InfuSystem Holdings, Inc.
Q2 2014 Earnings Call Transcript

Published: 1 Aug 2014

[Operator:]

Good morning, everyone, and welcome to the InfuSystem Holdings Second Quarter 2014 Conference Call. This is your operator, Sylvia. Let me first give you to Mr. Jonathan P. Foster, Chief Financial Officer.

[Jonathan P. Foster:]

Good morning. First of all, let me get some administrative matters out of the way. The company issued a press release this morning. The release is available on most financial websites. Additionally, a web replay will be available on the company's website for 30 days. Both the press release on Form 8-K and the company's Form 10-Q for the second quarter of 2014 have been filed with the SEC this morning. Except for the historical information contained herein, the matters discussed in this conference call are forward-looking statements within the meaning of the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities Exchange Act of 1934 that involve risk and uncertainties that could cause actual results to differ materially from those predicted by such forward-looking statements. These risk and uncertainties include general economic conditions, as well as other risks detailed from time to time in InfuSystem's publicly filed documents. Specifically, information about risk and uncertainties that could cause the company's actual results and financial condition to differ from those predicted by forward-looking statements are disclosed in the company's annual report on Form 10-K for the year ended December 31, 2013, under the heading Risk Factors, and elsewhere in the report, and that may be updated from time to time in the quarter release Form 10-Q, including the Forms 10-Q for the most recent quarter and the form 8-K filed this morning. The company has no obligation to update the forward-looking information contained in this conference call. While discussing the company's performance, the company will refer to certain non-GAAP measures, such as adjusted EBITDA, which is not considered a measure of financial performance under Generally Accepted Accounting Principles. A reconciliation of the differences between non-GAAP financial measures, such as adjusted EBITDA and the most comparable GAAP measure, is contained in the company's press release, as previously mentioned. With that, I would like to turn the call over to Mr. Eric Steen, our Chief Executive Officer.

[Eric K. Steen:]

Good morning, everyone, and thank you for joining the InfuSystem Holdings Inc. 2014 second quarter conference call. Joining me today are Jan Skonieczny, Chief Operating Officer; and Jon Foster, Chief Financial Officer. There are 3 things that I would like to talk about today

[Janet Skonieczny:]

Thank you, Eric. July was quite an active and complicated month on the CMS front. We're still digesting the information and quite frankly, waiting for clarity from CMS on the specifics. CMS did make 2 major announcements pertaining to competitive bidding in the first part of July. The first related to a proposed rule on how to address CMS fee schedules in rural areas not currently part of either the round 1 or round 2 Recompete. This rule proposes methodology to use information from CMS' competitive bid program experienced to adjust the CMS reimbursement in these areas. The major provisions in this proposal are

[Eric K. Steen:]

Thank you, Jan, for that in-depth update on CMS. Speaking of government reimbursement, I'm proud to announce that InfuSystem, as a leader in home infused and services, has joined the National Home Infusion Association's Future of Infusion Advisory Council. I look forward to supporting and becoming personally involved in NHIA's efforts to lobby our legislatures to provide more funding for infusion therapy in the home. The patients home should never be referred to as an alternate site of care, but should be referred to as the preferred site of care due to not only the intuitively obvious and documented savings that home infusion provides, but also the important healing benefits of being at home with family and loved ones during both treatment and recovery. NHIA contracted with Avalere, a respected Washington DC-based health care policy firm, to study the cost savings that Medicare could realize if there was an appropriate home infusion benefit. Avalere's recently released reported in white paper support legislation that will soon be introduced to Congress. Lastly, let me touch on guidance. I am pleased with our results to date and in continuing guidance of high-single-digit revenue growth through the end of 2015. Now I'd like to ask Jon Foster to take us through the numbers.

