IPC The Hospitalist Company Reports Second Quarter 2014 Financial Results

NORTH HOLLYWOOD, Calif., July 23, 2014 (GLOBE NEWSWIRE) -- IPC The Hospitalist Company, Inc. (Nasdaq:IPCM), a leading national hospitalist physician group practice, today announced financial results for the second quarter ended June 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.

Second Quarter 2014 Highlights (comparisons are to second quarter 2013):

• Net revenue increased 18% to $172.3 million, with same-market area net revenue growth of 14%.
• Patient encounters increased 14% to 1,727,000.
• Adjusted EBITDA increased 15% to $18.2 million.

Six Months Ended June 30, 2014 Highlights (comparisons are to six months ended June 30, 2013):

• Net revenue increased 15% to $345.0 million, with same-market area net revenue growth of 11%.
• Patient encounters increased 13% to 3,491,000.
• Adjusted EBITDA increased 9% to $36.1 million.

Adam D. Singer, M.D., Chief Executive Officer of IPC The Hospitalist Company, said, "We continue to deliver solid operating results and remain committed to a growth strategy that we believe creates long-term value for our patients, our physicians and the facilities we serve. Our second quarter results demonstrate the continued strength and effectiveness of our business model with double digit growth in net revenues, adjusted EBITDA and adjusted net income. This solid performance reflects a 22% increase in headcount as a result of both organic hires and acquisitions."

Dr. Singer added, "In line with our growth strategy we have completed eight acquisitions to-date in 2014, and coupled with our increased recruiting resources, we are poised to hire another record number of providers for 2014 and beyond. We continue to strive to be the employer and acquirer of choice and we remain confident that we can continue to further penetrate existing and new markets in both the acute care and post-acute care arenas."

Second Quarter 2014

Patient encounters for the three months ended June 30, 2014 increased by 214,000, or 14.1%, to 1,727,000, compared with 1,513,000 for the same period in the prior year. Net revenue for the three months ended June 30, 2014 was $172.3 million, an increase of $26.5 million, or 18.2%, from $145.8 million for the same period in the prior year. Of this $26.5 million increase, 74.0% was attributable to same-market area growth, including tuck-in acquisitions and new hires, and 26.0% was attributable to revenue generated from operations in new markets. Same-market net revenue increased 13.7% and same-market encounters increased 9.0%. The difference between revenue growth and encounter growth is attributable to an increase in hospital stipends, medical directorship revenues, meaningful use incentives and a true-up to previously estimated parity rates. 

Physician practice salaries, benefits and other expenses for the three months ended June 30, 2014 were $125.7 million, or 73.0% of net revenue, compared with $106.6 million, or 73.1% 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 $5.1 million, or 21.9%, to $28.3 million, or 16.4% of net revenue, for the three months ended June 30, 2014, compared with $23.2 million, or 15.9% of net revenue, for the same period in the prior year. The 50 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 June 30, 2014, compared with 14.7% of net revenue for the same period in the prior year.

The net change in fair value of contingent consideration ("net change in fair value") for acquisitions was a reduction to expense of $0.7 million and $5.3 million for the three months ended June 30, 2014 and 2013, respectively.

Adjusted EBITDA for the three months ended June 30, 2014 increased 14.5% to $18.2 million, or an adjusted EBITDA margin of 10.6%, compared with adjusted EBITDA of $15.9 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 general and administrative expenses as a percentage of revenue.

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

Adjusted net income for the three months ended June 30, 2014 increased 12.4% to $10.2 million, or a 5.9% adjusted net income margin, compared with adjusted net income of $9.1 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 June 30, 2014 decreased to $10.6 million from $12.3 million for the same period in the prior year, and GAAP net income margin was 6.2% and 8.4% for the three months ended June 30, 2014 and 2013, respectively.

Adjusted diluted earnings per share for the three months ended June 30, 2014 and 2013 was $0.58 and $0.53, respectively. GAAP diluted earnings per share for the three months ended June 30, 2014 was $0.61, compared with $0.71 for the same period in the prior year.

Liquidity and Capital Resources

As of June 30, 2014, IPC had approximately $66.0 million in liquidity, which is composed of $26.3 million in cash and cash equivalents, and an available line of credit of $39.7 million. IPC had borrowings of $85.0 million from its revolving line of credit outstanding at June 30, 2014.

Net cash provided by operating activities for the six months ended June 30, 2014 was $26.1 million, compared with $20.5 million for the same period in the prior year. The change in working capital during the six months ended June 30, 2014 was largely related to an increase in accounts receivable of $9.7 million, a decrease in prepaid expenses and other current assets of $7.5 million, an increase in accounts payable and accrued liabilities of $3.4 million, and a decrease in accrued compensation of $1.2 million. Days sales outstanding (DSO), which is used to measure the effectiveness of collections, was 56 DSO as of June 30, 2014 and December 31, 2013.

Net cash used in investing activities was $24.1 million for the six months ended June 30, 2014, compared with $17.5 million for the same period in the prior year. Cash of $21.6 million was used during the six months ended June 30, 2014 for physician practice acquisitions and contingent consideration payments on prior acquisitions, compared with $15.3 million in the same period in the prior year.

For the six months ended June 30, 2014, net cash used in financing activities was $0.8 million, compared with $11.4 million for the same period in the prior year. During the six months ended June 30, 2014 and 2013, the Company repaid $5.0 million and $15.0 million, respectively, of its outstanding revolving line of credit.

2014 Guidance

The Company reaffirms its guidance for the full year 2014 and expects revenue to be in the range of $720 million to $732 million, an adjusted EBITDA range of $76 million to $79 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 assumptions of (i) weighted average shares outstanding of 17.6 million for the year, (ii) a 38.3% effective tax rate, (iii) $8.4 million in stock based compensation expense, and (iv) $6.0 million in depreciation and amortization expense. Not included in the assumptions are (i) new market acquisitions completed after today's date, or (ii) future gains or losses related to changes in the fair value of contingent consideration of acquired practices.

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 six months ended June 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 June 30, 2014 and 2013, the Company recorded a reduction to expense of $695,000 and $5,262,000, respectively, and during the six months ended June 30, 2014 and 2013, the Company recorded a reduction to expense of $1,078,000 and $6,355,000, 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):

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):

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 July 23, 2014 at approximately 8:00 p.m. ET (5:00 p.m. PT) and will remain available until August 20, 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.