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IPC The Hospitalist Company Reports Third Quarter 2014 Financial Results

NORTH HOLLYWOOD, Calif., Oct. 22, 2014 (GLOBE NEWSWIRE) -- IPC The Hospitalist Company, Inc. (Nasdaq:IPCM), a leading national hospitalist physician group practice, today announced financial results for the third quarter ended September 30, 2014. All operating results referred to as "adjusted" exclude the change in fair market value of contingent consideration ("net change in fair value") for acquisitions. See "Reconciliation of Non-GAAP Financial Measures" below for explanations of these non-GAAP financial measures and reconciliation to GAAP financial measures.

Third Quarter 2014 Highlights (comparisons are to third quarter 2013):

  • Net revenue increased 14% to $169.8 million, with same-market area net revenue growth of 9%.
  • Patient encounters increased 16% to 1,749,000.
  • Adjusted EBITDA increased 11% to $18.1 million.

Nine Months Ended September 30, 2014 Highlights (comparisons are to nine months ended September 30, 2013):

  • Net revenue increased 15% to $514.8 million, with same-market area net revenue growth of 10%.
  • Patient encounters increased 14% to 5,240,000.
  • Adjusted EBITDA increased 10% to $54.2 million.

Adam D. Singer, M.D., Chief Executive Officer of IPC The Hospitalist Company, said, "We continue to execute our long-term growth strategy that offers our providers an environment to focus on patient care and improved patient outcomes. Our strong third quarter results were driven by solid contributions from both acquisitions and organic hires."

Dr. Singer added, "We are pleased with the initial benefits that we are seeing from our recruiting initiatives, which coupled with the fifteen acquisitions completed year-to-date through September, resulted in a 17% increase in headcount. We also anticipate achieving our original headcount target by year end, and along with our healthy acquisition pipeline, we are very excited about the growth opportunities for 2015 and beyond."

Third Quarter 2014

Patient encounters for the three months ended September 30, 2014 increased by 240,000, or 15.9%, to 1,749,000, compared with 1,509,000 for the same period in the prior year. Net revenue for the three months ended September 30, 2014 was $169.8 million, an increase of $20.7 million, or 13.9%, from $149.1 million for the same period in the prior year. Of this $20.7 million increase, 62.0% was attributable to same-market area growth, including tuck-in acquisitions and new hires, and 38.0% was attributable to revenue generated from operations in new markets. Same-market net revenue increased 8.7% and same-market encounters increased 9.9%.

Physician practice salaries, benefits and other expenses for the three months ended September 30, 2014 were $123.6 million, or 72.8% of net revenue, compared with $108.2 million, or 72.6% of net revenue, for the same period in the prior year. The dollar increase in cost of services is largely related to the increase in the number of hospitalists added through hiring and acquisitions during the period.

General and administrative expenses increased $3.5 million, or 14.2%, to $28.1 million, or 16.6% of net revenue, for the three months ended September 30, 2014, compared with $24.6 million, or 16.5% of net revenue, for the same period in the prior year. The 10 basis point increase as a percentage of revenue is primarily related to the Company's expansion of its corporate business development and recruiting resources. The dollar increase in expense is primarily the result of increased costs to support the continuing growth of operations and acquisitions, including new regional office costs, incremental costs of supporting the Company's post-acute business, expansion of the Company's corporate business development and recruiting resources and other expenses. Excluding stock-based compensation, general and administrative expenses were 15.3% of net revenue for the three months ended September 30, 2014 and 2013.

The net change in fair value of contingent consideration ("net change in fair value") for acquisitions was an increase to expense of $2.4 million and $0.3 million for the three months ended September 30, 2014 and 2013, respectively.

Adjusted EBITDA for the three months ended September 30, 2014 increased 11.4% to $18.1 million, or an adjusted EBITDA margin of 10.6%, compared with adjusted EBITDA of $16.2 million, or an adjusted EBITDA margin of 10.9% for the same period in the prior year. The adjusted EBITDA margin decrease of 30 basis points compared with the same period in the prior year is primarily related to an increase in physician practice expenses as a percentage of revenue.

The effective tax rate for the three months ended September 30, 2014 and 2013 was 38.3%.

Adjusted net income for the three months ended September 30, 2014 increased 9.1% to $10.1 million, or a 5.9% adjusted net income margin, compared with adjusted net income of $9.2 million, or a 6.2% adjusted net income margin, for the same period in the prior year. GAAP net income for the three months ended September 30, 2014 decreased to $8.6 million from $9.1 million for the same period in the prior year, and GAAP net income margin was 5.1% and 6.1% for the three months ended September 30, 2014 and 2013, respectively.

Adjusted diluted earnings per share for the three months ended September 30, 2014 and 2013 was $0.57 and $0.53, respectively. GAAP diluted earnings per share for the three months ended September 30, 2014 was $0.49, compared with $0.52 for the same period in the prior year.

