OREANDA-NEWS. May 11, 2016. ExamWorks Group, Inc. (NYSE:EXAM), a leading provider of independent medical examinations, peer reviews, bill reviews, Medicare compliance services, case management services, record retrieval services, document management services and other related services (“IME services”) today reported financial results for the first quarter of 2016.     

First Quarter 2016 Highlights

  • Revenues for the first quarter of 2016 were \\$226.5 million, an increase of \\$30.2 million, or 15.4%, over the year-ago quarter revenues of \\$196.3 million.  On a constant currency basis, revenues increased 18.2% with organically generated revenues increasing 6.1% during the first quarter of 2016.  Currency headwinds negatively impacted reported revenues this quarter by approximately \\$5.6 million when compared to the prior year quarter.          
     
  • Adjusted EBITDA for the first quarter of 2016 was \\$37.5 million (16.6% of revenues), an increase of \\$5.5 million, or 17.2%, over the year-ago quarter adjusted EBITDA of \\$32.0 million. Adjusted EBITDA is a non-GAAP measure that is described and reconciled to net income below and is not a substitute for the GAAP equivalent.

Other Highlights

  • Merger Agreement – On April 27, 2016, ExamWorks entered into a definitive agreement to be acquired by an affiliate of Leonard Green & Partners, L.P. for \\$35.05 per share in cash.  The acquisition is subject to approval from ExamWorks stockholders and other customary closing conditions. The transaction is currently expected to close in the third quarter of 2016.  In accordance with the merger agreement’s “go shop” provision, the Company will conduct a market test for 25 business days concluding June 1, 2016.
     
  • National Accounts
    • The Company continues to serve seven national accounts in the United States.  With this release, the Company was expecting to announce a new national account bringing the total count to eight.  While we expect that ultimately this client will become a national account, as of this time they have instead decided to significantly reduce the number of vendors on the panel and reevaluate the move to a mandated national program later this year.  Because of the reduced number of vendors, we do continue to expect that this customer will contribute towards our US IME organic growth this year.   
  • Acquisitions
     
    • Completed the following previously announced acquisitions in 2016 for total consideration of approximately \\$97.0 million and which generate aggregate annual revenues of approximately \\$66.0 million:
       
      • ABI (January 8, 2016) – United States
      • AMR (January 19, 2016) - United States
      • Prizm (April 5, 2016) – United States
  • 2016 Guidance – Management has suspended the issuance of earnings guidance in light of the Company entering into a definitive merger agreement with affiliates of Leonard Green & Partners, L.P.  Seller projections that were provided to Leonard Green & Partners, L.P. in connection with this transaction, together with other relevant information about the background and reasons for the transaction, will also be provided in the proxy statement seeking stockholder approval, a preliminary version of which is expected to be filed with the Securities and Exchange Commission (the “SEC”) on or about May 17, 2016.  

Financial Review

Revenues – For the three months ended March 31, 2016, revenues were \\$226.5 million, an increase of 15.4% over the \\$196.3 million of revenues generated in the first quarter of 2015.   

Below is a table presenting our reported revenues and growth rates for each of the regions we serve.

Reported Revenues
(In thousands except %)
   Three Months Ended March 31,
   2015 2016 As
Reported		 Constant
FX (a)		 Organic
Constant
FX (a)
United States \\$121,718\\$149,440  22.8%  22.8%  5.1%
United Kingdom  47,444 47,933  1.0%  6.9%  2.7%
Australia  19,205 19,676  2.5%  11.6%  11.6%
Canada  7,949 9,454  18.9%  31.7%  28.6%
Total \\$196,316\\$226,503  15.4%  18.2%  6.1%
            

(a) The constant FX columns represent growth rates excluding the effects of currency.

Costs of revenues – For the three months ended March 31, 2016, costs of revenues were \\$149.1 million, an increase of 16.3% over the \\$128.2 million in costs of revenues in the first quarter of 2015.  The increase was primarily due to increased revenues.  Costs of revenues as a percentage of revenues for the first quarter of 2016 were 65.8% compared to 65.3% in the prior year quarter due to changes in sales mix.  Included in costs of revenues in the first quarter of 2015 and 2016 are approximately \\$469,000 and \\$307,000 of share-based compensation expenses, respectively.