[Jonathan P. Foster:]

Thank you, Eric. First, let me discuss our cost of debt. As I mentioned in our last call, we were working on reducing our cost of debt. On May 9 our recent consistent profitable performance enabled us to enter into the Second Amendment with Wells Fargo and PennantPark to reduce our cost of debt by 150 basis points going forward. This was done with no amenities, just a simple reduction in the interest rates. We explored avenues with lower rates, but such transaction would have come with hefty early termination fees with the current lenders and underwriting and closing fees and expenses. Management will continue to balance future debt requirements to current debt cost structure, any change in covents and the cost benefits if any potential credit agreement to provide the best debt structure for InfuSystem and our shareholders. As I've mentioned in previous calls, InfuSystem has a positive and collaborative relationship with Wells and PennantPark, one we greatly appreciate. Now we'll discuss the financial results for the second quarter in more detail. Revenues in the second quarter of 2014 were $16.4 million, up $1.7 million or 12% from $14.7 million in the second quarter of 2013. During the period, net revenues from rentals increased 9%, while net revenues from product sales increased 51% over the same period in 2013. Revenues for the 6 months ended June 30, 2014 was $33.6 million, 14% increase over the same prior year period. During the period, net revenues from rentals increased 10%, while net revenues from product sales increased 72% over the same period in 2013. The increase in revenues was primarily related to the addition of new customers and increased penetration into existing customer count, both in sales and rentals. Recall that we had an opportunistic product sale during Q1 of a particular pump at a low gross margin that resulted in $0.9 million in additional revenue. Gross profit for the 3 months ended June 30, 2014 was $11.9 million, a 15% increase compared to the same prior year period. For the 6 months ended June 30, 2014, gross profit was $24 million, an increase of $3.2 million, or 16%, over the same prior year period. As previously discussed last quarter, we reassessed the estimated useful life of certain property and equipment, and as a result, the estimated useful life of our medical equipment was changed from 5 to 7 years. A major factor in this change are the servicing of such equipment by our Kansas facility. Provision for doubtful accounts for the quarter ended June 30, 2014 was $1.4 million, an increase of $0.1 million, or 8%, compared to the $1.3 million for the quarter ended June 30, 2013. The provision for doubtful accounts was 9% of revenues at June 30, 2014, consistent with the same period in the prior year. The flattening of bad debt during the quarter demonstrates that our efforts to collect on patient pay are beginning to take hold. Provision for doubtful accounts for the 6 months ended June 30, 2014 was $3.5 million, compared to $3 million for the same prior year period. This represents an increase of 19%. The provision for doubtful accounts was 11% of revenue at June 30, 2014 and very comparable to the 10% revenue the same prior year period. Our allowance for doubtful accounts -- for accounts receivable in the balance sheet as of June 30, 2014 was $5.6 million, down from the Q1's allowance of $5.9 million. Amortization of intangible assets for the quarter ended June 30, 2014 was $0.6 million, a decrease of 4% compared to $0.7 million in the same prior year period. Year-to-date, amortization as of June 30, 2014, was $1.3 million, consistent with the same prior year period. During the quarter ended June 30, 2014, selling and marketing expenses were $2.6 million, an increase of $0.1 million or 6%, compared to $2.5 million for the quarter ended June 30, 2013. Selling and marketing expenses for the 6 months ended June 30, 2014 were $5.3 million, compared to $4.9 million for the same prior year period, an increase of $0.4 million or 8%. These increases were largely attributed to increased commissions based on higher revenue for the comparable periods. As a percent of revenue, selling is down by 1% for both the quarter and the 6 months. During the quarter ended June 30, 2014 our G&A expenses were $4.9 million, just slightly down from the $5 million for the quarter ended June 30, 2013. The decrease in G&A expense versus the same prior year period was mainly attributed to savings of $0.7 million in professional fees, offset by increases in spending on information technology and pain management for $0.2 million. Write-off of obsolete pumps in our Kansas location were $0.1 million. Severance of $0.1 million and $0.2 million for increases in headcount. G&A expenses for the 6 months ended June 30, 2014 were $9.8 million, compared to $10 million for the same prior year period. This decrease in G&A expense versus the same prior year period was mainly attributed to savings of $0.8 million in professional fees, offset by increasing in spending on information technology and pain management for $0.4 million, write-off of obsolete pumps in our Kansas location of $0.1 million and severance of $0.1 million. During the quarter ended June 30, 2014, we recorded interest expense of $0.8 million, compared to $0.9 million for the same prior year period. Interest expense for the 6 months