InfuSystem Holdings, Inc. (INFU) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the Q3 Earnings Call -- Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to CFO, Jonathan Foster. You may begin, Jonathan.

Thank you, John. Good morning, everyone, and welcome to InfuSystem Holdings Third Quarter 2012 Conference Call. This is Jonathan Foster, Chief Financial Officer. With me on the call today is Mr. Dilip Singh, our Interim Chief Executive Officer. First of all, let me get some administrative matters out of the way. The company issued a press release yesterday evening. The release is available on most financial websites. Additionally, a web replay will be available on the company's website for 30 days. Except for the historical information contained herein, the matters discussed in this conference call are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those predicted by such forward-looking statements. These risks and uncertainties include general economic conditions, as well as other risks detailed from time to time in InfuSystem's publicly filed documents. The company has no obligation to update the forward-looking information contained in this conference call. While discussing our performance, we will refer to certain non-GAAP measures such as EBITDA, which is not considered a measure of financial performance under Generally Accepted Accounting Principles. With that, I'd like to turn the call over to Mr. Dilip Singh.

Thank you, Jon. Good morning, everyone. Third quarter results again validate the appropriateness of our strategy to focus on improving performance in core areas of our business, while further integrating and realizing business synergies. In this regard, the company's return to profitability in the third quarter is an important milestone, but it is not the only one. In less than 2 full quarters since assuming control of the company, the current leadership team has accumulated annualized cost savings of approximately $1.5 million. This is an increase of $500,000 from what we reported in Q2. At the same time, we have achieved significant progress in reducing our deposition, from $30.1 million as of March 31, to $24.6 million on September 30. John will address this in more detail in a few moments, but I do wish to emphasize that this significant decrease reflects our continuing focus on managing expenses, driving cash flow and strengthening our balance sheet. Revenue of $14.2 million not only demonstrates a strong performance, but also represents underlying growth. While this was a 2% down compared with comparable 2011 period, please note that last year's performance was significantly enhanced by an opportunistic $1.3 million sale, which John will discuss further in his financial analysis. Our topline in the first 9 months of 2012 was $42.6 million, a 5% improvement over the same period in 2011. Operationally, the company continues to build strength and momentum in both rental and sales. We continue to be adding pairs, providers and partners and we continue to be supplier of choice in our markets. Our managing team and employees together have embraced efforts to focus, prioritize, execute and sustain this growth. Feedback from our customers continues to be positive. They appreciate our commitment to further enhancing customer service solutions that make their jobs easier by delivering, for example, on user-friendly enabling technology solutions. As mentioned in our release, excluding fees associated with Concerned Stockholder Group, settlement agreement, Fifth Amendment and strategic alternatives, EBITDA for first 9 months of 2012 would have been $11 million, up from $8.8 million in 2011. During the third quarter, the company's Board of Directors continued to explore and evaluate potential strategic alternatives, as we first disclosed in first quarter 2012 and started by prior management. These alternatives include a potential sale or other transaction, including a possible refinancing of the company's debt. We then incurred costs of $500,000 related to these activities. In conclusion, we are encouraged by our continued progress and the opportunities available to us in our core markets. Our goal remains the same: Grow top-line revenues, continue seeking operational efficiencies, improve EBITDA and deliver profits. With that, I will now turn the call over to Jonathan Foster, who will discuss our financial results in more detail and then, we'll open the call to your questions. Thank you. Jon?

