Spheris Reports Third Quarter 2008 Results
Financial Highlights--Third quarter of 2008
Net revenues for the third quarter of 2008 were $44.7 million comparedwith $48.9 million in the third quarter of 2007. The decrease in net revenueswas due primarily to the impact of net lost business and lower averagepricing.
Operating income for the third quarter of 2008 was $1.2 million, or 2.7%of net revenues, compared with operating income of $1.5 million, or 3.1% ofnet revenues, in the third quarter of 2007. The decrease in operating incomewas due to lower net revenues, accelerated technology investments to furtherdevelop and enhance our product and service offerings, as well as costsassociated with the expansion of our global capacity. These costs werepartially offset by operational cost savings from increased utilization of ourglobal production workforce and speech recognition technologies, in additionto other cost savings initiatives.
The Company defines Adjusted EBITDA as earnings before interest, taxes,depreciation and amortization, and other expense or income. Adjusted EBITDAfor the third quarter of 2008 was $7.0 million, or 15.7% of net revenues,compared with $7.6 million, or 15.5% of net revenues, in the third quarter of2007. The decrease in Adjusted EBITDA was due primarily to the impact oflower net revenues and the accelerated technology investments described above.
Adjusted EBITDA is a financial measure not computed in accordance withUnited States generally accepted accounting principles, or GAAP. Please referto the "Supplemental Financial Information" and related note contained in thispress release for further discussion and reconciliation of Adjusted EBITDA toGAAP financial measures.
Financial Highlights--First Nine months of 2008
Net revenues for the nine month period ended September 30, 2008 were$141.1 million compared with $151.8 million in the prior-year period. Thedecrease in net revenues was due primarily to the impact of net lost businessand lower average pricing.
Operating income for the nine month period ended September 30, 2008 was$1.0 million, or 0.7% of net revenues, compared with operating income of $6.1million, or 4.0% of net revenues, in the prior-year period. During the firstquarter of 2008, the Company recorded $1.3 million of expenses relating to atransaction that was not consummated. Excluding these transaction costs,operating income would have been $2.3 million, or 1.6% of net revenues, forthe nine month period ended September 30, 2008. In addition to the impact ofthe transaction costs, the decrease in operating income was due primarily tolower net revenues as described above, accelerated technology investments tofurther develop and enhance our product and service offerings, as well ascosts associated with the expansion of our global capacity. These costs werepartially offset by operational cost savings from increased utilization of ourglobal production workforce and speech recognition technologies, in additionto other cost savings initiatives.
Adjusted EBITDA for the nine month period ended September 30, 2008 was$18.7 million, or 13.3% of net revenues, compared with $24.3 million, or 16.0%of net revenues, in the prior-year period. Excluding the $1.3 million oftransaction related expenses noted above, Adjusted EBITDA would have been$20.0 million, or 14.2% of net revenues, for the nine month period endedSeptember 30, 2008. The decrease in Adjusted EBITDA was primarily due to theimpact of lower net revenues, accelerated technology investments, andtransaction costs described above.
Commenting on the third quarter 2008 results, Steven E. Simpson, Presidentand Chief Executive Officer of Spheris, stated, "The third quarter andyear-to-date results reflect the challenges in today's marketplace, but weremain encouraged by opportunities we are seeing. As our technologydevelopments progress, we continue to accelerate the efficiencies gained fromboth our speech recognition tools and global resources. We have receivedpositive feedback as a result of successfully demonstrating the new featuresand functionality through an intensive pilot program that led to signing asignificant new account."
Simpson added, "Even though we are pleased with the products coming out ofdevelopment, our goal remains to be the first to market with an end-to-endclinical documentation technology and service offering."
Balance Sheet Highlights
As of September 30, 2008, the outstanding indebtedness under the Company'ssenior secured credit facility was $77.3 million and the outstandingindebtedness under the Company's senior subordinated notes was $125.0 million.
As of September 30, 2008, Spheris held $9.9 million in unrestricted cashand cash equivalents and had $17.7 million of borrowing capacity under theCompany's senior secured credit facility. During the first nine months of2008, the Company generated $1.0 million of cash from operating activitiescompared with $9.8 million during the same period in 2007. The decrease incash generated from operating activities was attributable to the year overyear change in operating performance, timing of wages and benefit payments,and the current period payment of certain security deposits, as offset by thefavorable impact of improved collections on accounts receivable.