Liquidity and Capital Resources

As of September 30, 2014, IPC had approximately $80.2 million in liquidity, which is composed of $25.5 million in cash and cash equivalents, and an available line of credit of $54.7 million. IPC had borrowings of $70.0 million from its revolving line of credit outstanding at September 30, 2014.

Net cash provided by operating activities for the nine months ended September 30, 2014 was $53.8 million, compared with $46.6 million for the same period in the prior year. The change in working capital during the nine months ended September 30, 2014 was largely related to an increase in accounts receivable of $7.1 million, a decrease in prepaid expenses and other current assets of $9.6 million, an increase in accounts payable and accrued liabilities of $4.0 million, and an increase in accrued compensation of $6.6 million. Days sales outstanding (DSO), which is used to measure the effectiveness of collections, was 55 DSO and 56 DSO as of September 30, 2014 and December 31, 2013, respectively.

Net cash used in investing activities was $38.8 million for the nine months ended September 30, 2014, compared with $71.1 million for the same period in the prior year. Cash of $35.1 million was used during the nine months ended September 30, 2014 for physician practice acquisitions and contingent consideration payments on prior acquisitions, compared with $68.0 million for the same period in the prior year.

For the nine months ended September 30, 2014, net cash used in financing activities was $14.5 million, compared with $30.7 million of cash provided by financing activities for the same period in the prior year. During the nine months ended September 30, 2014, the Company repaid $20.0 million of its outstanding revolving line of credit. During the nine months ended September 30, 2013, the Company repaid $20.0 million of its outstanding revolving line of credit and borrowed $45.0 million under the revolving line of credit to fund its practice acquisitions towards the end of such period.

2014 Guidance

The Company has updated the range of its guidance for the full year 2014 and now expects revenue to be in the range of $692.0 million to $698.0 million, adjusted EBITDA in the range of $71.0 to $72.5 million, and adjusted diluted earnings per share to be in the range of $2.23 to $2.29. This compares to previous full year 2014 expectations for revenue to be in the range of $720.0 million to $732.0 million, adjusted EBITDA in the range of $76.0 million to $79.0 million, and adjusted diluted earnings per share to be in the range of $2.41 to $2.51. The Company has provided this outlook based on the following assumptions: (i) weighted average shares outstanding of 17.6 million for the year; (ii) a 38.3% effective tax rate, and (iii) $5.5 million in depreciation and amortization expense. Not included in the assumptions are (i) new market practice acquisitions completed after today's date, and (ii) future gains or losses related to changes in estimates of earn-outs attributable to practice acquisitions.

Reconciliation of Non-GAAP Financial Measures

This press release contains non-GAAP financial measures of adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA), adjusted net income and adjusted diluted earnings per share.

During the three and nine months ended September 30, 2014 and 2013, the Company reported a change in fair value of contingent consideration for acquired practices as operating expense pursuant to GAAP, which is referred to in this press release as the "net change in fair value of contingent consideration" or "net change in fair value". The fair value of accrued contingent consideration is largely determined using the income approach for estimating future consideration to be paid based on projected earnings of acquired practices as of specified measurement dates. Because accrued contingent consideration is generally based on a certain multiple of earnings of the acquired practices during a specified measurement period, a relatively small or moderate change in such projected earnings may result in a material change to the fair value of such contingent consideration liability with a corresponding adjustment to income from operations.

During the three months ended September 30, 2014 and 2013, the Company recorded an increase to expense of $2,390,000 and $282,000, respectively, and during the nine months ended September 30, 2014 and 2013, the Company recorded an increase to expense of $1,312,000 and a reduction to expense of $6,073,000, respectively, as a net change in fair value. In this press release, GAAP financial measurements of net income and diluted earnings per share, as well as a non-GAAP financial measurement of EBITDA have been adjusted to exclude the amount of the net change in fair value of contingent consideration. The Company believes that these non-GAAP financial measures are useful to management and investors reviewing financial and business trends related to its results of operations, and that when these non-GAAP financial measures are viewed with GAAP financial measures, investors are provided with a meaningful understanding of IPC's ongoing operating and financial performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for GAAP financial measures.