Thank you, Dilip. Total revenues for the quarter ended September 30, 2012, were $14.2 million compared to $14.6 million in the third quarter of 2011, which resulted in a 2% decrease compared to the similar period in the prior year. This decrease was primarily a result of, as Dilip mentioned, our opportunistic pump sale of $1.3 million in the prior year to a few customers. Excluding this item, our revenue for the quarter would have increased by 7%. For the 9 months ended September 30, 2012, revenues were $42.6 million, up from $40.6 million in the 2011 period. This was a 5% improvement from the year-to-date period which was primarily related to the addition of new customers with larger patient bases, increased penetration into our existing customer accounts and the mitigation by our customers of the oncology drug shortage affecting certain products. Excluding our opportunistic pump sales in the third quarter 2011 would have resulted in a year-to-date revenue increase of 8% compared to $39.3 million in the prior year. Just looking at rental revenue, it was up, over 2011, almost 10% quarter-over-quarter and year-to-date, demonstrating the organic growth opportunities for InfuSystem in this segment. The gross profit for the 3 months ended September 30, 2012, was $10.2 million, up 10% from $9.2 million in the third quarter of last year. Gross profit for the 9 months of 2012 was $30.9 million, an increase of 13% compared to $27.3 million for the first 9 months of 2011. Gross margin percentage for the third quarter and year-to-date in 2012 was 72% and 73%, respectively. This compared to the third quarter in 2011 of 64% and 67% year-to-date as of September 30, 2011. This increase is due to 2 reasons. The first is pump depreciation is gradually decreasing as our actual pump lives in our rental fleet are averaging longer than the 5-year depreciable life used. The second is that we had a higher mix of rentals compared to sales and rentals of a higher margin than sales and service. Turning to selling, general and administrative expenses, SG&A for the third quarter of fiscal 2012 was $9.3 million, significantly lower than the prior period's $31.7 million. The 9 months ended September 30, 2012, SG&A was $30.5 million compared with $92.9 million for the same period last year. Prior year's numbers contained a charge for asset impairment of $23.4 million and $67.6 million, respectively. Excluding non-cash impairment charges, SG&A increased $1 million for the quarter and $5.1 million for the 9 months ended. For the quarter, we incurred $900,000 related to certain events and processes. These costs included $500,000 pertaining to an intensive study initiated by prior management to explore and evaluate potential strategic alternatives, which Dilip noted earlier, including a potential sale or other transaction including a possible refinancing of the company's debt. It also included about $500,000 due to the increased interest expense as a result of the monthly ticking fee that was implemented on August 1 under the Fifth Amendment of our credit facility. And we had a $100,000 reduction in expenses associated with the concerned stockholder group. For the 9 months ended September 30, 2012, the cost associated with the concerned shareholder group are now complete. The increase in SG&A related primarily to $2.2 million in legal expenses, $1 million in severance costs and $600,000 in retention payments to key employees; this is all net of the $1.4 million of stock -- reversal of stock compensation expense and $500,000 in expenses related to strategic alternatives. Outside of these charges, SG&A experienced an increase, primarily, compared to the prior periods, in selling, compensation and travel costs and an increase in our finance and accounting staffs. The third quarter net income was approximately $100,000 equal to a de minimis income per basic and diluted share, compared to $16.6 million net loss equal to $0.79 loss per diluted share in the prior period. For the 9 months ended September 30, 2012, the company's net loss was $1.7 million or $0.08 per diluted share versus a net loss of $44.7 million or $2.12 per diluted share for the year-ago period. One-time net expenses discussed above related to the concerned shareholder group settlement agreement, Fifth Amendment and strategic alternatives of $500,000 and $4 million for the 3 months and 9 months, respectively, ended September 30, 2012, respectively, hampered these results. EBITDA for the third quarter of fiscal 2012 was $2.9 million compared with $3.2 million a year ago excluding the mentioned asset impairment charges. For the 9 months ended September 30, 2012, EBITDA was $6.1 million compared with $8.8 million for the same period in 2011, excluding the asset impairment charges of 2011. Excluding the fees associated with the settlement agreement, Fifth Amendment cost and strategic alternatives, EBITDA for 2012 would have been $3.4 million for the quarter and $11 million year-to-date. We use EBITDA as a means to measure the company's operating performance. We have a full reconciliation of EBITDA and non-GAAP measure to net income or loss in our press release issued yesterday evening. The company defines EBITDA as earnings before interest, taxes, depreciation and amortization. Now, to the cash flow statement. Net cash provided by operations for the 3 months ended September 30, 2012, was $4.6 million compared to roughly $800,000 in the prior-year period. The latest quarter's results reflected an increase in professional fees associated with strategic alternatives and an increase in interest expense as a result of the ticking fee. In addition, the company reported capital expenditures of $1.5 million, an increase of roughly $600,000 compared to the prior-year period. With regard to liquidity and debt, the company had available approximately $3.4 million on its $5 million revolving credit facility. During the quarter, the company reduced its draw under this credit facility by $400,000 in addition to the normal quarterly payment on its $20.6 million term debt. As a result of our Fifth Amendment that was entered in the second quarter of 2012, we reclassified, during this quarter, all our previous long-term debt pertaining to our credit facility to short-term debt, a total of $20.6 million based on the new maturity date of July 1, 2012 -- I mean, 2013. The company ended the quarter with $1.5 million of cash compared to $800,000 in the previous quarter of 2012. We intend to refinance our indebtedness prior to maturity in order for us to maintain sufficient funds for our operations and alleviate the burden of additional costs generated by the settlement agreement and the Fifth Amendment. We ended the quarter with accounts receivable days outstanding or DSO of 48 days, which decreased slightly from this time last year's 50 days due to improved paperwork flow. Our days sale in inventory or DSI increased to 24 days, days sale on accounts payable increased to 31 days, mainly due to the expenses related to the settlement agreement, but also due to better cash management. Total working capital days decreased from 48 days to 42 days. In summary, as Dilip stated earlier, this quarter was one that we are proud of getting back to profitability while strengthening the balance sheet. That concludes the formal part of the call. We'll now open it up to questions.

