UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018March 31, 2019
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File NumberNumber: 000-50194
HMS HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
| Delaware | 11-3656261 | |
| (State or | (I.R.S. Employer Identification No.) | |
| 5615 High Point Drive, Irving, TX | 75038 | |
| (Address of principal executive offices) | (Zip Code) |
(214) 453-3000
(Registrant’s Telephone Number, Including Area Code)telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☒ | Accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company ☐ | |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock $0.01 par value | HMSY | The Nasdaq Stock Market LLC (Nasdaq Global Select Market) |
As of August 3, 2018,May 2, 2019, there were approximately 83,463,38287,095,920 shares of the registrant’s common stock (par value $0.01 per share) outstanding.
HMS HOLDINGS CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018MARCH 31, 2019
INDEX
Glossary of Terms and Abbreviations
Throughout this Quarterly Report on Form 10-Q, the Company may use certain abbreviations, acronyms and terms which are described below:
| ACA | Patient Protections and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act |
| ACO | Accountable Care Organization |
| ADR | Additional Documentation Request |
| ASC | Accounting Standards Codification |
| ASO | Administrative Service Only |
| ASU | Accounting Standards Update |
| CHIP | Children's Health Insurance Program |
| CMS | Centers for Medicare & Medicaid Services |
| CMS NHE | CMS National Health Expenditures |
| COB | Coordination of benefits |
| COSO | Committee of Sponsoring Organizations of the Treadway Commission |
| Credit Agreement | The Amended and Restated Credit Agreement dated as of May 3, 2013, as amended by Amendment No. 1 to Amended and Restated Credit Agreement dated as of March 8, 2017, and as further amended by Amendment No. 2 to Amended and Restated Credit Agreement, dated as of December 19, 2017, by and among HMS Holdings Corp. the Guarantors party thereto, the Lenders party thereto and Citibank, N.A. as Administrative Agent |
| DSO | Days |
| ERISA | Employment Retirement Income Security Act of 1974 |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| FASB | Financial Accounting Standards Board |
| Form 10-Q | HMS Holdings Corp. Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019 |
| HIPAA | Health Insurance Portability and Accountability Act of 1996 |
| HITECH | Health Information Technology for Economic and Clinical Health Act |
| IRC | Internal Revenue Code |
| IRS | |
| LIBO Rate | |
| MCO | Managed |
| PBM | Pharmacy Benefit Manager |
| PHI | Protected health information |
| PI | Payment Integrity |
| PMPM | Per Member Per Month |
| PMPY | Per Member Per Year |
| R&D Credit | U.S. Research and Experimentation Tax Credit pursuant to IRC Section 41 |
| RAC | Recovery Audit Contractor |
| RFP | Request for proposal |
| ROU | Right-of-use |
| SEC | U.S. Securities and Exchange Commission |
| Securities Act | Securities Act of 1933, as amended |
| Section 199 Deduction | U.S. Production Activities Deduction pursuant to IRC Section 199 |
| SG&A | Selling, general and administrative |
| TPL | Third-party liability |
| TPM | Total Population Management |
| U.S. GAAP | United States Generally Accepted Accounting Principles |
| 2006 Stock Plan | HMS Holdings Corp. Fourth Amended and Restated 2006 Stock Plan, as amended by Amendment No. 1 to the HMS Holdings Corp. Fourth Amended and Restated 2006 Stock Plan dated as of February 16, 2017 |
| 2016 Omnibus Plan | HMS Holdings Corp. 2016 Omnibus Incentive Plan |
| 2017 Tax Act | Tax Cuts and Jobs Act of 2017 |
| 2018 Form 10-K | HMS Holdings Corp. Annual Report on Form 10-K for the year ended December 31, 2018 |
| 401(k) Plan | HMS Holdings Corp. 401(k) Plan |
3
Cautionary Note Regarding Forward-Looking Statements
For purposes of this Form 10-Q, the terms “HMS,” “Company,” “we,” “us,” and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise.
Cautionary Note Regarding Forward-Looking Statements
Included in this Form 10-Q are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements. Such statements relate to our current expectations, projections and assumptions about our business, the economy and future events or conditions. They do not relate strictly to historical or current facts.
We have tried to identify forward-looking statements by using words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “likely,” “may,” “outlook,” “plan,” “potential,” “project,” “seek,” “strategy,” “target,” “trend,” “will,” “would,” “could,” “should,” and similar expressions and references to guidance, although some forward-looking statements may be expressed differently. These statements include, among other things, information concerning our future growth, business strategy, strategic or operational initiatives, our future operating or financial performance, our ability to invest in and utilize our data and analytics capabilities to expand our solutions and services, the benefits and synergies to be obtained from completed and future acquisitions, the future performance of companies we have acquired, the future effect of different accounting determinations or remediation activities, the sufficiency of our sources of funding for working capital, capital expenditures, acquisitions, stock repurchases, debt repayments and other matters, our future expenses, interest rates effectiveand tax rates, and financial results,our ability to meet our future liquidity requirements, the impact of changes to U.S. healthcare legislation or healthcare spending affecting Medicare, Medicaid or other publicly funded or subsidized health programs, and other statements regarding our possible future actions, business plans, objectives and prospects.