ended June 30, 2014 was $1.6 million, compared to $1.8 million for the 6 months ended June 30, 2013. These decreases are due to the lower levels of debt in the comparable period. During the quarter ended June 30, 2014, we recorded income tax expense of $0.7 million, compared to tax benefit of $0.1 million in the quarter ended June 30, 2013. During the 6 months ended June 30, 2014, income tax expense was $1.1 million, compared to a tax benefit in the same prior period of $0.1 million. The increase in income tax expense is primarily due to increased profitability during the quarter and year-to-date period, June 30, 2014. For the second quarter of 2014, net income was $0.9 million, equal to $0.04 per diluted share, compared to $0.1 million or $0.00 per diluted share in the prior year period. Net income for the 6 months ended June 30, 2014, was $1.5 million, or $0.07 per diluted share, compared to $0.2 million in net income and $0.01 per diluted share in the prior year period. As of June 30, 2014, we had cash or cash equivalents of $1 million and $4.4 million of net availability on revolver, compared to $1.1 million of cash and cash equivalents, and $5.9 million availability on the revolver as of December 31, 2013. This decrease in liquidity is related to -- primarily to an increase of $2.3 million during the first 6 months of 2014 in medical equipment and rental service. For the same period in 2013, we increased our rental fleet by only $1.3 million. This increase is to serve current and future customers. Cash provided by operating activities for the 6 months ended June 30, 2014 was $1.8 million, compared to $2.2 million for the 6 months ended June 30, 2013. The decrease in cash is due to the cash flow effects of the change in accounts payable and other accruals. Cash used in investing activities was $0.5 million for the 6 months ended June 30, 2014, compared to $0.8 million for the 6 months ended June 30, 2013. The decrease is primarily related to a $2.4 million improvement in proceeds from medical equipment, which is related to the opportunistic sale of a particular pump, as well as other sales increases. This, however, was offset by $1.9 million increase in spending on non-pump assets, which is a direct result in our significant ongoing investment in information technology, and as Eric mentioned, the revamp of our facilities across the nation. Cash used in financing activities for the 6 months ended June 30, 2014 was $1.4 million, compared to $3.6 million used for financing activities for the 6 months ended June 30, 2013. This change is mainly attributed to the company paying off many old capital leases in 2013, whereas this year the company has made the required principal payments on all outstanding leases. The company utilizes adjusted EBITDA as a means to measure its operating performance. The reconciliation from adjusted EBITDA, a non-GAAP measure, to net income can be found in the appendix of the press release issued this morning. The company defines EBITDA as earnings for interest taxes, depreciation and amortization. Adjusted EBITDA was $4 million for the second quarter of 2014, compared to $3.3 million in 2013. Adjusted EBITDA for the 6 months of 2014 was 17 -- was $7.3 million, compared to $7 million for the same period in 2013. Total debt plus cash on hand, net debt, was $25.7 million, compared to last fiscal year of $25.6 million and prior year quarter, $28.2 million, equaling a year-over-year decrease of net debt by $2.5 million. Comparing our working capital days as of June 30, 2014 to this time last year, we ended the quarter with accounts receivable days sales outstanding, or DSO, of 59 days, slightly higher than this time last year at 58 days, but down from the last fiscal quarter of 62 days. Let me go a little further into these numbers. As mentioned in prior calls, operations is focused on the collection of receivables in this changing health care environment. Additional resources have been brought to bear on this issue. Total net AR of $10.8 million was down for the last fiscal quarter's $12.1 million while as mentioned earlier, allowance for doubtful accounts was reduced by $0.3 million. Our days sales and inventory, including our medical equipment held for sale or rental, or DSI, decreased from 28 days from last year's Q2 of 21. Day sales on accounts payable decreased from prior year's Q2 of 24 to 23 days. Overall, networking capital days of 57 improved from the second quarter of '13, 62 days. One of the efficiency measures I've mentioned in prior calls is our turnover ratio or as I sometime referred to at a rental rate -- rental revenue ratio. Taking just our rental revenue over our medical equipment and rental service at historical cost. The ratio in the current quarter was 1.50, compared to the prior year quarter of 1.54, both on an annualized basis. The decrease in these ratios reflects recent purchases of our rental fleet required to serve current and future rental customers. So to wrap up, let me emphasize that InfuSystem continues its growth in revenue, growth in gross profit, increase in earnings per share, our plans to increase our efforts on collection of receivables, our need for more pumps indicates future revenue growth. And most of all, this type of performance is what enabled us to reduce our interest rate with our current lenders. With that, let me turn it back over to Eric.