Selling, general and administrative expenses (“SGA”) – For the three months ended March 31, 2016, SGA expenses were \\$47.3 million, an increase of 12.1% over the \\$42.2 million in SGA expenses in the first quarter of 2015.  Adjusted SGA as a percentage of revenue was 17.7% in the first quarter of 2016 an improvement over the 18.7% in the comparable prior year period.  This improvement was due to organic growth and an improved cost structure in our U.K. business.  Adjusted SGA excludes the impact of share based compensation and acquisition-related transaction costs and other expenses that are added back to arrive at adjusted EBITDA.  Included in SGA expenses in the first quarter of 2016 are \\$5.1 million in share-based compensation expenses and \\$2.0 million in acquisition-related transaction costs and other expenses.  Included in SGA expenses in the first quarter of 2015 are \\$5.7 million in share-based compensation expenses and (\\$172,000) in acquisition-related transaction costs and other expenses. 

Depreciation and amortization expenses (“D&A”) – For the three months ended March 31, 2016, D&A expenses were \\$16.6 million, an increase of 12.2% from the \\$14.8 million in D&A expenses in the first quarter of 2015.  The increase was due to the amortization of finite lived intangibles resulting from recent acquisitions offset by decreased amortization for intangible assets becoming fully amortized in 2015 and 2016.  For the three months ended March 31, 2016, amortization expense was \\$14.7 million and depreciation expense was \\$1.9 million.

Interest and other expenses, net – For the three months ended March 31, 2016, interest and other expenses, net, were \\$8.4 million, a 5.0% increase over the \\$8.0 million in interest and other expenses, net in the first quarter of 2015.    

Adjusted EBITDA – For the three months ended March 31, 2016, adjusted EBITDA was \\$37.5 million, an increase of 17.2% over the \\$32.0 million of adjusted EBITDA generated in the first quarter of 2015. 

Adjusted EBITDA is a non-GAAP measure that is described and reconciled to net income below and is not a substitute for the GAAP equivalent.  

Other financial data – For the three months ended March 31, 2016, we generated \\$15.8 million of cash flow from operations compared to \\$6.2 million for the prior year quarter.  We ended the quarter with \\$16.0 million of cash on hand and \\$250.0 million available under our senior secured revolving credit facility.  Additionally, we ended the quarter with \\$582.6 million of total debt, consisting of \\$500.0 million of notes due April 2023, \\$50.0 million outstanding under our senior secured revolving credit facility and \\$32.6 million outstanding under our UK discount facilities. Our total leverage to adjusted EBITDA as of the end of the first quarter, calculated in accordance with our senior secured credit facility, was approximately 3.7x.  

About ExamWorks Group 
ExamWorks Group, Inc. is a leading provider of independent medical examinations, peer reviews, bill reviews, Medicare compliance services, case management services, record retrieval services, document management services and other related services (“IME services”). We help our clients manage costs and enhance their risk management processes by verifying the validity, nature, cause and extent of claims, identifying fraud and providing fast, efficient and quality IME services. ExamWorks is focused on providing clients a national presence while maintaining the local service and capabilities they need and expect.

Non-GAAP Financial Measures

In connection with the ongoing operation of our business, our management regularly reviews Adjusted EBITDA, a non-GAAP financial measure, to assess our performance. We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, acquisition-related transaction costs, share-based compensation expenses, and other (income) expenses. We believe that Adjusted EBITDA is an important measure of our operating performance because it allows management, lenders, investors and analysts to evaluate and assess our core operating results from period to period after removing the impact of changes to our capitalization structure, acquisition-related costs, income tax status, and other items of a non-operational nature that affect comparability.