[Operator Instructions] And we do have a question from Joe Munda from Sidoti & Company.

Dilip, can you give us a sense of the size of the pump fleet currently?

You're talking about the number of employees?

No. The size of -- how many pumps do you have?

Oh, we can definitely talk about the total amount of pumps. Yes.

We have roughly 24,000 pumps on the rental side -- on rental side, so roughly about 36,000 total pumps.

So 24,000 rental, 12,000 for sale and inventory?

No, it'd be -- no, from the standpoint I'm talking, 36,000 total pumps in our rental fleets.

36,000 in rental fleet. And what was the breakdown between rentals and sales in the quarter, percentage-wise?

Are you talking pumps or revenue?

I'm talking revenue. At this point, I'm talking revenue.

Yes. Okay. From the standpoint of -- it's right there on our P&L statement. So we have roughly...

Oh, I'm sorry, I didn't -- yes, there you go. Okay, you broke it out. Traditionally...

Yes, we're now breaking that out. So you'll see there, rentals were $13 million compared to almost $12 million a year ago, on the 3 months ended. And then almost $39 million versus $35.5 million last year. So rentals is definitely our higher gross margin. And so...

Yes. Well, that's my -- it leads into our next question, what -- I mean, what is leading to the growth in the rental segment? Are you guys increasing the pump fleet or is there new customers coming in now or higher average sales price, or rental price? How does it balance [ph]?

So the customer base, Joe, is definitely increasing. And we get, for growth of the revenue, new pumps when we have new customers. And last but not the least is that the volume of the pumps, also, to larger customers, is increasing.

And Joe, I'd just like to mention, we only buy pumps really once customers identify that they're coming onboard. So it's -- we don't -- on the rental side, we don't buy pumps in anticipation of customers. We only buy it once we know they're coming onboard.

So of that 36,000 fleet that you have, how many would you say are currently out? All of them or is it like 35,000 are being used and you guys have a spare 1,000?

Yes, you're now getting into the area of proprietary. We really don't discuss the utilization percentage. But here's what I will tell you, is that our utilization percentage is drastically up, about 10% from last year where we've made a key focus on increasing our utilization. That's another reason for the increase in our gross margin.

Okay. That's helpful. And then you guys talked about pump depreciation coming down due to longer life rather than 5 years from your pumps. Can you give some color on that?

Sure. First of all, with our acquisition of FBI, we now have some first-in-class repair and refurbishment capabilities. So that has definitely helped us extend our lives. When this Company was originally founded, they started with a 5-year depreciable life. Right now, the majority of our pump fleet is fully depreciated.

Okay. And so, what is -- let's say you go out and buy a new pump. What is now the depreciable life on that new pump?

It's still 5 years. We are looking at discussing with the auditors about examining our depreciable life and what it should be, but it's definitely greater than 5 years. But this is something we're looking from the accounting side.

Yes. I mean, I've heard of new laws where they're going to lower the depreciable life on an item like a pump. Would that benefit you guys? Or would that be -- I don't know how to look at it.

Well, from the book perspective, really, the depreciable life should match what it really is. And so, I think the original, when they set the company up, that they expected there to be some more obsolescence in the pump technology, but the pump technology is, really, has remained unchanged over the years. So that, plus our capabilities at FBI, have really extended the lives of our pumps. And when you look at our pumps, the way that FBI -- the way that our service facility in Kansas refurbishes them, you really can't discern the difference between a new pump and an old pump.