Forward-looking statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual results may differ materially from past results and from those indicated by such forward-looking statements if known or unknown risks or uncertainties materialize, or if underlying assumptions prove inaccurate. These risks and uncertainties include, among other things:
| ▪ | our ability to execute our business plans or growth strategy; |
| ▪ | our ability to innovate, develop or implement new or enhanced solutions or services; |
| ▪ | the nature of investment and acquisition opportunities we are pursuing, and the successful execution of such investments and acquisitions; |
| ▪ | our ability to successfully integrate acquired businesses and realize synergies; |
| ▪ | significant competition for our solutions and services; | |
| ▪ | variations in our results of operations; |
| ▪ | our ability to accurately forecast the revenue under our contracts and solutions; |
| ▪ | our ability to protect our systems from damage, interruption or breach, and to maintain effective information and technology systems and networks; |
| ▪ | our ability to protect our intellectual property rights, proprietary technology, information processes and know-how; |
| ▪ |
| our failure to maintain a high level of customer retention or the unexpected reduction in scope or termination of key contracts with major customers; |
| ▪ | customer dissatisfaction or our non-compliance with contractual provisions or regulatory requirements; |
| ▪ | our failure to meet performance standards triggering significant costs or liabilities under our contracts; |
| ▪ | our inability to manage our relationships with |
| ▪ | our reliance on subcontractors and other third party providers and parties to perform services; |
| ▪ | our ability to continue to secure contracts and favorable contract terms through the competitive bidding process; |
| ▪ | pending or threatened litigation; |
| ▪ | unfavorable outcomes in legal proceedings; |
| ▪ | our success in attracting and retaining qualified employees and members of our management team; |
4
| ▪ | our ability to generate sufficient cash to cover our interest and principal payments under our credit |
| ▪ | unexpected changes in tax laws, regulations or guidance and unexpected changes in our effective tax rate; |
| ▪ | unanticipated increases in the number or amount of claims for which we are self-insured; |
| ▪ |
| ▪ | changes in the U.S. healthcare environment or healthcare financing system, including regulatory, budgetary or political actions that affect healthcare spending or the practices and operations of healthcare organizations; |
| ▪ | our failure to comply with applicable laws and regulations governing individual privacy and information security or to protect such information from theft and misuse; |
| ▪ | our ability to comply with current and future legal and regulatory requirements; |
| ▪ | negative results of government or customer reviews, audits or investigations; |
| ▪ | state or federal limitations related to outsourcing of certain government programs or functions; |
| ▪ | restrictions on bidding or performing certain work due to perceived conflicts of interests; |
| ▪ | the market price of our common stock and lack of dividend payments; and |
| ▪ | anti-takeover provisions in our corporate governance documents. |
These and other risks are discussed in this Form 10-Q and under the headings “Part I, Item 1. Business,“Business,” “Part I. Item 1A, Risk“Risk Factors,” “Part II, Item 7. Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations,”Operations” and “Part II, Item 7A. Quantitative“Quantitative and Qualitative Disclosures About Market Risk,”Risk” of our 20172018 Form 10-K, and in other documents we file with the SEC.
Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. We caution readers not to place undue reliance upon any of these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-K, Form 10-Q and Form 8-K reports and our other filings with the SEC.
Market and Industry Data
This Form 10-Q containsmay include market, industry and government data and forecasts that have been obtained from publicly available information, various industry publications, and other published industry sources.sources and our own internal data and estimates. We have not independently verified thethird-party information and cannot make any representation as to the accuracy or completeness of such information. None of the reports and other materials of third partythird-party sources referred to in this Form 10-Q were prepared for use in, or in connection with, this report.Form 10-Q.
Trademarks and TradenamesTrade Names
We have a number of registered trademarks, including HMS®, as well as the corresponding HMS + logo design mark, HMS IntegritySource®, Eliza®and, Essette®., and Elli® These and other trademarks of ours appearing in this reportForm 10-Q are our property. Solely for convenience, trademarks and trade names of ours referred to in this Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names. This report contains additionalOther trademarks and trade names and trademarksappearing in this Form 10-Q are the property of other companies.their respective owners. We do not intend our use or display of other companies' trademarks or trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.
PART I — FINANCIAL INFORMATION
HMS HOLDINGS CORP. AND SUBSIDIARIES
(in thousands, except share and per share amounts)
| June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
| Assets | (unaudited) | (unaudited) | ||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 88,127 | $ | 83,313 | $ | 219,857 | $ | 178,946 | ||||||||
| Accounts receivable, net of allowance of $14,322 and $14,799, at June 30, 2018 and December 31, 2017, respectively | 193,114 | 189,460 | ||||||||||||||
| Accounts receivable, net of allowance of $14,037 and $13,683, at March 31, 2019 and December 31, 2018, respectively | 204,795 | 206,772 | ||||||||||||||
| Prepaid expenses | 16,526 | 16,589 | 22,097 | 19,970 | ||||||||||||
