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Press release from Marketwire

CML HealthCare Inc. Reports 2010 Year-End Financial Results

Friday, March 04, 2011

CML HealthCare Inc. Reports 2010 Year-End Financial Results06:00 EST Friday, March 04, 2011MISSISSAUGA, ONTARIO--(Marketwire - March 4, 2011) - CML HealthCare Inc. (the "Corporation" or "CML"), (TSX:CLC) today reported the financial results of CML HealthCare Income Fund (the "Fund") for the three and twelve-month periods ended December 31, 2010 (all amounts are in Canadian dollars, unless noted otherwise). Consolidated Financial Highlights: (C$ million except percent & per share amounts)Twelve-months ended Dec. 31, 2010 ("F2010")Twelve-months ended Dec. 31, 2009 ("F2009")% Change in F2010Three- months ended Dec. 31, 2010 ("Q4 2010")Three- months ended Dec. 31, 2009 ("Q4 2009")% Change in Q4 2010Revenue480.4518.5(7.3%)118.5128.0(7.4%)Operating, general, & administration expenses355.3378.4(6.1%)88.693.8(5.5%)EBITDA(1)125.1140.1(10.7%)29.934.2(12.6%)EBITDA(1) Margin26.0%27.0%(3.7%)25.2%26.7%(5.6%)Goodwill impairment32.150.0(35.8%)32.150.0(35.8%)Asset impairment19.1-na19.1-naNet Earnings/(Loss)31.455.5(43.4%)(32.4)(17.6)(85.0%)Earnings per unit0.350.62(43.5%)(0.36)(0.20)(80.0%)Cash provided by operating activities108.4131.7(17.7%)29.232.6(10.3%)Distributable cash(2)101.9106.4(4.2%)24.125.4(5.4%)Distributions declared96.196.00.1%24.024.00.0%Payout ratio94.3%90.2%4.5%99.9%94.4%5.8% Q4 Headlines: Reimbursement cuts announced in the U.S. at the end of 2010, along with the industry related volume declines during the year and considering the current healthcare and economic environments; led to changes in assumptions associated with our year-end asset impairment tests, resulting in impairment charges for goodwill of $32.1 million and long-lived assets of $19.1 million; Achieved U.S. cost savings targeted in F2010 of $1.0 million per quarter, run-rate, including the realization of cost-savings associated with the RIS/PACS upgrade in Maryland;Reconfiguration of our central laboratory to further enhance quality and cost effectiveness is progressing on plan; Secured $1.5 million in additional technical-fee funding for medical imaging from the Ontario Ministry of Health and Long-Term Care (the "MOH") for fiscal year 2010; and "The imaging market in the U.S. continues to be challenging. While we are pleased volumes have generally stabilized in the fourth quarter relative to the third quarter, and normalized margins were in line with the third quarter, reimbursement cuts announced in December will negatively affect this business in the future," said Paul Bristow, President and CEO of CML. "We continue to aggressively pursue cost minimization initiatives mitigating these challenges. ," continued Mr. Bristow. "In Q4 2010, plans for the reconfiguration of our chemistry platform at our central laboratory in Mississauga, Ontario were finalized, new equipment was installed, and implementation of its automation will occur on a staged basis with completion by Q2 2011. The redesign is expected to provide work flow improvements and increased efficiency. As well, during the quarter, we assumed laboratory testing services from a local hospital in New Liskeard, Ontario which will add approximately $0.6 million to annual revenues" said Mr. Bristow. "In addition to executing on our previously announced initiatives including the implementation of RIS/PACS at selected sites in British Columbia and Ontario, and the refurbishment of our specimen collection and imaging centres in Canada, we are currently evaluating automation of elements of our microbiology and haematology platforms to enhance quality and service, cost effectively. These initiatives will allow us to improve on our commitment to provide healthcare services with Care. Confidence. Comfort.® to our patients, and to drive shareholder value.""Although we are forecasting continued challenges in the U.S. in the near term, our Canadian business, which continues to be very stable and accounts for approximately 94% of our EBITDA, generates the cash flow necessary to support our dividend. For the balance of 2011, we anticipate the current dividend level of $0.755 per share per annum will be maintained. However, any decision to declare and pay dividends on the Company's common shares will be made by the Company's Board of Directors, in its sole and absolute discretion, upon consideration of the Company's earnings, financial and operational requirements, and such other factors and conditions it deems advisable at a future time," said Mr. Bristow."There were developments at the end of F2010 in the U.S. that negatively impact reimbursements effective January 1, 2011," said Tom Weber, Executive Vice President and CFO of CML. "As fully described in Note 16 of our F2010 Notes to Financial Statements, the changes relate to bundling of certain CT reimbursement codes and a decrease in the conversion factor used in the formula to determine Medicare reimbursement rates for all modalities," continued Mr. Weber. "As a result of these developments and volume declines during 2010, and