We believe that various forms of the Adjusted EBITDA metric are often used by analysts, investors and other interested parties to evaluate companies such as ours for the reasons discussed above. Additionally, Adjusted EBITDA is used to measure certain financial covenants in our credit facility. Adjusted EBITDA is also used for planning purposes and in presentations to our Board of Directors as well as in our incentive compensation programs for our employees.

Non-GAAP information should not be construed as an alternative to GAAP information, as the items excluded from the non-GAAP measures often have a material impact on our financial results. Management uses, and investors should use, non-GAAP measures in conjunction with our GAAP results.

Below is a table presenting a reconciliation to Adjusted EBITDA from net income, the most comparable GAAP measure, for each of the periods indicated.

Important Additional Information

In connection with the proposed merger, ExamWorks intends to file relevant materials with the Securities and Exchange Commission (the “SEC”), including a preliminary proxy statement on Schedule 14A.  Following the filing of the definitive proxy statement with the SEC, ExamWorks will distribute the definitive proxy statement and a proxy card to each shareholder entitled to vote at the special meeting relating to the proposed merger.  SHAREHOLDERS ARE URGED TO CAREFULLY READ THESE MATERIALS IN THEIR ENTIRETY (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND ANY OTHER RELEVANT DOCUMENTS THAT EXAMWORKS WILL FILE WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.  The proxy statement and other relevant materials (when available), and any and all documents filed by ExamWorks with the SEC, may also be obtained for free at the SEC’s website at www.sec.gov.  In addition, shareholders may obtain free copies of the documents filed with the SEC by ExamWorks via ExamWorks’ Investor Relations section of its website at www.examworks.com or by contacting Investor Relations by directing a request to ExamWorks, Attention: Investor Relations, 3280 Peachtree Road, Suite 2625, Atlanta, Georgia, 30305, or by calling 404-952-2400.

This document does not constitute a solicitation of proxy, an offer to purchase or a solicitation of an offer to sell any securities.  ExamWorks, its directors, executive officers and certain employees may be deemed to be participants in the solicitation of proxies from the shareholders of ExamWorks in connection with the proposed merger. Information about the persons who may, under the rules of the SEC, be considered to be participants in the solicitation of ExamWorks stockholders in connection with the proposed merger, and any interest they have in the proposed merger, will be set forth in the definitive proxy statement when it is filed with the SEC.  Additional information regarding these individuals is set forth in ExamWorks proxy statement for its 2015 Annual Meeting of Shareholders, which was filed with the SEC on March 25, 2015, its Annual Report on Form 10­K and 10-K/A for the fiscal year ended December 31, 2015, which were filed with the SEC on March 26, 2016 and April 29, 2016, respectively, and in subsequent documents filed with the SEC.  These documents (when available) may be obtained for free at the SEC’s website at www.sec.gov and via ExamWorks’ Investor Relations section of its website at www.examworks.com. 