| Income tax receivable | 7,216 | 1,892 | 17,628 | 18,817 | ||||||||||||
| Deferred financing costs, net | 564 | 564 | 564 | 564 | ||||||||||||
| Other current assets | 266 | 836 | 249 | 240 | ||||||||||||
| Total current assets | 305,813 | 292,654 | 465,190 | 425,309 | ||||||||||||
| Property and equipment, net | 93,369 | 98,581 | 90,294 | 94,435 | ||||||||||||
| Goodwill | 487,617 | 487,617 | 487,617 | 487,617 | ||||||||||||
| Intangible assets, net | 78,708 | 91,482 | 64,801 | 67,140 | ||||||||||||
| Operating lease right-of-use assets | 20,110 | - | ||||||||||||||
| Deferred financing costs, net | 1,955 | 2,237 | 1,532 | 1,673 | ||||||||||||
| Other assets | 2,618 | 2,589 | 3,110 | 2,344 | ||||||||||||
| Total assets | $ | 970,080 | $ | 975,160 | $ | 1,132,654 | $ | 1,078,518 | ||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable, accrued expenses and other liabilities | $ | 56,687 | $ | 61,900 | $ | 63,078 | $ | 74,902 | ||||||||
| Estimated liability for appeals | 22,252 | 30,787 | 24,043 | 21,723 | ||||||||||||
| Total current liabilities | 78,939 | 92,687 | 87,121 | 96,625 | ||||||||||||
| Long-term liabilities: | ||||||||||||||||
| Revolving credit facility | 240,000 | 240,000 | 240,000 | 240,000 | ||||||||||||
| Operating lease liabilities | 18,677 | - | ||||||||||||||
| Net deferred tax liabilities | 18,089 | 21,989 | 19,710 | 18,485 | ||||||||||||
| Deferred rent | 4,539 | 4,852 | ||||||||||||||
| Other liabilities | 9,874 | 9,403 | 6,758 | 10,012 | ||||||||||||
| Total long-term liabilities | 272,502 | 276,244 | 285,145 | 268,497 | ||||||||||||
| Total liabilities | 351,441 | 368,931 | 372,266 | 365,122 | ||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Shareholders' equity: | ||||||||||||||||
| Preferred stock -- $0.01 par value; 5,000,000 shares authorized; none issued | — | — | — | — | ||||||||||||
| Common stock -- $0.01 par value; 175,000,000 shares authorized; 97,051,108 shares issued and 83,387,914 shares outstanding at June 30, 2018; 96,536,251 shares issued and 83,256,858 shares outstanding at December 31, 2017 | | | 970 | | | | 965 | | ||||||||
| Common stock -- $0.01 par value; 175,000,000 shares authorized; 100,745,077 shares issued and 87,081,712 shares outstanding at March 31, 2019; 98,924,501 shares issued and 85,261,664 shares outstanding at December 31, 2018; | 1,007 | 989 | ||||||||||||||
| Capital in excess of par value | 382,630 | 368,721 | 453,080 | 425,748 | ||||||||||||
| Retained earnings | 370,615 | 366,164 | 441,877 | 422,235 | ||||||||||||
| Treasury stock, at cost: 13,663,194 shares at June 30, 2018 and 13,279,393 shares at December 31, 2017 | (135,576 | ) | (129,621 | ) | ||||||||||||
| Treasury stock, at cost: 13,663,194 shares at March 31, 2019 and 13,663,194 shares at December 31, 2018 | (135,576 | ) | (135,576 | ) | ||||||||||||
| Total shareholders' equity | 618,639 | 606,229 | 760,388 | 713,396 | ||||||||||||
| Total liabilities and shareholders' equity | $ | 970,080 | $ | 975,160 | $ | 1,132,654 | $ | 1,078,518 | ||||||||
See accompanying notesNotes to the unaudited consolidated financial statements.
Consolidated Financial Statements.
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
| Revenue | $ | 146,791 | $ | 133,313 | $ | 288,216 | $ | 247,046 | $ | 147,953 | $ | 141,425 | ||||||||||||
| Cost of services: | ||||||||||||||||||||||||
| Compensation | 55,188 | 51,853 | 111,267 | 100,773 | 57,452 | 56,079 | ||||||||||||||||||
| Direct project and other operating expenses | 20,199 | 16,648 | ||||||||||||||||||||||
| Information technology | 14,240 | 11,281 | 26,503 | 21,064 | 13,105 | 12,263 | ||||||||||||||||||
| Occupancy | 4,014 | 4,230 | 8,397 | 7,777 | 4,079 | 4,383 | ||||||||||||||||||
| Direct project expenses | 10,908 | 10,101 | 20,991 | 20,544 | ||||||||||||||||||||
| Other operating expenses | 7,051 | 6,562 | 13,616 | 13,765 | ||||||||||||||||||||
| Amortization of acquisition related software and intangible assets | 9,621 | 7,372 | 17,753 | 13,658 | 4,166 | 8,132 | ||||||||||||||||||
| Total cost of services | 101,022 | 91,399 | 198,527 | 177,581 | 99,001 | 97,505 | ||||||||||||||||||
| Selling, general and administrative expenses | 26,532 | 27,553 | 58,530 | 51,161 | 29,246 | 31,998 | ||||||||||||||||||
| Settlement expense | 20,000 | - | 20,000 | - | ||||||||||||||||||||
| Total operating expenses | 147,554 | 118,952 | 277,057 | 228,742 | 128,247 | 129,503 | ||||||||||||||||||
| Operating (loss)/income | (763 | ) | 14,361 | 11,159 | 18,304 | |||||||||||||||||||
| Operating income | 19,706 | 11,922 | ||||||||||||||||||||||
| Interest expense | (3,034 | ) | (2,339 | ) | (5,682 | ) | (4,625 | ) | (2,849 | ) | (2,648 | ) | ||||||||||||
| Interest income | 188 | 33 | 308 | 188 | 1,114 | 120 | ||||||||||||||||||
| (Loss)/income before income taxes | (3,609 | ) | 12,055 | 5,785 | 13,867 | |||||||||||||||||||
| Income before income taxes | 17,971 | 9,394 | ||||||||||||||||||||||
| Income taxes | (242 | ) | 5,538 | 2,761 | 5,908 | (1,671 | ) | 3,003 | ||||||||||||||||
| Net (loss)/income | $ | (3,367 | ) | $ | 6,517 | $ | 3,024 | $ | 7,959 | |||||||||||||||
| Net Income | $ | 19,642 | $ | 6,391 | ||||||||||||||||||||
| Basic income per common share: | ||||||||||||||||||||||||
| Net (loss)/income per common share -- basic | $ | (0.04 | ) | $ | 0.08 | $ | 0.04 | $ | 0.10 | |||||||||||||||
| Net income per common share -- basic | $ | 0.23 | $ | 0.08 | ||||||||||||||||||||
| Diluted income per common share: | ||||||||||||||||||||||||
| Net (loss)/income per common share -- diluted | $ | (0.04 | ) | $ | 0.08 | $ | 0.04 | $ | 0.09 | |||||||||||||||
| Net income per common share -- diluted | $ | 0.22 | $ | 0.07 | ||||||||||||||||||||
| Weighted average shares: | ||||||||||||||||||||||||
| Basic | 83,231 | 83,921 | 83,222 | 83,708 | 85,853 | 83,933 | ||||||||||||||||||
| Diluted | 83,231 | 85,826 | 84,837 | 85,534 | 88,614 | 85,682 | ||||||||||||||||||
See accompanying notesNotes to the unaudited consolidated financial statements.