[Eric K. Steen:]

Thank you, Jon. In concluding my formal remarks, 3 things

[Jonathan P. Foster:]

Thank you for your question.

[Eric K. Steen:]

We're still looking at the long-term of growing profitable. Growing revenue is easy. Growing profitable revenue is a bit more complicated. Our rental base in disposable sales are growing. However, we still get large onetime capital sales pops to our revenue line when we buy used pumps, recondition them and then sell them as patient ready with a warranty. We've had big sales in fourth quarters of prior years. We could have had bigger sales this past fourth quarter, but I declined some low offers. And now we have had those sales in the first and second quarter more profitably. I will revisit the guidance number with Jon, but I don't want to be in a position where I have my team chasing revenue instead of profits. With that said, I'd like to open up the phone lines in taking questions.

[Operator:]

[Operator Instructions] And our first question comes from Joe Munda from Sidoti & Company.

[Joseph P. Munda:]

Eric, I just want to -- a lot of information thrown at us there. We really appreciate it, very in-depth. But I wanted to touch first off on your last comment regarding the guidance, high single-digit growth. After first quarter putting up 17%, this quarter putting up almost 12%, I mean, that would indicate to us that your back half of the year is going to be mid-single-digit growth. But based on the increase in pump purchases that we're seeing in the Q here, I mean, there seems to be a disconnect between that guidance and the purchasing you guys are doing. Any clarity there would be great.

[Eric K. Steen:]

Yes, Joe, when I first met you and people said you need to give a guidance number it was in 2013 and I was giving guidance to the end of 2015 because, as we discussed, I had -- wanted to implement a strategic plan. So I think part of it is just looking for the long term. And I don't want to just get in the habit of giving you the quarter-to-quarter or short-term guidance. So let me relook at the number. Things are going better as expected -- than expected to be sure. But I do want to -- we are looking at some things that we do today that are not profitable. And I do want to be saddled with wanting to keep revenue just for the sake of revenue.

[Joseph P. Munda:]

Okay. That's helpful. As far as the comments regarding opening up new pump centers, can you give us some sense, is there going to be significant CapEx involved there? A, being the facility; and B, being the increase of pumps. Or has that already occurred in the pump purchases?

[Eric K. Steen:]

Well, thanks for that question, Joe. As you may remember, we went through this description when we opened our Houston facility. And so the past operating practice of the company was to return all of our oncology pumps to Madison Heights for cleaning and certification in between patient use. By opening the facility in Houston, just the savings we had in FedEx pays for all the operational cost. And the same thing when we opened in the Northeast. We are going to save so much money. We have most of the big New York City infusion centers. We're going to save so much money just in shipping from New York City alone. That will fund the operational space and it will fund the employees that work there. The number of pumps, well -- I guess the number of pumps goes down because instead of having our capital expense in the FedEx hub, we're going to have our capital expense on the ground ready to be used. So I think what it does for us, it saves the shipping cost, which funds the local facility, it lowers our CapEx by having the pumps there. And then another important strategic thing is it puts us in the same-day rental business along the Atlantic seaboard when we opened in the Northeast. So for today, we rent pumps. We have, as you know -- you know a lot about our business. We have a lot of home infusion companies that rent pumps for us when they have peaks in demand. And so today, we can serve those fine home infusion companies with next-day delivery. Now with the center in L.A., center in Houston, Kansas City, Detroit and the Northeast, we'll be able to serve the Northeast, the Great Lakes, the planes, the Southwest and the West all with same-day delivery. And then at one point if you may remember the strategic planned presentation I did for investors at your conference, we eventually plan to open one in the Southeast as well. But one step at a time and -- but the operational efficiencies actually lowers our cost, improves our utilization and positions us in a new business area of opportunity.