The following unaudited tables reconcile non-GAAP financial information to net income and diluted earnings per share, which the Company believes are the most comparable GAAP measures (dollars in thousands, except for per share data):

Three Months Ended September 30,
2014 2013
GAAP Adjustment Non-GAAP GAAP Adjustment Non-GAAP
Income from operations $14,307 $2,390 $16,697 $14,791 $282 $15,073
Investment income 2 2 7 7
Interest expense (361) (361) (109) (109)
Income before income taxes 13,948 2,390 16,338 14,689 282 14,971
Income tax provision 5,341 915 6,256 5,626 108 5,734
Net income $8,607 $1,475 $10,082 $9,063 $174 $9,237
Earnings per share (diluted) $0.49 $0.08 $0.57 $0.52 $0.01 $0.53
Weighted average shares (diluted) 17,652,892 17,652,892 17,368,426 17,368,426
Nine Months Ended September 30,
2014 2013
GAAP Adjustment Non-GAAP GAAP Adjustment Non-GAAP
Income from operations $48,847 $1,312 $50,159 $51,962 $(6,073) $45,889
Investment income 4 4 12 12
Interest expense (1,057) (1,057) (323) (323)
Income before income taxes 47,794 1,312 49,106 51,651 (6,073) 45,578
Income tax provision (benefit) 18,304 502 18,806 19,782 (2,326) 17,456
Net income $29,490 $810 $30,300 $31,869 $(3,747) $28,122
Earnings per share (diluted) $1.68 $0.04 $1.72 $1.85 $(0.22) $1.63
Weighted average shares (diluted) 17,591,876 17,591,876 17,239,296 17,239,296

The following unaudited table reconciles the non-GAAP financial measurement of adjusted EBITDA to income from operations, which the Company believes is the most comparable GAAP measures (dollars in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013
Income from operations (GAAP) $14,307 $14,791 $48,847 $51,962
Plus: Depreciation and amortization 1,375 1,148 4,006 3,462
EBITDA (non-GAAP) 15,682 15,939 52,853 55,424
Less: Net change in fair value of contingent consideration 2,390 282 1,312 (6,073)
Adjusted EBITDA (non-GAAP) $18,072 $16,221 $54,165 $49,351

Conference Call Information

IPC The Hospitalist Company will host an investor conference call to review the quarterly results at 5:00 p.m. ET (2:00 p.m. PT) today. To participate in the conference call, please dial 877-225-7695 (USA) or 720-545-0027 (International). A live webcast of the call will also be available in the Investor Relations section on the corporate web site at http://www.hospitalist.com. A webcast replay can be accessed at the same site beginning October 22, 2014 at approximately 8:00 p.m. ET (5:00 p.m. PT) and will remain available until November 21, 2014 at 11:59 p.m.

About IPC The Hospitalist Company

IPC The Hospitalist Company, Inc. (Nasdaq:IPCM) is a leading physician group practice company focused on the delivery of hospitalist medicine and related facility-based services. IPC's physicians and affiliated providers practice exclusively in hospitals or other inpatient facilities, including acute, sub-acute and long-term care settings. The Company offers its employed providers comprehensive training, information technology, and management support systems necessary to improve the quality and reduce the cost of patient care in the facilities it serves. For more information, visit the IPC website at http://www.hospitalist.com.

Safe Harbor Statement

Certain statements and information in this press release may be deemed to be "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements in this press release may include, but are not limited to, those statements set forth under the section titled "2014 Guidance" regarding projected operating results, revenues, earnings, and IPC's growth opportunities and strategy. Forward-looking statements are often characterized by terminology such as "believe", "hope", "may", "anticipate", "should", "intend", "plan", "will", "expect", "estimate", "project", "positioned", "strategy" and similar expressions. Any forward-looking statements are necessarily based on a variety of estimates and assumptions which, though considered reasonable by the Company, may not be realized and are inherently subject to significant business, economic, competitive, industry, regulatory, market and financial uncertainties and contingencies, many of which are and will be beyond IPC's control. Important risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by any forward-looking statements are described in IPC's most recent Annual Report on Form 10-K, including the section titled "Risk Factors" and actual results could differ materially from those anticipated in forward-looking statements.

In particular the following risks and uncertainties may have such an impact:

  • failure to comply with complex and intensive government regulation of the healthcare industry;
  • the adequacy of IPC's insurance coverage and insurance reserves;
  • IPC's ability to recruit and retain qualified physicians and non-physician providers;
  • IPC's ability to successfully identify, complete and efficiently integrate new acquisitions;
  • the effect of changes in rates or methods of third-party reimbursement; and
  • the high level of competition in IPC's industry.

IPC undertakes no obligation following the date of this press release to update or revise any such statements or projections whether as a result of new information, future events, or otherwise.