HMS HOLDINGS CORP. AND SUBSIDIARIESConsolidated Financial Statements.
SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
| Common Stock | Treasury Stock | |||||||||||||||||||||||||||
# of Shares Issued | Par Value | Capital in Excess of Par Value | Retained Earnings | # of Shares | Amount | Total Shareholders' Equity | ||||||||||||||||||||||
| Balance at December 31, 2017 | 96,536,251 | $ | 965 | $ | 368,721 | $ | 366,164 | 13,279,393 | $ | (129,621 | ) | $ | 606,229 | |||||||||||||||
| Adoption of accounting standard (Note 1 and 3) | - | - | - | 1,427 | - | - | 1,427 | |||||||||||||||||||||
| Net income | - | - | - | 3,024 | - | - | 3,024 | |||||||||||||||||||||
| Stock-based compensation expense | - | - | 14,208 | - | - | - | 14,208 | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | 383,801 | (5,955 | ) | (5,955 | ) | |||||||||||||||||||
| Exercise of stock options | 151,034 | 2 | 2,388 | - | - | - | 2,390 | |||||||||||||||||||||
| Vesting of restricted stock units, net of shares withheld for employee tax | 363,823 | 3 | (2,687 | ) | - | - | - | (2,684 | ) | |||||||||||||||||||
| Balance at June 30, 2018 | 97,051,108 | $ | 970 | $ | 382,630 | $ | 370,615 | 13,663,194 | $ | (135,576 | ) | $ | 618,639 | |||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
SHAREHOLDERS’ EQUITY (in thousands, except share amounts)
(unaudited)
| Three months ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Common Stock and paid-in capital | ||||||||
| Balance, beginning of period | $ | 426,737 | $ | 369,686 | ||||
| Exercise of stock options | 23,139 | 144 | ||||||
| Stock-based compensation expense | 10,979 | 9,494 | ||||||
| Vesting of restricted stock units, net of shares withheld for employee tax | (6,768 | ) | (2,587 | ) | ||||
| Balance, end of period | 454,087 | 376,737 | ||||||
| Retained earnings | ||||||||
| Balance, beginning of period | 422,235 | 366,164 | ||||||
| Net income | 19,642 | 6,391 | ||||||
| Cumulative effect of accounting changes | - | 1,427 | ||||||
| Balance, end of period | 441,877 | 373,982 | ||||||
| Treasury stock | ||||||||
| Balance, beginning of period | (135,576 | ) | (129,621 | ) | ||||
| Purchase of treasury stock | - | (5,955 | ) | |||||
| Balance, end of period | (135,576 | ) | (135,576 | ) | ||||
| Total shareholders' equity | $ | 760,388 | 615,143 | |||||
| Shares outstanding | ||||||||
| Balance, beginning of period | 98,924,501 | 96,536,251 | ||||||
| Exercise of stock options | 1,443,685 | 9,043 | ||||||
| Vesting of restricted stock units, net of shares withheld for employee tax | 376,891 | 330,860 | ||||||
| Balance, end of period | 100,745,077 | 96,876,154 | ||||||
| Treasury Stock Outstanding | ||||||||
| Balance, beginning of period | 13,663,194 | 13,279,393 | ||||||
| Purchase of treasury stock | - | 383,801 | ||||||
| Balance, end of period | 13,663,194 | 13,663,194 | ||||||
See accompanying Notes to the unaudited Consolidated Financial Statements.
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Six Months Ended June 30, | ||||||||
| 2018 | 2017 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 3,024 | $ | 7,959 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of property, equipment and software | 16,758 | 12,927 | ||||||
| Amortization of intangible assets | 12,774 | 9,740 | ||||||
| Amortization of deferred financing costs | 282 | 1,042 | ||||||
| Stock-based compensation expense | 14,208 | 9,380 | ||||||
| Deferred income taxes | (3,900 | ) | 1,265 | |||||
| Change in fair value of contingent consideration | - | 500 | ||||||
| Release of estimated liability for appeals | (8,436 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (3,654 | ) | (9,039 | ) | ||||
| Prepaid expenses | 63 | 149 | ||||||
| Other current assets | 570 | 526 | ||||||
| Other assets | (29 | ) | 149 | |||||
| Income taxes receivable / (payable) | (5,324 | ) | (6,180 | ) | ||||
| Accounts payable, accrued expenses and other liabilities | (2,546 | ) | (8,196 | ) | ||||
| Estimated liability for appeals | (99 | ) | 518 | |||||
| Net cash provided by operating activities | 23,691 | 20,740 | ||||||
| Investing activities: | ||||||||
| Acquisition of a business, net of cash acquired | - | (171,174 | ) | |||||
| Purchases of property and equipment | (2,455 | ) | (8,881 | ) | ||||
| Investment in capitalized software | (10,173 | ) | (6,626 | ) | ||||
| Net cash used in investing activities | (12,628 | ) | (186,681 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from exercise of stock options | 2,390 | 1,986 | ||||||
| Payments of tax withholdings on behalf of employees for net-share settlement for stock-based compensation | (2,684 | ) | (2,874 | ) | ||||
| Payments on capital lease obligations | - | (5 | ) | |||||
| Proceeds from credit facility | - | 42,204 | ||||||
| Purchases of treasury stock | (5,955 | ) | - | |||||
| Net cash (used in)/provided by financing activities | (6,249 | ) | 41,311 | |||||
| Net increase (decrease) in cash and cash equivalents | 4,814 | (124,630 | ) | |||||
| Cash and Cash Equivalents | ||||||||
| Cash and cash equivalents at beginning of year | 83,313 | 175,999 | ||||||
| Cash and cash equivalents at end of period | $ | 88,127 | $ | 51,369 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | 11,472 | $ | 10,656 | ||||
| Cash paid for interest | $ | 4,916 | $ | 3,451 | ||||
| Supplemental disclosure of non-cash activities: | ||||||||
| Change in balance of accrued property and equipment purchases | $ | 1,082 | $ | (1,313 | ) | |||
| Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 19,642 | $ | 6,391 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of property, equipment and software | 7,930 | 7,345 | ||||||
| Amortization of intangible assets | 2,339 | 6,121 | ||||||
| Amortization of deferred financing costs | 141 | 141 | ||||||
| Stock-based compensation expense | 10,979 | 9,494 | ||||||