Okay. And then just one final question. You guys talked about a $0.5 million study from prior management regarding strategic alternatives and I guess other issues with the company. Did any results come out of that or was that just a moot point?

Joe, as we stated earlier, this study of strategic alternative options by Houlihan Lokey was started in the first quarter of this year, and the process is continuing. And we want to make sure that we go through an exhaustive process. And if there's a change, in terms of our initiative, that means when it comes to an end or if there are some concrete results related to it, we'll definitely announce it through an 8-K to all of you.

Okay. So I mean, you guys also talked about the debt coming due this year -- I'm sorry, maturing in July 2013. Is it safe to say that the company will be sold before then or some type of strategic partnership or alternative has to come to fruition by then?

Joe, this is Jon. It's stated in our risks section, we must refinance our debt; that is our top priority. And we're working on that and we hope to have something to share in the near future.

Okay. I'm just a little confused why $22 million would go from long-term debt to short-term debt.

Oh, well, that's because of the just the accounting rules. Once you're less than a year in your maturity date, it's no longer long-term...

No, no, I understand that. Why you guys wouldn't refinance it before that actually occurred?

Well, we are. I mean, I'm just saying we must, we're right now -- we're -- if we -- any company that would put that in their risk factor, "We must refinance our debt", you can -- that is the focus of management right now is to finance our debt -- refinance our debt.

Okay. Yes, I'm just looking at, because you guys are saying "strategic alternatives". I'm looking at this saying "less than a year", and that's what I was thinking. But anyway, I appreciate the answer.

[Operator Instructions] Our next question is from Michael Potter from Monarch Capital.

Just a couple of questions here. To continue on with the, I guess, the Houlihan retainer. The $0.5 million, it's the $0.5 million that was paid to Houlihan during the quarter? Is that correct?

Not all of it was Houlihan. It was -- there were some professional fees involved there as well.

Okay. Are -- is this some monthly retainer? Are we going to continue to see this expense going forward?

From a standpoint until we end the strategic alternative exploration, there will be some additional expenses going forward. We don't anticipate them to be too much longer.

Okay. So we're going to continue to see these pretty high fees being paid during the current quarter?

We're doing everything to keep those fees as low as possible, but...

Well, we're under contract, I'm assuming, so. We're fulfilling our contract, so it's a straight answer.

Right. From a standpoint of the strategic alternatives and our engagement with Houlihan Lokey, there will be some expenses in the fourth quarter.

Okay. All right. The retention payment that was made was, how much again?

It's roughly $600,000 paid in the first quarter of this year, made to key employees by the prior management.

That was also prior management?

Correct. That was done in February.

Okay. How many employees was that payment made to?

I don't have that off the top of my head. Probably 15 to 20.

15 to 20 employees? Okay. Okay. Can you give -- you mentioned -- I know we talked about it in the last conference call. With regards to the refinancing, obviously this is, I would say would be one of the paramount issues that the company is facing right now. Because I think we're paying, what, a $100,000 per month ticking fee?

It's 1% per month.

1% per month. Okay. So you anticipate having that, or being in a new agreement in the near term. I'm assuming, is that before the end of the year?

Michael, I would prefer it to be tomorrow. So we're working as hard as we can to get to close, so -- to get something to close there. So like I said, in the near future, we hope to be sharing some good news with you.

Okay. Just another question. Obviously, it's not on the top of things to do, but we've talked about entering new markets for some time and leveraging our infrastructure skill set and perhaps, focusing on the pain management or diabetes market. Have we made any further progress there?

Well, as stated earlier, Michael, the trials are still continuing, but good news is that we are seeing an increase in our services other than colorectal cancer side, other cancer treatments. So the operating model of the company, which is well established for the last 25 years, is now being embraced by larger clinics and hospitals for treating multidiscipline cancers, and we are seeing that the -- there are service -- increase in our services in other cancer treatments. And on the new initiatives, as I said that the trials are moving forward and we anticipate -- I'm not going to give you a forward-looking statement here, but the trials are going reasonably well.

[Operator Instructions] We have a question from Raj Risi [ph] from Clayhill [ph] Capital.