considering the current health care and economic environments, we updated the assumptions in our annual goodwill and intangible asset impairment tests. This resulted in a goodwill impairment charge of $32.1 million and a long-lived asset impairment charge of $19.1 million in 2010." Mr. Weber noted, "these non-cash accounting charges are required under Canadian Generally Accepted Accounting Principles". Financial Results Twelve Months Ended December 31 For the twelve months ended December 31, 2010 ("F2010"), revenue of $480.4 million compared to $518.5 million for the same period in 2009 ("F2009"). Canadian imaging and non-cap laboratory services experienced organic growth, and laboratory capped revenue increased based on the funding agreement with the MOH, resulting in an aggregate 1.7% increase in revenue from Canadian operations. This increase was, however, more than offset by decreased revenue from our U.S. imaging business. F2010 U.S. revenue was negatively affected by challenging economic and industry issues including:Decline in physicians' office visits, and hence, medical imaging referrals as the U.S. economic downturn has led to high unemployment and the loss of employer funded health benefits. As well, there has been a trend for employers to switch to higher deductible or co-pay health insurance programs leading the insured to be more discriminating on screening procedures; There continues to be a focus on excessive radiation exposure associated with CT scans, resulting in a decline in requisitions for this high-end modality; Medicare announced several reimbursement cuts: i) equipment utilization rate assumption on high-end modalities was increased from 50% to 60% in 2010, thereby reducing associated reimbursement rates; and ii) the discount to reimbursement for scanning of contiguous body part was increased from 25% to 50% effective July 1, 2010; and Introduction of pre-authorization programs by certain payors in markets where we operate led to lower utilization rates for high-end imaging modalities. In addition to U.S. industry issues listed above, the decline in F2010 revenue compared to the same period in F2009 was also impacted by:$27.8 million as a result of the accounting for the new Management Services Agreement (MSA) with the radiologist group in Maryland (no impact on EBITDA or net earnings); $15.5 million from foreign exchange as the Canadian dollar was higher in 2010 than in 2009; and Lower volumes in Q1 2010 resulting from inclement weather that closed referring physicians' offices for up to five days in certain markets where we operate; The above factors were partially offset by an increase of $13.0 million in new revenue from acquisitions in Rhode Island and Maryland completed in the second half of 2009.Operating, general and administrative ("OG&A") expenses totaled $355.3 million in F2010 compared to $378.4 million in F2009. Lower OG&A expenses in F2010 predominantly reflect:$27.8 million as a result of the accounting for the new MSA with the radiologist group in Maryland; $13.5 million from favorable foreign exchange rates; and Effective cost containment The above factors were partially offset by increased expenses associated with: $10.7 million in additional costs related to acquisitions completed in the second half of 2009 in Rhode Island and Maryland; $4.3 million in additional costs due to normal inflation and to support organic growth in Canada; $2.3 million due to Harmonized Sales Tax (HST) in Canada that took effect July 1, 2010; $1.5 million in non-recurring fees associated with the conversion from an income fund structure to a corporate structure; $1.4 million in tax refunds in F2009 that were not applicable in F2010 $0.4 million of cost associated with implementation of the Human Resources Information System (HRIS) and RIS/PACS; and F2010 EBITDA(1) was $125.1 million compared to $140.1 million in F2009. EBITDA(1) margin in F2010 of 26.0% was lower than 27.0% in F2009 largely as a result of fluctuations in foreign exchange, HST impact in Canada, and lower margins in the U.S. operations for reasons previously noted. The Fund's net earnings in F2010 of $31.4 million or $0.35 per unit were 43.4% lower than $55.5 million or $0.62 per unit in F2009. The reason for the decline is largely due to a tax recovery of $7.7 million in Canada in F2009 resulting from a decrease in Canadian statutory tax rates, not applicable in F2010, an increase in impairment loss of $1.2 million compared to F2009, and weak industry conditions in the U.S. as previously noted. Financial Summary (C$ millions, except percent amounts) (unaudited)Twelve-months ended Dec. 31, 2010Twelve-months ended Dec. 31, 2009Three-months ended Dec. 31, 2010Three-months ended Dec. 31, 2009Net earnings (loss) for the period31.455.5(32.4)(17.6)Less: recovery of income taxes(6.0)(13.6)0.2(10.1)Add: interest expense, net12.513.63.23.2Less: Loss on sale of property & equipment-0.3-0.1Add: Other expenses, net3.10.9(0.2)0.5Less: Foreign exchange gain(0.4)(0.2)(0.1)-Add: Amortization33.233.78.18.1Add: Impairment of long-lived assets19.1-19.1-Add: Goodwill