| Deferred income taxes | 1,225 | (777 | ) | |||||
| Noncash lease expense | 1,196 | - | ||||||
| Loss on disposal of assets | - | 72 | ||||||
| Release of estimated liability for appeals | - | (8,436 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,977 | 2,328 | ||||||
| Prepaid expenses | (2,127 | ) | 2,539 | |||||
| Other current assets | (9 | ) | 469 | |||||
| Other assets | (766 | ) | (25 | ) | ||||
| Income taxes receivable | 1,189 | 2,919 | ||||||
| Accounts payable, accrued expenses and other liabilities | (15,995 | ) | (14,115 | ) | ||||
| Operating lease liabilities | (1,519 | ) | - | |||||
| Estimated liability for appeals | 2,320 | 271 | ||||||
| Net cash provided by operating activities | 28,522 | 14,737 | ||||||
| Investing activities: | ||||||||
| Purchases of property and equipment | (369 | ) | (791 | ) | ||||
| Investment in capitalized software | (3,621 | ) | (4,963 | ) | ||||
| Net cash used in investing activities | (3,990 | ) | (5,754 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from exercise of stock options | 23,139 | 144 | ||||||
| Payments of tax withholdings on behalf of employees for net-share settlements | (6,768 | ) | (2,587 | ) | ||||
| Payments on capital lease obligations | 8 | - | ||||||
| Purchases of treasury stock | - | (5,955 | ) | |||||
| Net cash provided by/(used in) financing activities | 16,379 | (8,398 | ) | |||||
| Net increase in cash and cash equivalents | 40,911 | 585 | ||||||
| Cash and Cash Equivalents | ||||||||
| Cash and cash equivalents at beginning of year | 178,946 | 83,313 | ||||||
| Cash and cash equivalents at end of period | $ | 219,857 | $ | 83,898 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes/(refunds received), net of refunds | $ | (4,288 | ) | $ | 626 | |||
| Cash paid for interest | $ | 2,771 | $ | 2,055 | ||||
| Supplemental disclosure of non-cash activities: | ||||||||
| Change in balance of accrued property and equipment purchases | $ | (201 | ) | $ | 881 | |||
See accompanying notesNotes to the unaudited consolidated financial statements.Consolidated Financial Statements.
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the ThreeFOR THE THREE MONTHS ENDED MARCH 31, 2019 and Six Months Ended June 30, 2018 and 2017
(unaudited)
| 1. | Business and Summary of Significant Accounting Policies |
(a) Business
The terms “HMS,” “Company,” “we,” “us,” and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise. HMS is a leadingan industry-leading provider of cost containment solutions in the U.S. healthcare marketplace. We use innovativehealthcare data technology, extensive data servicesanalytics and powerful analyticsengagement solutions, to deliver coordination of benefits, payment integrity, population risk analytics, and care management and consumer engagement solutions to help payers reduce costs, improve healthcare payers improve financial performanceoutcomes and clinical outcomes.enhance member experiences. We provide coordination of benefits services to government and commercial healthcare payers and sponsors to ensure that the responsiblecorrect party pays healthcare claims.the claim. Our payment integrity services ensure healthcare claims billed are accuratepromote accuracy by fighting fraud, waste and appropriate,abuse, and our caretotal population management and consumer engagement technology helpssolutions provide risk-bearing organizations with reliable intelligence across their member populations to better engage withidentify risks and manage the care delivered to their members.improve patient engagement and outcomes. Together these various services help customers recover erroneously paid amounts from liable third parties; prevent future improper payments; reduce fraud, waste and abuse; better managemove the care their members receive; engage healthcare consumers to improve clinical outcomes while increasing member satisfaction and retention; and achieve regulatory compliance.system forward for our customers. We currently operate as one business segment with a single management team that reports to ourthe Chief Executive Officer.
The Consolidated Financial Statements and accompanying consolidated financial statements and notesNotes in this Form 10-Q are unaudited. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“U.S. GAAPGAAP”) for complete financial statements. These statements include all adjustments (which include only normal recurring adjustments, except as disclosed) that management considers necessary to present a fair statement of the Company’s results of operations, financial position and cash flows. The results reported in these unaudited consolidated financial statementsConsolidated Financial Statements should not be regarded as necessarily indicative of results that may be expected for the entire year. It is suggested that these unaudited consolidated financial statementsConsolidated Financial Statements be read in conjunction with the Company’s consolidated financial statements and notes thereto as of and for the year ended December 31, 20172018, which were filed with the SEC as part of the 2017Company’s Annual Report on Form 10-K.10-K for the year ended December 31, 2018 (“2018 Form 10-K”). The consolidated balance sheet as of December 31, 20172018 included herein was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
The preparation of the Company’s unaudited consolidated financial statementsConsolidated Financial Statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, primarily accounts receivable, intangible assets, fixed assets, accrued expenses, estimated liability for appeals, the disclosure of contingent liabilities at the date of the unaudited consolidated financial statementsConsolidated Financial Statements and the reported amounts of revenue and expenses during the reporting periods. The Company’s actual results could differ from those estimates.