[Joseph P. Munda:]

Okay. Eric, in your comments there, you said the pump fleet would come down, the pump number would actually come down as a result of the opening of these new facilities.

[Eric K. Steen:]

Eventually because we're going to have less pumps in the year via FedEx. So I'm not planning on getting rid of any of our existing pumps at all, no way. We're going to continue to grow our pump fleet, but we're adding new customers quickly as you can see from the numbers. Our rental is up 10%. So we're buying pumps, we're adding to the fleet, but when we become more efficient with more local facilities, we're going to be able to stretch that fleet and get better utilization out of it.

[Joseph P. Munda:]

Okay. So we're not expecting pump sales in immediate term as a result -- because you had talked about some lumpiness as far as some of those numbers are concerned. Are we -- so we're not expecting, as a result of the opening of these facilities, any outsize sales of pumps just to get to the number?

[Eric K. Steen:]

No, no. Our popular models of pumps that we rent, we're going to hang on to those. The pump sales we have -- these onetime pump sales we have, a lot of times those aren't even ambulatory pumps because there's a lot more pumps or the pole-mounted pumps they use hospitals. And the previous first biomedical that InfuSystem purchased, they have a great network of buying these hospital pumps that come off of leases or the hospital changes to a new model, and our -- what we call our trader broker desk. We buy those pumps. We recondition them in our iso- certified facility to get them up to meet manufacture standards and get them looking like new and then we resell those primarily pole-mounted hospital pumps. And so when you see those big spikes in sales, like -- our product revenue was up 72% this -- so far this year. That's not from selling sets, although I'm happy to see there are IV disposable pumps, it's growing. That's from selling a bunch of pole-mounted hospital pumps that I could have sold in December, come out with a bigger number at the end of the year but at a lower GP and instead we held off and took a better offer on those pumps in the -- primarily in the first quarter of this year. So I think that's what I -- I think I'm indelibly etched as being a middle manager with a public company who did things like sell your first quarter goods in this fourth quarter and then wonder why the fourth quarter doesn't look good. I just don't want to be get stuck in that kind of a trap. But I am going to revisit the guidance with Jon, and I promise to get back with you after I do that.

[Jonathan P. Foster:]

If I could add, Eric, if you recall, Joe, that during '12 and '13, we were fairly tight on liquidity. So for you to have opportunistic pump sales, you got to have opportunistic pump purchases. Now since we've had the new credit facility for over a year now, we've had the liquidity that when we've had opportunities to do opportunistic pump purchases, we've been able to do it. And so from that standpoint, we have the liquidity to enable our broker dealer desk to do its job.

[Operator:]

And our next question comes from Doug Weiss [ph] from ESW [ph] Investment.

[Unknown Analyst:]

So just to make sure I understood the comments on CMS correctly, it sounded like you don't know the exact date that the Recompete would take place, but it sounded like you were looking somewhere around 2019? Did I get that right?

[Janet Skonieczny:]

No, the Recompete is already taking place. That process has begun and those contracts will begin July. The middle of July 2016, and they will end December 31, 2019. And what we do know today is that our category of external infusion pumps have been excluded from that Round 2 Recompete.

[Eric K. Steen:]

Right.

[Janet Skonieczny:]

The piece that we're not sure about is what types of additional cuts will be made to those product categories that are not included in this next round of competitive bidding.

[Unknown Analyst:]

In other words, cost could be made arbitrarily outside of the bidding process?

[Janet Skonieczny:]

I don't think they'll be arbitrary. I think -- as I mentioned in the first part of my discussion, CMS is working hard to develop some additional methodologies on how to treat some of those other areas and other products with respect to price cuts. And so what they're doing is they're using some of the knowledge and intelligence that they've gained from previous rounds of competitive bidding to determine how to make those cuts.