Forward-Looking Statements

Statements made in this press release that express ExamWorks’ or management’s intentions, plans, beliefs, expectations or predictions of future events are forward-looking statements, which ExamWorks intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or the negative of these terms or other similar expressions that convey uncertainty of future events or outcomes.  Forward-looking statements may include information concerning ExamWorks’ possible or assumed future results of operations, including descriptions of ExamWorks’ revenues, profitability, outlook and overall business strategy.  You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to ExamWorks’ operations and business environment, all of which are difficult to predict and many of which are beyond ExamWorks’ control.  Although ExamWorks believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many uncertainties and factors could affect ExamWorks’ actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements, including but not limited to: ExamWorks may be unable to obtain shareholder approval as required for the merger? conditions to the closing of the merger, including the obtaining of required regulatory approvals, may not be satisfied? the merger may involve unexpected costs, liabilities or delays? the business of ExamWorks may suffer as a result of uncertainty surrounding the merger? the outcome of any legal proceedings related to the merger? ExamWorks may be adversely affected by other economic, business, and/or competitive factors? the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement? the ability to recognize benefits of the merger? risks that the merger disrupts current plans and operations and the potential difficulties in employee retention as a result of the merger? other risks to consummation of the merger, including the risk that the merger will not be consummated within the expected time period or at all? the risks described from time to time in ExamWorks reports filed with the SEC under the heading “Risk Factors,” including the Annual Report on Form 10­K for the fiscal year ended December 31, 2015, Quarterly Reports on Form 10­Q and Current Reports on Form 8­K and in other of ExamWorks’ filings with the SEC? general industry and economic conditions; our ability to implement our growth strategy and acquisition program; our ability to integrate completed acquisitions; our expansion into international markets; our increasing reliance on national account clients; our ability to secure additional financing; regulation of our industry; our information technology systems and the risk of security and data breaches; our ability to protect our intellectual property rights and other information; our ability to compete successfully with our competitors; our ability to monitor and retain qualified physicians and other medical providers; our ability to obtain, retain and grow customer relationships; our ability to provide accurate health-related risk assessment analyses of data; our ability to comply with existing and future regulation; our ability to retain key management personnel; and restrictions in our credit facility, senior notes indenture and future indebtedness.  In addition, the risks discussed in our periodic reports, registration statements and other filings with the Securities and Exchange Commission could cause actual results to differ materially from the results anticipated by forward-looking statements.

You should keep in mind that any forward-looking statement made by ExamWorks herein, or elsewhere, speaks only as of the date on which made.  ExamWorks expressly disclaims any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in ExamWorks’ expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based.

EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
      
  For the three months ended
March 31,
  2015  2016
      
Revenues\\$196,316 \\$226,503
Costs and expenses:     
 Costs of revenues 128,176  149,126
 Selling, general and administrative expenses 42,152  47,339
 Depreciation and amortization 14,848  16,636
  Total costs and expenses 185,176  213,101
  Income from operations 11,140  13,402
Interest and other expenses, net:     
 Interest expense, net 8,004  8,399
  Total interest and other expenses, net 8,004  8,399
  Income before income taxes 3,136  5,003
Provision for income taxes 1,112  1,743
  Net income\\$2,024 \\$3,260
      
Per share data:     
Net income per share:     
 Basic\\$0.05 \\$0.08
 Diluted\\$0.05 \\$0.08
      
Weighted average number of common shares outstanding:      
 Basic 40,418  40,805
 Diluted 42,680  42,362
      
Adjusted EBITDA\\$31,952 \\$37,484
 
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
         
   December 31,   March 31, 
Assets  2015   2016 
Current assets:        
Cash and cash equivalents \\$47,865  \\$15,999 
         
Accounts receivable, net  245,449   249,062 
Prepaid expenses  16,809   19,914 
Other current assets  1,958   1,078 
Total current assets  312,081   286,053 
         
Property, equipment and leasehold improvements, net  20,145   22,264 
         
Goodwill  508,297   581,379 
         
Intangible assets, net  84,673   109,409 
Long-term accounts receivable, less current portion  62,717   67,495 
Deferred tax assets, noncurrent  50,405   40,596 
Deferred financing costs, net  2,520   2,386 
Other assets  3,969   4,178 
Total assets \\$1,044,807  \\$1,113,760 
Liabilities and Stockholders’ Equity        
Current liabilities:        
Accounts payable \\$60,599  \\$65,948 
Accrued expenses  60,748   55,261 
Accrued interest expense  6,245   13,414 
Deferred revenue  3,684   3,498 
Current portion of contingent earnout obligation  —   2,556 
Other current liabilities  9,056   7,282 
Total current liabilities  140,332   147,959 
Notes payable  493,126   493,359 
Senior secured revolving credit facility and working capital facilities 35,243   82,578 
Long-term contingent earnout obligation, less current portion  —   5,079 
Deferred tax liability, noncurrent  3,333   3,250 
Other long-term liabilities  12,738   14,225 
Total liabilities  684,772   746,450 
Commitments and contingencies        
Stockholders’ equity:        
Preferred stock, \\$0.0001 par value; Authorized 50,000 shares; no       
shares issued and outstanding at December 31, 2015 and March 31, 2016  —   — 
Common stock, \\$0.0001 par value; Authorized 250,000 shares;       
issued 42,983 and 43,222 shares at December 31, 2015 and        
March 31, 2016, respectively  4   4 
         
