fund's U.S. denominated debt and a reduction in the obligations of $1.8 million in capital lease obligations. As at September 30, 2010, the Fund had approximately $57.4 million available under the revolving credit facility and 89,842,404 Fund units issued and outstanding.Notice of Conference CallManagement of CML HealthCare Income Fund will host a conference call today, Thursday, November 11, 2010 at 10:00 am (EST) to discuss the Fund's 2010 third quarter financial results. A live audio webcast of the call will be available at www.cmlhealthcare.com. Please connect at least 15 minutes prior to the conference call to ensure 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 Thursday, November 18, 2010 by calling 1-800-642-1687 or 416-849-0833, reference number 17819768#.(1) The Fund defines EBITDA as earnings before interest, taxes, amortization, other expenses, goodwill impairment, gain/loss on disposals of property and equipment, and foreign exchange gain/loss. EBITDA margins are calculated by dividing EBITDA by revenue.EBITDA is not a recognized measure under Canadian generally accepted accounting principles ("GAAP"). Management believes that, in addition to net earnings, EBITDA is a useful supplemental measure, as it provides investors with an indication of the Fund's performance. EBITDA is used by the Fund 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 GAAP. The Fund's method of calculating EBITDA may differ from other companies or income trusts and, accordingly, EBITDA may not be comparable to measures used by other companies or income trusts. (2) Distributable Cash of the Fund is not a Canadian GAAP measure, and though it is generally used by Canadian open-ended trusts as an indicator of financial performance, it should not be seen as a measure of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. One characteristic of certain non-GAAP measures such as Distributable Cash is the inclusion of management's adjustments for entity-specific issues not contemplated in a standard measurement, such as Standardized Distributable Cash that focuses on comparability across entities and consistency over time. Therefore, the Fund's Distributable Cash may differ from similar calculations as reported by other similar entities and, accordingly, may not be comparable to Distributable Cash as reported by such entities. The Fund's objective for disclosing the Distributable Cash calculation is to outline the net cash flow generated by the Fund that was available for distribution during the period and anticipated to be sustainable into the next period. The Fund uses Distributable Cash to evaluate, on a consistent basis, sustainable cash generated from its operations, and to evaluate cash available for distributions.(3) On July 18, 2007, the Canadian Institute of Chartered Accountants issued its interpretive release "Standardized Distributable Cash in Income Trusts and Other Flow Through Entities: Guidance on Preparation and Disclosures". The Fund has reviewed the interpretive release and has adopted the guidance as applicable to the Fund. The above table represents a summarized presentation. Please refer to our September 30, 2010 Management's Discussion and Analysis ("MD&A") for complete disclosure relating to Standardized Distributable Cash.(4) Comprised of adjustments related to known and measurable timing differences in respect of MOH cap revenue receivables; insurance adjustments; bonus adjustments; tax refunds related to pre-acquisition periods; non-recurring settlement of a pre-acquisition liability; adjustment for amounts loaned to a senior U.S. employee; one-time payments made related to the transition to the new MSA, and a one-time settlement of non-operating receivables relating to prior years.(5) Discretionary/Non-recurring expenses represent one-time legal and audit costs; payment related to restructuring in U.S. and Canada; charge for professional fee related to a potential acquisition that is unlikely to be completed; additional cost under the new MSA relating to RIS/PACS; and non-recurring sales tax payment (6) Non-recurring revenue/expense recoveries/supplier incentive represents retroactive payments from MOH for professional and lab fees; retroactive payments for imaging test fee increases; one-time pre-implementation costs related to RIS/PACS and HRIS; recoveries of certain sales taxes paid; and supplier incentive received net of the price reductions expected on future purchase of supplies.