impairment32.150.032.150.0EBITDA(1)125.1140.129.934.2Revenue480.4518.5118.5128.0EBITDA(1) margin as a percent of revenue26.0%27.0%25.2%26.7%Three Months Ended December 31 For the three months ended December 31, 2010 ("Q4 2010"), revenue totaled $118.5 million, and EBITDA(1) totaled $29.9 million, or 25.2% of revenue; compared to revenue of $128.0 million and EBITDA(1) of $34.2 million, or 26.7% of revenue for the three months ended December 31, 2009 ("Q4 2009"). The decrease in revenue was primarily attributable to difficult market conditions in the U.S. as previously discussed, as well as a stronger Canadian dollar compared to the U.S. dollar in Q4 2010 compared to the same quarter in 2009. With the total impairment loss of $51.2 million in Q4 2010 compared to an impairment loss of $50.0 million in Q4 2009, net loss was $32.4 million in Q4 2010 or $0.36 per unit compared to net loss of $17.6 million or $0.20 per unit in Q4 2009. Distributable Cash (2) For the year ended December 31, 2010, Distributable Cash(2) totaled $101.9 million compared to $106.4 million in F2009. With distributions declared of $96.1 million in F2010 and $96.0 million in F2009, payout ratios were 94.3% and 90.2% respectively. Please refer to Standardized Distributable Cash(2) and Distributable Cash(2) table below. Standardized Distributable Cash(3)& Distributable Cash(2)Table (C$000s)Twelve-months ended Dec. 31, 2010Twelve-months ended Dec. 31, 2009Three-months ended Dec. 31, 2010Three-months ended Dec. 31, 2009Cash flow from operating activities108,406131,72729,21832,562Less:Total capital expenditures as per consolidated statement of cash flows(21,552)(25,677)(3,401)(3,427)Expenditures relating to acquisition of licenses & intangible assets(6,142)(5,176)(2,222)(2,279)Standardized distributable cash(3)80,712100,87423,59526,856Adjustments:Non-cash working capital items:Normalizing adjustments to non-cash working capital items(4)6,782(5,323)(2,754)(1,486)Capital Expenditures:Add back:Intangible asset acquired1,6481,319(9)-One time capital expenditures18,64411,2204,2251,805Changes in capital expenditure notional reserve(7,198)825(2,179)(192)Capital lease payments(1,503)(224)(399)(167)Discretionary/non-recurring (recovery) expenses(5)3,8915331,573185Cash available for distribution102,976109,22424,05227,001Non-recurring revenue/expense recoveries/supplier incentive(6)(1,065)(2,864)-(1,588)Distributable cash(2)101,911106,36024,05225,413Distributions declared to unitholders96,07195,97424,03023,996Distributions declared as a percent of Distributable Cash(2)94.3%90.2%99.9%94.4%Distributions declared as a percent of Standardized Distributable Cash(3)119.0%95.1%101.8%89.3%Weighted average number of Fund units outstanding in the period89,842,40489,842,40489,842,40489,842,4043 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 Company 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 December 31, 2009 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; amounts loaned to an officer; payments relating to new MSA with the radiologist group at ARS; operating receivable claw back; settlement of non-operating receivable; ARS tax refunds related to pre-acquisition periods; and non-recurring settlement of a pre-acquisition liability relating to ARS. 5 Discretionary/Non-recurring expenses represent one-time legal and professional corporate conversion fees; payments related to the new MSA; SAR's expense due to additional distribution in December 2010; prior period payment for software licenses; pre-implementation costs related to certain business re-engineering projects; one-time payment relating to restructuring; a one-time tax adjustment; a one-time write off of a deposit; and non-recurring commodity tax expense. 6 Non-recurring revenue represents retroactive payments for professional and lab fees from MOH, retroactive payments in British Columbia; retroactive MOH cap adjustment; non-recurring commodity tax recoveries and adjustments for supplier incentive. Segmented Highlights Canadian Operations(C$ millions, except percent amounts)Twelve-months ended Dec. 31, 2010Twelve-months ended Dec. 31, 2009Three-months ended Dec. 31, 2010Three-months ended Dec. 31, 2009(Unaudited)Revenue368.4362.194.592.0OG&A251.0241.165.661.0EBITDA(1)117.4121.028.930.9EBITDA(1) margin31.9%33.4%30.6%33.6%Net earnings for the period89.2102.021.931.7F2010 and Q4 2010 revenue increase in Canada compared to the corresponding periods in 2009 reflect primarily: i) organic growth in imaging services and non-cap lab services; and ii) increase in laboratory revenue based on the capped laboratory agreement with the MOH. F2010 and Q4 2010 OG&A increased over the same periods in 2009 due to: i) increased costs due to normal inflation and to support organic growth; ii) professional fees associated with the conversion from an income trust structure to a corporate structure; iii) the impact of HST which came into effect on July 1, 2010; iv) costs relating to the HRIS and RIS/PACS projects; and v) $1.4 million in tax refunds in F2009 not applicable in F2010. Lower EBITDA margins in F2010 and Q4 2010 compared to the same period in 2009 is an