On April 22, 2010, MedQuist and its majority shareholder, CBay Inc. ("CBay"), completed the acquisition of substantially all of the assets of Spheris, Inc. ("Spheris") out of bankruptcy. MedQuist acquired all the U.S. assets and the client base of Spheris. CBay acquired the India-based workforce and facilities of Spheris, so as to avail MedQuist with additional offshore capacity. The benefits of this acquisition are not expected to be fully reflected in results until the fourth quarter of 2010 and into first quarter 2011.
The purchase price for the Spheris assets acquired by the Company was approximately $112.4 million, consisting of approximately $98.8 million in cash, plus a promissory note with a fair value of $13.6 million.
The following results for both the three months and six months ended June 30, 2010 include the Spheris results from the acquisition date.
Net revenues for the three months ended June 30, 2010 increased $20.1 million or 25.9% to $97.5 million compared to $77.5 million for the three months ended June 30, 2009. The acquisition of Spheris contributed $26.4 million in incremental revenue for both the three-months and six-months, offset by value-based price reductions and lower product and field service revenues.
Prior to its acquisition, Spheris had been experiencing significant client defections, in large part, due to the adverse impact of its deteriorating financial condition. The revamped senior executive team has begun to integrate MedQuist methodologies and processes into the Spheris service delivery model to better address client needs and stabilize the risk of future client defections. However, the lag effect of client terminations may negatively impact our post-acquisition revenue through at least the fourth quarter 2010.
Operating income for the second quarter of 2010 improved to $4.6 million when compared to $1.0 million reported for the second quarter of 2009.
Total operating costs and expenses increased by 21.5% to $93.0 million from $76.5 million reported in the prior year second quarter primarily due to the inclusion of Spheris operating costs, and acquisition related costs of $4.8 million. Also included in second quarter costs and expenses were legal proceedings and settlement expenses and restructuring charges in the amount of $1.1 and $0.9 million, respectively.
Net income for the second quarter of 2010 was $0.9 million or $0.02 per diluted share compared to $0.8 million and $0.02 per diluted share reported in the prior year comparable period.
Net revenues for the six months ended June 30, 2010 increased by $15.1 million to $171.5 million compared to $156.4 million for the six months ended June 30, 2009. The $26.4 million of incremental revenue from Spheris since its acquisition was offset by value-based price reductions and lower product and field service revenues. Operating income increased $3.7 million, up 45% over prior year results.
Net income for the six-months was $8.2 million or $0.22 per diluted share compared to $7.7 million and $0.20 per diluted share reported in the prior year comparable period.
Adjusted EBITDA increased $3.1 million to $17.1 million for the second quarter of 2010, compared to $14.0 million for the second quarter of 2009. For the six-month period, Adjusted EBITDA increased $3.9 million to $30.2 million compared to $26.3 million in the comparable period. (For more information regarding the Adjusted EBITDA and our use of this non-GAAP financial measure, see below under the heading "Use of non-GAAP Financial Information")
"We are pleased with our operating performance for the second quarter of 2010; reflecting our ability to provide a value proposition to our clients and our progress to date in the integration of Spheris," said CEO Peter Masanotti.
"We increased Adjusted EBITDA by 22.3% over the prior year same quarter, despite an increasingly competitive market environment, as the Spheris acquisition helped expand our client base and provides us continuing opportunities to realize operating efficiencies through the increased use of technology and an expanded use of offshore labor.
"Integration savings of approximately $7 million, resulting from the scale made available through the Spheris acquisition, are expected to be realized in the fourth quarter of 2010. The Company anticipates that its integration activities will be substantially completed during the first quarter of 2011."
Since CBay became our majority owner in August 2008, we have focused our efforts on stabilizing our existing client base and creating a value proposition for our clients through:
- increasing use of technology applications in both our processes and those of our clients - including, tailoring our proprietary clinical documentation workflow management system for client specific solutions and increased integration of speech recognition technology
- increasing use of offshore transcription and editing work
- delivering unparalleled, high quality services and opportunities to drive down price for our clients
The size of our global medical transcriptionist and editor pool allows us to quickly and efficiently provide our clients with the labor resources necessary to implement comprehensive, scalable solutions.
We expect that the impact of the above actions and the increased scale from the Spheris acquisition will continue to be reflected in lower operating costs and improved margins; as we continue to share the benefits of a shrinking cost base and enhanced technologies with our clients through profitable, competitive pricing.
Use of non-GAAP Financial Information.
In addition, to the United States generally accepted accounting principles, or GAAP, results provided throughout this document, MedQuist has provided Adjusted EBITDA data that is a non-GAAP financial measurement. Adjusted EBITDA is Net income excluding taxes, interest, equity in income of an affiliated company, depreciation, amortization, cost of legal proceedings and settlements, acquisition and integration related charges, restructuring charges and certain non-recurring accrual reversals.
Management believes that this non-GAAP financial measure used to manage the business may provide our investors with useful information in addition to the GAAP financial measures presented here. The tables attached to this press release include a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure and a description of why we believe the non-GAAP financial measure is useful to investors.
Forward-Looking Statements
This report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, the industry in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as "projects," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "should," "would," "could," "will," "opportunity," "potential" or "may," variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are only predictions and, as such, are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. For a discussion of these risks, uncertainties and assumptions, any of which could cause our actual results to differ from those contained in the forward-looking statement, see the section of MedQuist's Annual Report on Form 10-K for the year ended December 31, 2009, entitled "Risk Factors" and discussions of potential risks and uncertainties in MedQuist's subsequent filings with the Securities and Exchange Commission.
MedQuist Inc. and Subsidiaries | ||||||||||
Consolidated Statements of Operations | ||||||||||
(In thousands, except per share amounts) | ||||||||||
Unaudited | ||||||||||
Three months ended | Six months ended | |||||||||
June 30, | June 30, | |||||||||
2010 | 2009 | 2010 | 2009 | |||||||
Net revenues | $ 97,528 | $ 77,471 | $ 171,509 | $ 156,415 | ||||||
Operating costs and expenses: | ||||||||||
Cost of revenues | 67,090 | 51,357 | 116,923 | 105,225 | ||||||
Selling, general and administrative | 10,020 | 8,451 | 18,817 | 17,889 | ||||||
Research and development | 3,312 | 2,380 | 5,593 | 4,796 | ||||||
Depreciation | 2,786 | 2,669 | 4,696 | 5,221 | ||||||
Amortization of intangible assets | 3,015 | 1,504 | 4,835 | 3,015 | ||||||
Cost of legal proceedings and settlements | 1,109 | 10,134 | 2,152 | 12,058 | ||||||
Acquisition and integration related charges | 4,765 | - | 5,659 | - | ||||||
Restructuring charges | 870 | - | 930 | - | ||||||
Total operating costs and expenses | 92,967 | 76,495 | 159,605 | 148,204 | ||||||
Operating income | 4,561 | 976 | 11,904 | 8,211 | ||||||
Equity in income of affiliated company | 32 | 356 | 546 | 428 | ||||||
Interest income (expense) | (3,633) | 19 | (3,779) | 65 | ||||||
Income before income taxes | 960 | 1,351 | 8,671 | 8,704 | ||||||
Income tax provision | 80 | 515 | ||||||||