[Eric K. Steen:]

And it basically establish in their proposal a floor of 70 -- of 90% of their average of the regional price they got from competitive bid process and a ceiling of 110%. But they really haven't discussed how they're going to determine where the prices fall and when within those averages.

[Unknown Analyst:]

Right. Okay. And then on...

[Jonathan P. Foster:]

And if I can add.

[Unknown Analyst:]

Sorry, go ahead.

[Eric K. Steen:]

No, just one last thing. If you go to CMS' website, they deal in seasons. They say generally deal in dates. They'll say they will announce the rules for competitive bidding for Round 2 Recompete in fall of 2014, so that just kind of shows you the timetables that we're dealing with.

[Unknown Analyst:]

Right, okay. And then on some of the investments you described. Are those primarily being capitalized? Or are those resulting in spike up on some of the expense lines?

[Eric K. Steen:]

Both. From a standpoint of -- as we've talked about, year-to-date, investment and IT, information technology and pain management has increased spend -- expenses by roughly $400,000. Also on the balance sheet, we've capitalized some software cost as well. That is included in the spike in our investment that we've -- that I mentioned in the call.

[Unknown Analyst:]

Okay. And then just -- not to harp too much on the guidance, but just on the -- on your -- in terms of the seasonality on the rental side, would you expect the same kind of pattern that we saw last year where it was somewhat backend loaded in terms of rental numbers?

[Eric K. Steen:]

I would say, yes. I know -- and the one thing that spikes up the pump rentals is a good flu season and that generally happens in the winter. So I think typically the company historically see bigger revenues at the -- towards the end of the year.

[Unknown Analyst:]

Okay. So you think you'll -- I mean, you had pretty strong sequential numbers last year in the third quarter, fourth quarter. I'm assuming somewhat of a slowdown in terms of year-over-year growth. Am I -- is that realistic? Or do you still think you might do pretty good kind of mid to high-single digit?

[Eric K. Steen:]

Well I'm an optimist and so I think you're going to do great. I think we're going to blow the numbers out. But what I don't want to do is, especially when I -- I took the position and some people told me, hey in this company, there's been a lot of promises. And so I want to promise a lot, but I want to always deliver more than I promise.

[Unknown Analyst:]

Okay, that makes sense. On -- then just looking through the rest of the year on the doubtful accounts and that was a nice sequential drop here, I guess, which was what you had -- kind of expected. Would that -- is this kind of a good run rate going forward? And would that -- would it be a good run rate on an absolute basis? Or as a percentage of rental revenue?

[Jonathan P. Foster:]

We're trying to decrease it. I mean, our efforts are just beginning to take hold so I think that's an indication that we're expecting better results as we continue the process of increasing our collection efforts.

[Unknown Analyst:]

Okay. And then on taxes, how much of that tax reported GAAP tax is actually paid in cash?

[Jonathan P. Foster:]

Our main -- really the only -- we have some small payments that are due in states where that we don't have NOLs. We're -- we just now expanded into them. Our main cash pay is in Canada, which is generally $300,000 to $500,000 a year. We ended the year of 2013 with roughly $14 -- a little over $14 million in federal and state NOLs, but most of that is just booked tax expense and the cash expenses mainly in Canada.

[Unknown Analyst:]

Okay. So you still have -- so you still have -- you'll finish the year, it looks like, with -- if you do a couple of million in earnings that would bring your NOLs down to about $12 million. Is that the right way to think of it?

[Jonathan P. Foster:]

Yes, thereabouts. I mean, taxes all depends based on what new laws come out and -- but yes exactly. We will definitely end the year with NOLs and right now, we forecast -- since we -- they're on our balance sheet as an asset, before cash that we'll be able to get full use of those NOLs.

[Operator:]

And we have no further questions at this time. Mr. Foster, I turn the call back to you.

[Jonathan P. Foster:]

Okay. Thanks for joining today. We'll talk to you next quarter.

[Eric K. Steen:]

Have a great day.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.