inherent result of the factors previously noted.U.S. Operations(US$ millions, except percent amounts)Twelve-months ended Dec. 31, 2010Twelve-months ended Dec. 31, 2009Three-months ended Dec. 31, 2010Three-months ended Dec. 31, 2009(Unaudited)Revenue108.8136.923.734.1OG&A101.3120.222.731.0EBITDA(1)7.516.81.03.1EBITDA(1) margin6.9%12.3%4.2%9.1%Goodwill impairment32.347.832.347.8Impairment of long-lived assets19.2-19.2-Net earnings (loss) for the period(57.9)(44.8)(54.6)(47.0)F2010 and Q4 2010 revenue was lower than the same period in 2009 as a result of: i) the accounting for the new MSA with the radiologist group in Maryland; ii) inclement weather in Q1 2010 resulting in fewer operating days; iii) decreased reimbursement rates; and iv) lower volumes associated with industry and economic conditions, partially offset by an increase in revenue from acquisitions completed in the second half of 2009 in Maryland and Rhode Island. Relative to Q3 2010, Q4 2010 revenue was lower by US$1.6 million, $0.4 million of which was due to one less operating day in the fourth quarter, and US$1.1 million due to changes in estimates in respect of the allowances for contractual adjustments. OG&A declines in both F2010 and Q4 2010 compared to the prior year was primarily as a result of: i) the accounting for the new MSA with the radiologist group in Maryland; ii) effective cost containment, partially offset by increased expenses associated with acquisitions completed in the second half of 2009 in Maryland and Rhode Island. Lower EBITDA margins in F2010 and Q4 2010 compared to the same period in 2009 is an inherent result of the factors previously noted. Goodwill and long-lived asset impairment totaled US $51.5 million in F2010 and Q4 2010 compared to US$47.8 million in the corresponding periods in 2009. Balance Sheet As at December 31, 2010, CML had working capital of $26.1 million, including cash and cash equivalents of $9.7 million, compared to working capital of $25.2 million, including cash and cash equivalents of $21.8 million as at December 31, 2009. Long-term debt, including the current portion and net of cash and cash equivalent, was $325.5 million as at December 31, 2010 compared to $298.7 million as at December 31, 2009. As at December 31, 2010, CML had $49.4 million available under the revolving credit facility. As at December 31, 2010, there were 89,842,404 Fund units issued and outstanding. Board of Directors On March 3, 2011, the Board of Directors of CML elected Patrice Merrin, a CML Director and Chair of the Compensation Committee since 2008 to Chair the Board. Ms. Merrin succeeds outgoing Chairman Stephen Wiseman who remains a Director and Chair of the Audit Committee. The Board expressed its gratitude to Mr. Wiseman for his nearly four years of service to the Corporation as Chairman. Notice of Conference Call Management of CML HealthCare Inc. will host a conference call today, Friday, March 4, 2011 at 10:00 am (EST) to discuss the Fund's 2010 year-end 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 Friday, March 18, 2011 by calling 905-694-9451 or 800-408-3053, reference number 8870840.(1) The Fund defines EBITDA as earnings before interest, taxes, amortization, other expenses-net, goodwill and long-lived asset impairment, gain/loss on disposals of property and equipment, and foreign exchange gain. 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.To view the Fund's F2010 Financial Statements and Notes to Financial Statements, please click here: http://media3.marketwire.com/docs/cml_0304_2011_fs_and_notes.pdfAbout CML HealthCare Inc. CML HealthCare Inc. is one of North America's largest community-based healthcare services provider. 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 Inc. is publicly-traded on the Toronto Stock Exchange under the symbol "CLC" and has approximately 89.8 million common shares outstanding. To reach CML HealthCare Inc. via the worldwide web, log on to www.cmlhealthcare.com. Caution concerning forward-looking statements This 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 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 share price; nature of the shares; fluctuations in cash dividends and capital investment; leverage and restrictive covenants; timing and amount of capital expenditures; restrictions on potential growth; tax-related risks; redemption right; dilution; and future sales of shares. 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 U.S.; 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 of the Fund's Annual Information Form, under "Business Risks" and elsewhere in the following Management's Discussion and Analysis of Operating Results and Financial Position 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. Any forward-looking statements included herein are expressly qualified in their entirety by this cautionary language.FOR FURTHER INFORMATION PLEASE CONTACT: Alice DunningCML HealthCare Inc.Director, Corporate Communications(905) 565-0043 ext.3472(905) 565-2844 (FAX)ORTom WeberCML HealthCare Inc.Chief Financial Officer(905) 565-0043 ext. 3204(905) 565-2844 (FAX)www.cmlhealthcare.com