These unaudited consolidated financial statementsConsolidated Financial Statements include HMS accounts and transactions and those of the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Summary of Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies that are referenced in the 20172018 Form 10-K other than as described below with respect to revenue recognition.leases.
Recently Adopted Accounting Pronouncements
In May 2014,February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU 2014-09,No. 2016-02, Revenue from Contracts with CustomersLeases (Topic 606)842) (“ASU 2014-09”2016-02”),. ASU 2016-02 requires most lessees to recognize a majority of the company’s leases on the balance sheet, which increases reported assets and liabilities. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. ASU 2016-02 is the new comprehensive revenue recognition standard that supersedes all existing revenue recognition guidance under U.S. GAAP.effective for annual reporting periods beginning after December 15, 2018 including interim periods within such annual reporting periods with early adoption permitted. The Company adopted ASU 2014-09this guidance on January 1, 2018 as2019, utilizing the optional transition method approach with an effective date of January 1, 2019. Consequently, financial information prior to all contracts using the modified retrospective methodeffective date was not updated and the Company recognizeddisclosures required under the new standard are not provided for dates and periods prior to the effective date. There were no cumulative effect adjustments to retained earnings as part of initially applyingadoption. The Company elected the new revenue standard as an adjustmentavailable practical expedients, including the practical expedient to not separate lease and non-lease components of its leases and the opening balance of retained earnings. The financial information for comparative prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The effect of adopting ASU 2014-09 in the current annual reporting period as compared with the guidance that was in effect before the change is immaterial.short-term lease practical expedient. The Company’s internal control framework did not materially change, but existing internal controls were modified due to certain changes to business processes and systems to support the new revenue recognitionleasing standard as necessary. The standard had a material impact on our consolidated balance sheets, the most significant impact being the recognition of approximately $21.3 million of ROU assets and $26.3 million lease liabilities on the effective date, but did not have an impact on our consolidated income statements. The Company continues to expect the impact of the adoption of the new standard to be immaterial to its net income and its internal control framework on an ongoing basis.
In August 2016, the FASB issued ASU No. 2016-15, Statements of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 clarifies where certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for annual reporting periods beginning after December 15, 2017, and for interim reporting periods within such annual periods. The Company adopted this guidance on January 1, 2018. The adoption of this guidance did not have an effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 finalizes previous proposals regarding shareholder concerns that the definition of a business is applied too broadly. The guidance assists entities with evaluating whether transactions should be accounted for as acquisitions of assets or of businesses. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this guidance on January 1, 2018. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting, (“ASU 2017-09”). ASU 2017-09 requires entities to apply modification accounting to changes made to a share-based payment award. The new guidance specifies that entities will apply modification accounting to changes to a share-based payment award only if any of the following are not the same immediately before and after the change: 1) The award’s fair value (or calculated value or intrinsic value, if those measurement methods are used), 2) the award’s vesting conditions, and 3) the award’s classification as an equity or liability instrument. ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within such annual periods, with early adoption permitted. The Company adopted this guidance on January 1, 2018. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 will require most lessees to recognize a majority of the company’s leases on the balance sheet, which will increase reported assets and liabilities. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 including interim periods within such annual reporting periods with early adoption permitted. The Company has not early adopted this guidance. The Company developed a preliminary implementation plan and is reviewing historical lease agreements to quantify the impact of adoption. Depending on the results of the Company’s review, there could be material changes to the Company’s financial position and/or results of operations. The Company expects to complete the initial analysis of all historical agreements and the overall assessment process by the end of the third quarter of 2018 in anticipation of performing additional reviews and other implementation considerations in the fourth quarter of 2018.
In January 2017, the FASB issued ASU No. 2017-04,Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment(“ASU 2017-04”). This amendment simplifies the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendment simplifies this approach by having the entity (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment is effective for public entities that are SEC filers prospectively for their annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance but this guidance is not expected to have a material impact on the Company’s financial position, results of operations or internal control framework.
In June 2018, the FASB issued ASU No. 2018-07,Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting,(“ASU 2018-07”). ASU 2018-07 requires entities to apply similar accounting for share-based payment transactions with non-employees as with share-based payment transactions with employees. ASU 2018-07 is effective for public entities for fiscal yearyears beginning after December 15, 2018, including interim periods within thatthose fiscal year.years. The Company adopted this guidance on January 1, 2019. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 introduces the current expected credit losses methodology for estimating allowances for credit losses. ASU 2016-13 applies to all financial instruments carried at amortized cost and off-balance-sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credit, and financial guarantees. The new accounting standard does not apply to trading assets, loans held for sale, financial assets for which the fair value option has been elected, or loans and receivables between entities under common control. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance but this guidance is not expected to have a material impact on the Company’s financial position, results of operations or internal control framework.
| 2. | Revenue Recognition |
Financial instruments (principally cash and cash equivalents, accounts receivable, accounts payable and accrued expenses) are carried at cost, which approximates fair value due to the short-term maturity of these instruments. The Company’s long-term credit facility is carried at cost, which, due to the variable interest rate associated with the revolving credit facility, approximates its fair value. The Company has no Level 1 or Level 2 financial instruments and there were no transfers between Level 1 or Level 2 financial instruments. Included in Other liabilities on the unaudited Consolidated Balance Sheets at June 30, 2018 is a $35,000 contingent consideration liability classified as Level 3 which remains unchanged from December 31, 2017. The liability is valued using a Monte Carlo simulation and includes unobservable inputs such as expected levels of revenues and discount rates. Changes in the unobservable inputs of this instrument could result in a significant change in the fair value measurement.