(7) Adjusted EBITDA: EBITDA is adjusted to reflect changes in contractual allowance estimates. In the U.S., net fee-for-service revenue is recorded as services are provided at established rates, reduced by allowances for contractual adjustments. Contractual adjustments result from the terms of certain reimbursement contracts and represent differences between charges at established rates and estimates of recoverable amounts. In the third quarter of 2010, the estimates of recoverable amounts were updated for certain procedures, which resulted in a reduction in recognized revenue in Q3 2010. Considering the periods in which this change in estimate relates, Q2 and Q3 revenues and EBITDA have been adjusted in order to provide a better representation of the operating performance of the business. Adjusted EBITDA is not a recognized measure under Canadian generally accepted accounting principles ("GAAP"). Management believes that, in addition to net earnings and EBITDA, Adjusted EBITDA is a useful supplemental measure, as it provides investors with an indication of the Fund's performance. Adjusted EBITDA is used by the Fund to analyze performance and compare profitability between periods. Investors should be cautioned, however, that Adjusted EBITDA should not be construed as an alternative to net earnings determined in accordance with GAAP. The Fund's method of calculating Adjusted EBITDA may differ from other companies or income trusts and, accordingly, Adjusted EBITDA may not be comparable to measures used by other companies or income trusts. To view the Fund's Q3 2010 Financial Statements and Notes, please click here: http://files.newswire.ca/736/cmlhealthcare.pdfAbout CML HealthCare Income FundCML HealthCare Income Fund is an unincorporated open-ended trust that owns CML HealthCare Inc., one of North America's largest healthcare services businesses. Based in Mississauga, Ontario, CML HealthCare Inc. is a leading provider of laboratory testing services in Ontario, the largest provider of medical imaging services in Canada and is a leading provider of medical imaging services in the U.S. Northeast. CML HealthCare Income Fund is publicly traded on the Toronto Stock Exchange under the symbol "CLC.UN" and has approximately 89.8million units outstanding. To reach CML HealthCare Income Fund via the worldwide web log on to www.cmlhealthcare.com.Caution concerning forward-looking statementsThis 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", "suspect", "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: failure to receive approval of the conversion of the Fund to a corporation from unitholders or any required regulatory, judicial, stock exchange and third party approvals in connection with the plan of arrangement; a reduction of funds from operations; general economic conditions; dependence on government-based revenues in Canada; pending and proposed legislative or regulatory developments in Canada including the impact of changes in laws, regulations and the enforcement thereof; intensifying competition, resulting from established competitors and new entrants in the businesses in which we operate; our ability to complete strategic acquisitions and to integrate our acquisitions successfully; insurance coverage of sufficient scope to satisfy any liability claims; operational and infrastructure risks including possible equipment failure and performance of information technology systems; fluctuations in total patient referrals; technological change and obsolescence; loss of services of key senior management personnel; privacy laws; dependence on our operating subsidiary to pay its interest obligations to us; unpredictability and volatility of the unit price; nature of the units; fluctuations in cash distributions and capital investment; structural subordination of the units; leverage and restrictive covenants; timing and amount of capital expenditures; restrictions on potential growth; tax-related risks; redemption right; dilution; future sales of units; distribution of CML Shares and Notes on termination of the Fund; and limited unitholder liability. Additional factors related to the business operations in the U.S. imaging market include, but are not limited to: potential termination of the management services agreement between our subsidiary, American Radiology Services and American Radiology Associates, P.A., or other arrangements with contracted radiology practices; fluctuations in total patient referrals; changes in third-party reimbursement rates or methodology; increased pressure to control healthcare costs; increased competition; technological change; exposure to professional malpractice liability; potential termination of relationship with Johns Hopkins; currency fluctuations; ability to grow business in the United States; U.S. income tax matters; different regulatory environment characterized by extensive regulation; penalties arising from failure to comply with all regulations; federal and state fraud and abuse laws; reversal of Board of Physician's decisions or legislative change; loss of licensing, certification or accreditation; Certificate of Need regulations; privacy legislation; legislative change affecting prices that physicians or suppliers can charge; avoidance of fee-splitting; environmental health and safety laws; and the uncertainty of the U.S. regulatory environment. 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, under "Business Risks" and elsewhere in our Management's Discussion and Analysis of Operating Results and Financial Position for the year ended December 31, 2009 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. %SEDAR: 00020333EFor further information: Alice Dunning, MBA, CFA  Director, Corporate CommunicationsCML HealthCare Income Fund  (905) 565-0043 Ext. 3472 (905) 565-1776 fax Email: dunninga@cmlhealthcare.comTom Weber, CA Chief Financial OfficerCML HealthCare Income Fund (905) 565-0043 Ext. 3402 (905) 565-1776 fax Internet: www.cmlhealthcare.com