Investor Conference Call and Webcast
Spheris will host a conference call on November 13, 2008, at 8 a.m. CT.The number to call for this interactive teleconference is (303) 262-2130.Following the conference call, the audio replay will be available for one weekby dialing (303) 590-3000 and entering the confirmation number, 11111017#.The live broadcast of Spheris' quarterly conference call will be availableonline at www.spheris.com and http://www.videonewswire.com/event.asp?id=52756on November 13, 2008, at 8 a.m. CT. The online replay will be availableshortly after the call and will continue to be available for 30 days.
Spheris is a leading global provider of clinical documentation technologyand services to more than 500 health systems, hospitals and group practicesthroughout the U.S. Spheris offers a highly advanced, Web-based technologyplatform blended with Spheris' outsource services. Spheris employsapproximately 5,000 skilled medical language specialists supporting theCompany's clients through a secure network. Using a Follow the Sun(sm) servicestrategy, customer support is provided 24 hours a day, 365 days a year with anemphasis on verifiable quality, turnaround time and pricing. Spheris'corporate headquarters is located in Franklin, Tenn. For more information,please visit www.spheris.com .
This press release contains statements as to the Company's beliefs andexpectations of the outcome of future events that are forward-lookingstatements as defined within the meaning of the Private Securities LitigationReform Act of 1995. These forward-looking statements are subject to risks anduncertainties as described in the filings made from time to time by theCompany with the Securities and Exchange Commission, including, withoutlimitation, the following: (i) the effect our substantial indebtedness has onour ability to raise additional capital to fund our business, to react tochanges in the economy or our business and to fulfill our obligations underour indebtedness, including our ability to meet financial covenants and otherconditions of our senior secured credit facility and indenture governing oursenior subordinated notes; (ii) our history of losses and accumulated deficit;(iii) our ability to effectively manage our global production capacity,including our ability to recruit, train and retain qualified medical languagespecialists and maintain high standards of quality service in our operations;(iv) our ability to adapt and integrate new technology into our clinicaldocumentation platforms to improve our production capabilities and expand thebreadth of our technology and service offerings; (v) our ability to maintainour competitive position against current and future competitors, including ourability to gain new business with acceptable operating margins and ongoingprice pressures related to our technology and services and the healthcaremarkets in general; (vi) the reluctance of potential customers to outsource orchange providers of their clinical documentation technology and services andits impact on our ability to attract new customers and increase revenues;(vii) financial and operational risks inherent in our global operations,including foreign currency exchange rate fluctuations and transfer pricinglaws between the United States and India; (viii) our ability to attract, hireor retain technical and managerial personnel necessary to develop andimplement technology and services to our customers; (ix) the effect on ourbusiness if we incur additional debt and assume contingent liabilities andexpenses in connection with future acquisitions or if we cannot effectivelyintegrate newly acquired operations; and (x) our ability to adequately protectour intellectual property rights, including our proprietary technology and theintellectual property we license from third parties.
Note to Supplemental Financial Information
The Company defines Adjusted EBITDA as earnings before interest, taxes,depreciation and amortization, and other expense or income (includingmark-to-market adjustments related to the Company's derivative financialinstruments). Adjusted EBITDA is a financial measure not computed inaccordance with United States generally accepted accounting principles, orGAAP. The Company believes that this non-GAAP measure, when presented inconjunction with the comparable GAAP measure, is useful to both management andinvestors in analyzing the Company's ongoing business and operatingperformance. The Company believes that providing the non-GAAP information toinvestors, in addition to the GAAP presentation, allows investors to view theCompany's financial results in the way management and the Company's seniorlenders view the Company's operating results. Management believes AdjustedEBITDA is useful as a supplemental measure of the performance of the Company'soperations because it isolates the Company's operating performance from theaccounting impact of the Company's financing strategies, tax provisions, anddepreciation and amortization. Additionally, since Adjusted EBITDA is asignificant component of certain financial covenants under the Company'ssenior secured credit facility agreement, management believes Adjusted EBITDAis useful for investors to better assess the Company's compliance with thesefinancial covenants. Management believes Adjusted EBITDA should be consideredin addition to, but not as a substitute for, items prepared in accordance