The Company’s revenue disaggregated by productsolution for the three and six months ended June 30 isMarch 31, 2019 and 2018 was as follows (in thousands):
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Coordination of benefits | $ | 100,754 | $ | 98,454 | $ | 192,507 | $ | 186,946 | ||||||||
| Analytical services | 46,037 | 34,859 | 95,709 | 60,100 | ||||||||||||
| Total | $ | 146,791 | $ | 133,313 | $ | 288,216 | $ | 247,046 | ||||||||
| Three Months Ended | ||||||||
| March 31, 2019 | March 31, 2018 | |||||||
| Coordination of Benefits | $ | 105,851 | $ | 91,752 | ||||
| Payment Integrity | 27,726 | 38,641 | ||||||
| Total Population Management | 14,376 | 11,032 | ||||||
| Total | $ | 147,953 | $ | 141,425 | ||||
12
Coordination of benefits
Coordination of benefits revenue is derived from contracts with state governments and Medicaid managed care plans that typicallycan span 3 to 5 years with the option to renew. Types of service contracts could include: (a) the identification of erroneously paid claims; (b) the delivery of verified commercial insurance coverage information; (c) the identification of paid claims where another third party is liable; and (d) the identification and enrollment of Medicaid members who have access to affordable employer insurance. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance obligations is largely based on variable consideration where, based on the number of claims or amount of findings the Company identified, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation. The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key inputs and assumptions in determining variable consideration includesinclude identified pricing and expected recoveries and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when our services are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Generally, coordination of benefit contract payment terms are not standardized within the respective contract; however, payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.
Analytical services
The Company’s analytical services revenue consists mostly of revenue for our payment integrity services but also careand total population management and consumer engagement services.solutions.
Payment integrity services revenue is derived from contracts with federal and state governments, commercial health plans and other at-risk entities that can span several years with the option to renew. Types of service contracts could include: (a) services designed to ensure that healthcare payments are accurate and appropriate; and (b) the identification of over/(under)under payments or inaccurate charges based on a review of medical records. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance obligations is largely based on variable consideration where, based on the numberamount of claims or amount ofrecovery findings the Company identified,identifies, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation. The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key inputs and assumptions in determining variable consideration includesinclude identified pricing and expected recoveries and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when our services are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Generally, payment integrity contract payment terms are not standardized within the respective contract; however, invoice payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.
Care
Total population management and consumer engagement services revenue is derived from contracts with health plans and other risk-bearing entities that can span several years with the option to renew. Types of service contracts could include: (a) programs designed to improve member engagement; and (b) outreach services designed to improve clinical outcomes. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these services is largely based on consideration associated with prices per order/transfer and PMPM/PMPY fees. The Company believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. The Company has elected the right to the invoice practical expedient for recognition of revenue related to its performance obligations.obligations when the amount we have the right to invoice the customer corresponds directly with the value to the customer. Additionally, certain caretotal population management and consumer engagement services contracts have distinct performance obligations related to software license and implementation fees which have historically been recognized as revenue ratably over the life of the contract. However, uponLastly, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Upon adoption of ASC 606, revenue for software licenses is recognized at the beginning of the license period when control is transferred as the license is installed and revenue for implementation fees is recognized when control is transferred over time as the implementation is being performed. As the performance obligation is deemed to have been satisfied and control transferred to our customers for software licenses and implementation fees on or before December 31, 2017, the Company recorded a decrease to deferred revenue and an increase to opening retained earnings of $1.4$1.1 million, net of tax, as of January 1, 2018 for the cumulative impact of adopting ASC 606. A portion of the Company’s careGenerally, total population management and consumer engagement services are deferred and revenue is recognized over time. Deferred revenue of this nature was approximately $5.4 million and $6.4 million as of June 30, 2018 and December 31, 2017, respectively, and is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. Generally, care management and consumer engagement contract payment terms are stated within the contract and are due within an explicitly stated time period (e.g., 30, 45, 60 days) from the date of invoice. A portion of the payment received may relate to future performance obligations and will result in an increase to deferred revenue until the obligation has been met.
In connection with Coordination of Benefits and certain Payment Integrity services, lockboxes and their associated bank accounts are setup to support recoveries and remittances. Generally, these bank accounts are for the benefit of the Company’s customers. Customer cash held in Company bank accounts for the benefit of the customer was approximately $5.4 million as of March 31, 2019. This amount is included in cash and cash equivalents and other current liabilities on the accompanying consolidated balance sheet.
The Company’s revenue disaggregated by market for the three months ended March 31, 2019 and 2018 was as follows (in thousands):
| Three Months Ended | ||||||||
| March 31, 2019 | March 31, 2018 | |||||||
| Commercial | $ | 76,259 | $ | 71,785 | ||||
| State | 61,742 | 54,620 | ||||||
| Federal | 9,952 | 15,020 | ||||||
| Total | $ | 147,953 | $ | 141,425 | ||||
A portion of the Company’s services are deferred and revenue is recognized at a later time. Deferred revenue was approximately $6.5 million and $5.6 million as of March 31, 2019 and December 31, 2018, respectively, and is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. Approximately $1.4 million of the December 31, 2018 balance was recognized in revenue during the quarter ended March 31, 2019.
Contract modifications are routine in nature and often done to account for changes in the contract specifications or requirements. In most instances, contract modifications are for services that are not distinct, and, therefore, modifications are accounted for as part of the existing contract.