I'm somewhat new to the story in terms of being a shareholder and having followed it, but I've gone back and looked over the numbers and I was just curious, the sales growth, the revenue growth on the rentals side, if we just look at that first. It seems to have really gone up a lot in Q1 and then sequentially over Q4, almost $1 million. And then, it seems to have sort of inched up a little bit. I was just wondering, is that the right way to look at this or is there seasonality in this business for some reason? And if that is the case, then if you could just talk to why that pattern exists, that would be helpful.

Really, from the standpoint -- I'll add color to what I said previously, that one of the main obstacles we had in 2011 was the drug shortage of drugs that our ambulatory pumps deliver. They're still listed on the official website as being in a drug shortage, but our customers have done a great job in mitigating that. And so, if we have a pump at a customer, and they don't have the drug for it to deliver, then we do not have a billing. So along those lines, that's been mitigated by our customers. But again -- but also, our operational team delivering great service to our customers and our sales force out there, increasing our customer base with larger facilities which is -- have a larger pump fleet requirement, has also added to that increase. So it's not just been an increase from our existing customer base, but also adding to that customer base.

So is it safe to surmise that most of that increase occurred in Q1 sequentially and then since then, it's been more incremental in nature?

Well, no. We're still adding our -- we're very confident with of, what's going forward in 2013. We have a very strong new customer pipeline that our sales force is working on. So we feel that, on the rental side, we have a very strong foundation going into 2013.

Okay. On the product sales side, you mentioned the $1.3 million of opportunistic sales in the third quarter [ph] of last year. Can you just give a little bit more color on that? I mean, how is that different from the normal sales? Why would it be broken apart? Is there more than Q4, because I guess Q4 last year also had a somewhat high number of product sales? Is that sort of something that maybe is pulling from sales this year? If you could just give us some color what exactly happened there and why you chose to break it out, that would be helpful.

For sure. [Indiscernible] a direct owner out of our facility in Kansas that -- where we do most of our direct sales, they look around for opportunistic opportunities, and a good example of that would be a facility that's looking to change out its large volume pump fleet and go with a newer model. And so, they're looking to sell their existing pump fleet in a one-time sale. We look at those from time to time and at the time, we identified a large volume of those pumps that we could bring in, refurbish and flip to buyers. So that occurred in Q3 and Q4 of last year. We see those opportunities from time to time. This year, we really haven't acted on any of those, simply because with our cost of capital, we're trying to manage our inventory cash standpoint. And so we bypassed on some of those opportunities this year.

Okay. Okay. So I guess there's a little bit of that in Q4 as well and it's ...

Q4 of last year, yes.

Right. And this is different from your normal sales in that it's sort of a quick flip, I guess.

Correct. Correct. Well, maybe as -- well, we still have some of those pumps in the inventory, and it's just a question of how much of those can we quickly find a buyer for and how many of those do we feel will make -- do we need those in inventory going forward. And so, they're quite different than our normal direct sales process.

Got it. Okay. That's helpful. And then final question, I guess prior management in prior quarters all had "nonrecurring items" that they chose to highlight. For example in Q3 last year, they highlighted some $400,000 of acquisition and due diligence costs and in the quarters prior to that, they also had sales embedded in other costs that they chose to sort of break out, this is all non-GAAP, of course. But if you make those adjustments and add those back, then it looks like adjusted EBITDA margins, if you will, last year, were pretty good, maybe even better than this year's. How much stock should someone place in those representations that were made about "nonrecurring costs" last year?

Well, since none of us were here, I'm not going to talk about prior management. But when Dilip and I had our first quarter call together, we stated how we were going to look at EBITDA. That we're going to basically look at basic EBITDA and if something was truly nonrecurring or onetime in nature where it wasn't in a gray area, we would identify it, and we've talked about some today. But from a standpoint of ongoing cost like that or unique cost, we view that as, going forward in our discussions, as just a part of doing business.

[Operator Instructions]

Operator, I believe we're out of time today. So...

Let's take one more call. Just take one more call.

One more question?

Yes, one more question [indiscernible].

[Operator Instructions] And we have no questions.

Okay, great.

Okay, in that case, thank you, all, for participating in the call. We look forward to talking to you individually in the weeks ahead, since we're out of our blackout period. In conclusion, we are encouraged by our continued progress and the opportunities available to us in our core markets. Our goal remains the same: grow topline revenues, continue seeking operational efficiencies, improve our EBITDA and deliver profits. Thank you, all, for participating in this call and have a nice day. Goodbye.

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