IPC The Hospitalist Company, Inc.
Consolidated Balance Sheets
(dollars in thousands, except for share data)
September 30,
2014

December 31, 2013
(unaudited)
Assets
Current assets:
Cash and cash equivalents $25,470 $25,010
Accounts receivable, net 110,664 103,585
Insurance receivable for malpractice claims - current portion 13,311 11,653
Prepaid expenses and other current assets 9,515 19,378
Total current assets 158,960 159,626
Property and equipment, net 7,217 6,343
Goodwill 388,194 357,387
Other intangible assets, net 5,161 5,857
Insurance receivable for malpractice claims - less current portion 23,512 20,599
Total assets $583,044 $549,812
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $9,446 $5,486
Accrued compensation 42,281 35,639
Payable for practice acquisitions, current portion 28,904 32,430
Medical malpractice and self-insurance reserves, current portion 13,900 12,211
Deferred tax liabilities, current portion 969 969
Total current liabilities 95,500 86,735
Long-term debt 70,000 90,000
Medical malpractice and self-insurance reserves, less current portion 48,990 44,044
Payable for practice acquisitions, less current portion 6,955 8,289
Deferred tax liabilities, less current portion 5,762 5,762
Total liabilities 227,207 234,830
Stockholders' equity:
Preferred stock, $0.001 par value, 15,000,000 shares authorized, none issued
Common stock, $0.001 par value, 50,000,000 shares authorized, 17,215,224 and 17,015,580 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively 17 17
Additional paid-in capital 179,291 167,926
Retained earnings 176,529 147,039
Total stockholders' equity 355,837 314,982
Total liabilities and stockholders' equity $583,044 $549,812
IPC The Hospitalist Company, Inc.
Consolidated Statements of Income
(dollars in thousands, except for per share data)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013
Net revenue $169,757 $149,073 $514,751 $447,917
Operating expenses:
Cost of services—physician practice salaries, benefits and other 123,551 108,221 376,511 326,873
General and administrative 28,134 24,631 84,075 71,693
Net change in fair value of contingent consideration 2,390 282 1,312 (6,073)
Depreciation and amortization 1,375 1,148 4,006 3,462
Total operating expenses 155,450 134,282 465,904 395,955
Income from operations 14,307 14,791 48,847 51,962
Investment income 2 7 4 12
Interest expense (361) (109) (1,057) (323)
Income before income taxes 13,948 14,689 47,794 51,651
Income tax provision 5,341 5,626 18,304 19,782
Net income $8,607 $9,063 $29,490 $31,869
Net income per share:
Basic $0.50 $0.54 $1.72 $1.90
Diluted $0.49 $0.52 $1.68 $1.85
Weighted average shares:
Basic 17,187,819 16,839,069 17,122,574 16,769,085
Diluted 17,652,892 17,368,426 17,591,876 17,239,296
IPC The Hospitalist Company, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
2014 2013
Operating activities
Net income $29,490 $31,869
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,006 3,462
Stock-based compensation expense 6,118 5,467
Changes in assets and liabilities:
Accounts receivable (7,079) (10,755)
Prepaid expenses and other current assets 9,645 9,788
Accounts payable and accrued expenses 3,960 3,515
Accrued compensation 6,642 7,423
Medical malpractice and self-insurance reserves, net 2,064 1,973
Accrued contingent consideration (1,023) (6,116)
Net cash provided by operating activities 53,823 46,626
Investing activities
Acquisitions of physician practices (35,138) (68,044)
Purchase of property and equipment (3,690) (3,032)
Net cash used in investing activities (38,828) (71,076)
Financing activities
Proceeds from long-term debt 45,000
Repayments of long-term debt (20,000) (20,000)
Net proceeds from issuance of common stock 4,787 4,062
Excess tax benefits from stock-based compensation 678 1,653
Net cash (used in) provided by financing activities (14,535) 30,715
Net increase in cash and cash equivalents 460 6,265
Cash and cash equivalents, beginning of period 25,010 16,214
Cash and cash equivalents, end of period $25,470 $22,479
IPC The Hospitalist Company, Inc.
Operating Data
(unaudited)
Patient Encounter Data:
The following is a summary of the Company's patient encounters for the seven consecutive quarters ended September 30, 2014:
Quarter Ended
Mar 31
2013
Jun 30
2013
Sep 30
2013
Dec 31
2013
Mar 31
2014
Jun 30
2014
Sep 30
2014
Patient encounters 1,576 1,513 1,509 1,613 1,764 1,727 1,749
Employee Data:
The following is a summary of the Company's affiliated hospitalists employed at the end of the seven consecutive quarters ended September 30, 2014:
Quarter Ended
Mar 31
2013
Jun 30
2013
Sep 30
2013
Dec 31
2013
Mar 31
2014
Jun 30
2014
Sep 30
2014
Employed physicians 1,096 1,062 1,175 1,257 1,212 1,184 1,251
Nurse practitioners and physician assistants 360 372 395 508 501 560 587
Total 1,456 1,434 1,570 1,765 1,713 1,744 1,838

CONTACT: Rick Kline IPC The Hospitalist Company, Inc. (818) 766-3502 Evan Pondel PondelWilkinson, Inc. (310) 279-5980 epondel@pondel.com

Source:IPC The Hospitalist Company, Inc.