Additional paid-in capital  446,409   457,193 
         
Accumulated other comprehensive loss  (26,003)  (24,766)
         
Accumulated deficit  (30,619)  (27,359)
Treasury stock, at cost; Outstanding 1,705 and 2,015 shares at       
         
December 31, 2015 and March 31, 2016, respectively  (29,756)  (37,762)
         
Total stockholders’ equity  360,035   367,310 
Total liabilities and stockholders’ equity \\$1,044,807  \\$1,113,760 
  
 EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
           
        For the three months
ended March 31,
         2015   2016 
           
Operating activities:    
 Net income\\$ 2,024 \\$ 3,260 
 Adjustments to reconcile net income to net cash provided by operating activities:    
   Depreciation and amortization  14,848   16,636 
   Amortization of deferred rent  138   99 
   Share-based compensation  6,136   5,419 
   Excess tax benefit related to share-based compensation  (2,086)  (4,766)
   Provision for doubtful accounts  1,918   2,116 
   Amortization of deferred financing costs  587   381 
   Deferred income taxes  (1,759)  348 
   Changes in operating assets and liabilities, net of effects of acquisitions:    
     Accounts receivable  (14,763)  (7,562)
     Prepaid expenses and other current assets  1,010   (2,184)
     Accounts payable and accrued expenses  4,668   (2,729)
     Accrued interest expense  (5,640)  7,169 
     Deferred revenue and customer deposits  (133)  (108)
     Other liabilities  (784)  (2,313)
      Net cash provided by operating activities  6,164   15,766 
Investing activities:    
 Cash paid for acquisitions, net  (2,299)  (92,348)
 Purchases of building, equipment and leasehold improvements, net  (2,229)  (2,737)
 Working capital and other settlements for acquisitions  (91)  (271)
 Proceeds from foreign currency net investment hedges  4,812   1,649 
 Other     (1,250)  (150)
      Net cash used in investing activities  (1,057)  (93,857)
Financing activities:    
 Net borrowings (repayments) under senior secured revolving credit facility  (3,853)  50,000 
 Excess tax benefit related to share-based compensation  2,086   4,766 
 Proceeds from the exercise of options and warrants  8,855   582 
 Payment of contingent earnout obligation  (1,023)  — 
 Net repayments under working capital facilities  (132)  (1,623)
 Purchases of stock for treasury  —   (8,006)
      Net cash provided by financing activities  5,933   45,719 
Exchange rate impact on cash and cash equivalents  (509)  506 
      Net increase (decrease) in cash and cash equivalents  10,531   (31,866)
Cash and cash equivalents, beginning of period  9,751   47,865 
Cash and cash equivalents, end of period\\$ 20,282 \\$ 15,999 
         
EXAMWORKS GROUP, INC. AND SUBSIDIARIES
Reconciliation to Adjusted EBITDA
(In thousands)
(Unaudited)
     
  For the three months
ended March 31,
   2015   2016
Reconciliation to Adjusted EBITDA:       
Net income\\$ 2,024  \\$3,260
 Share-based compensation expense (1)   6,136   5,419
 Depreciation and amortization   14,848   16,636
 Acquisition-related transaction costs   559   1,058
 Other (income) expenses (2)   (731)  969
 Interest and other expenses, net   8,004   8,399
 Provision for income taxes   1,112   1,743
Adjusted EBITDA  31,952   37,484
        

(1) Share-based compensation expense of \\$469,000 and \\$307,000 is included in costs of revenues for the three months ended March 31, 2015 and 2016, respectively, and the remainder is included in SGA expenses. 

(2) Other (income) expenses consist principally of integration related expenses, such as facility termination, severance, relocation costs and gains or losses on earnout settlements associated with our acquisition strategy.