CML HealthCare third quarter revenue decreases 8.9% to $116.8 million

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Nov 11 2010

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:

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 EBITDAMargin 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. EBITDAmargins 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 Results

Three Months Ended September 30, 2010

For 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; and
Additional 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

Q3 2010 EBITDA totaled $31.8 million compared to $35.3 million in Q3 2009. EBITDA margin of 27.2% in Q3 2010 was slightly lower than Q3 2009 of 27.6%. Note that EBITDA 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, 2010

For the first nine months of 2010, the Fund reported revenue of $361.9 million, OG&A expenses of $266.7 million, EBITDA 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 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

For the three month period ended September 30, 2010, the Fund generated distributable cash 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 cashof $28.6 million and declared distributions totaling $24.0 million, representing a payout ratio of 83.8%.

Segmented Highlights

Canadian Operations

Revenue 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 EBITDAmargins in Q3 2010 compared to the same period in 2009 are the result of the factors previously noted.

U.S. Operations

Both 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 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

Adjusting for the changes in the contractual allowance estimate as described in Note 7, Adjusted EBITDA margins improved from 10.7% in Q2 2010 to 11.4% in Q3 2010.

Balance Sheet

As 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.