withGAAP that are presented in this press release, as the items excluded in thepresentation of Adjusted EBITDA are significant components in understandingand assessing financial performance. A reconciliation of Adjusted EBITDA tothe nearest comparable GAAP financial measure is provided above. AdjustedEBITDA, as presented, may not be comparable to similarly titled measures ofother companies.The Company takes no responsibility for updating the information containedin this press release following the date hereof to reflect events orcircumstances occurring after the date hereof or the occurrence ofunanticipated events or for any changes or modifications made to this pressrelease. SPHERIS INC. Condensed Consolidated Statements of Operations (Unaudited and Amounts in Thousands) Three Months ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Net revenues $44,749 $48,943 $141,074 $151,795 Operating expenses: Direct costs of revenues (exclusive of depreciation and amortization below) 31,673 35,144 102,775 108,804 Marketing and selling expenses 400 1,186 2,276 3,755 General and administrative expenses 5,640 5,028 17,337 14,939 Depreciation and amortization 5,862 6,039 17,720 18,172 Total operating costs 43,575 47,397 140,108 145,670 Operating income 1,174 1,546 966 6,125 Interest expense, net of income 4,681 5,280 14,379 16,133 Loss on debt refinancing - 1,828 - 1,828 Other (income) expense 820 (149) 1,438 330 Net loss before income taxes (4,327) (5,413) (14,851) (12,166) Benefit from income taxes (1,736) (1,872) (5,569) (4,638) Net loss $(2,591) $(3,541) $(9,282) $(7,528) SPHERIS INC. Condensed Consolidated Balance Sheets (Amounts in Thousands, Except Share Amounts) (Unaudited) September 30, December 31, 2008 2007 Assets Current assets Unrestricted cash and cash equivalents $9,902 $7,195 Restricted cash 309 309 Accounts receivable, net of allowance of $1,387 and $1,569, respectively 30,514 33,595 Deferred taxes 4,635 3,386 Prepaid expenses and other current assets 5,365 4,460 Total current assets 50,725 48,945 Property and equipment, net 12,830 12,747 Internal-use software, net 1,712 1,932 Customer contracts, net 1,987 13,968 Goodwill 218,841 218,841 Deferred taxes 4,557 - Other noncurrent assets 5,808 3,689 Total assets $296,460 $300,122 Liabilities and stockholders' equity Current liabilities Accounts payable $2,911 $4,237 Accrued wages and benefits 12,540 18,130 Current portion of long-term debt and lease obligations 387 35 Other current liabilities 8,510 4,324 Total current liabilities 24,348 26,726 Long-term debt and lease obligations, net of current portion 199,907 191,761 Deferred tax liabilities - 92 Other long-term liabilities 4,742 4,857 Total liabilities 228,997 223,436 Commitments and contingencies Common stock, $0.01 par value, 100 shares authorized, 10 shares issued and outstanding - - Other comprehensive income 181 564 Contributed capital 111,600 111,158 Accumulated deficit (44,318) (35,036) Total stockholders' equity 67,463 76,686 Total liabilities and stockholders' equity $296,460 $300,122 SPHERIS INC. Condensed Consolidated Statements of Cash Flows (Unaudited and Amounts in Thousands) Nine Months Ended September 30, 2008 2007 Cash flows from operating activities: Net loss $(9,282) $(7,528) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 17,720 18,172 Amortization of acquired technology 162 486 Deferred taxes (5,898) (5,198) Change in fair value of derivative financial instruments 1,311 (10) Amortization of debt discounts and issuance costs 630 602 Loss on debt refinancing - 1,828 Other non-cash items 471 305 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 3,081 (345) Prepaid expenses and other current assets (991) (1,031) Accounts payable (1,326) (872) Accrued wages and benefits (5,590) (993) Other current liabilities 3,090 4,369 Other noncurrent assets and liabilities (2,385) (4) Net cash provided by operating activities 993 9,781 Cash flows from investing activities: Purchases of property and equipment (4,241) (3,086) Purchase and development of internal-use software (748) (558) Purchase of Vianeta, net of cash acquired - (1,547) Net cash used in investing activities (4,989) (5,191) Cash flows from financing activities: Proceeds from debt 7,288 71,320 Payments on debt and lease obligations (202) (76,051) Debt issuance costs - (583) Net cash provided by (used in) financing activities 7,086 (5,314) Effect of exchange rate change on cash and cash equivalents (383) 836 Net increase in unrestricted cash and cash equivalents 2,707 112 Unrestricted cash and cash equivalents, at beginning of period 7,195 6,323 Unrestricted cash and cash equivalents, at end of period $9,902 $6,435 Supplemental Schedule of Non-cash Investing and Financing Activities: Purchases of property and equipment and internal-use software through lease obligations $1,019 $- SPHERIS INC. Supplemental Financial Information (Unaudited and Amounts in Thousands) Three Months Ended Nine months Ended September 30, September 30, 2008 2007 2008 2007 Net loss $(2,591) $(3,541) $(9,282) $(7,528) Depreciation and amortization 5,862 6,039 17,720 18,172 Interest expense, net of income 4,681 5,280 14,379 16,133 Loss on debt refinancing - 1,828 - 1,828 Other (income) expense 820 (149) 1,438 330 Benefit from income taxes (1,736) (1,872) (5,569) (4,638) Adjusted EBITDA $7,036 $7,585 $18,686 $24,297
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