The Company has elected to use the practical expedient to expense the incremental costs of obtaining a contract if the amortization period of the asset that the Company would have otherwise recognized is one year or less.
| Accounts Receivable and Accounts Receivable Allowance |
The Company’s accounts receivable, net, consisted of the following (in thousands):
| June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||
| Accounts receivable | $ | 207,436 | $204,259 | $ | 218,832 | $ | 220,455 | |||||||
| Allowance | (14,322 | ) | (14,799) | (14,037 | ) | (13,683 | ) | |||||||
| Accounts receivable, net | $ | 193,114 | $189,460 | $ | 204,795 | $ | 206,772 | |||||||
We record an accounts receivable allowance based on historical patterns of billing adjustments, length of operating and collection cycle and customer negotiations, behaviors and payment patterns. Changes in these estimates are recorded to revenue in the period of change. AThe following is a summary of the activity in the accounts receivable allowance was as follows (in thousands):
| June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
| Balance--beginning of period | $ | 14,799 | $ | 10,772 | $ | 13,683 | $ | 14,799 | ||||||||
| Provision | 10,332 | 20,233 | 5,411 | 20,453 | ||||||||||||
| Charge-offs | (10,809 | ) | (16,206 | ) | (5,057 | ) | (21,569 | ) | ||||||||
| Balance--end of period | $ | 14,322 | $ | 14,799 | $ | 14,037 | $ | 13,683 | ||||||||
On April 17, 2017, the Company completed the acquisition of 100% of the outstanding capital stock of Eliza Holding Corp. (“Eliza”), for a preliminary purchase price of $171.6 million funded with available liquidity of approximately 75% cash on hand and 25% from the Company’s existing credit line.
The allocation of the purchase price to the fair value of the assets acquired and the liabilities assumed as of April 17, 2017, the effective date of the acquisition, is as follows (in thousands):
| Cash and cash equivalents | $ | 435 | ||
| Accounts receivable | 8,902 | |||
| Prepaid expenses | 1,427 | |||
| Property and equipment | 1,146 | |||
| Intangible assets | 76,240 | |||
| Goodwill | 107,754 | |||
| Other assets | 63 | |||
| Accounts payable | (2,620 | ) | ||
| Deferred tax liability | (19,681 | ) | ||
| Other liabilities | (2,057 | ) | ||
| Total purchase price | $ | 171,609 |
The purchase price allocated to the intangibles acquired was as follows (in thousands):
| Useful Life | ||||||
| Customer relationships | 15 years | $ | 56,200 | |||
| Intellectual property | 6 years | 19,600 | ||||
| Trade name | 1.5 years | 310 | ||||
| Restrictive covenants | 1 year | 130 | ||||
| Fair value of intangibles acquired | $ | 76,240 | ||||
Acquisition costs recorded in the second quarter 2017 to selling, general and administrative expenses were as follows (in thousands):
| Other operating expenses - consulting fees | $ | 3,515 | ||
| Other operating expenses - legal fees | 832 | |||
| Other operating expenses - transaction costs | 185 | |||
| Acquisition-related costs | $ | 4,532 |
The financial results of Eliza have been included in the Company’s consolidated financial statements since the date of acquisition.
| Intangible Assets and Goodwill |
Intangible assets consisted of the following (in thousands, except for weighted average amortization period):
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Amortization Period | |||||||||||
| June 30, 2018 | ||||||||||||||
| Customer relationships | $ | 156,790 | $ | (96,249 | ) | $ | 60,541 | 11.8 years | ||||||
| Trade names | 16,246 | (15,097 | ) | 1,149 | 0.5 years | |||||||||
| Intellectual property | 21,700 | (4,733 | ) | 16,967 | 4.5 years | |||||||||
| Restrictive covenants | 263 | (212 | ) | 51 | 1.1 years | |||||||||
| Total | $ | 194,999 | $ | (116,291 | ) | $ | 78,708 | |||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Amortization Period in Years | |||||||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||||||||
| March 31, 2019 | ||||||||||||||||||||||||||||||
| Customer relationships | $ | 159,290 | $ | (89,106 | ) | $ | 70,184 | 11.3 years | $ | 68,290 | $ | (17,588 | ) | $ | 50,702 | 12.7 | ||||||||||||||
| Intellectual property | 21,700 | (7,638 | ) | 14,062 | 3.9 | |||||||||||||||||||||||||
| Trade names | 16,246 | (13,916 | ) | 2,330 | 1 year | 136 | (117 | ) | 19 | 0.4 | ||||||||||||||||||||
| Intellectual property | 21,700 | (2,874 | ) | 18,826 | 5.2 years | |||||||||||||||||||||||||
| Restrictive covenants | 263 | (121 | ) | 142 | 1.3 years | 133 | (115 | ) | 18 | 0.4 | ||||||||||||||||||||
| Total | $ | 197,499 | $ | (106,017 | ) | $ | 91,482 | $ | 90,259 | $ | (25,458 | ) | $ | 64,801 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Amortization Period in Years | |||||||||||||
| December 31, 2018 | ||||||||||||||||
| Customer relationships | $ | 156,790 | $ | (104,740 | ) | $ | 52,050 | 12.8 | ||||||||
| Intellectual property | 21,700 | (6,670 | ) | 15,030 | 4.1 | |||||||||||
| Trade names | 16,246 | (16,215 | ) | 31 | 0.7 | |||||||||||
| Restrictive covenants | 263 | (234 | ) | 29 | 0.7 | |||||||||||
| Total | $ | 194,999 | $ | (127,859 | ) | $ | 67,140 |
Amortization expense of intangible assets is expected to approximate the following (in thousands):
| Year ending December 31, | Amortization | |||||||
| 2018 | $ | 11,579 | ||||||
| 2019 | 9,183 | |||||||
| 2019 (excluding the three months ended March 31, 2019) | $ | 6,856 | ||||||
| 2020 | 7,664 | 7,664 | ||||||
| 2021 | 7,197 | 7,197 | ||||||
| 2022 | 7,197 | 7,197 | ||||||
| 2023 | 4,822 | |||||||
| Thereafter | 35,888 | 31,065 | ||||||
| Total | $ | 78,708 | $ | 64,801 | ||||
For the three months ended June 30,March 31, 2019 and 2018, and 2017, amortization expense related to intangible assets was $6.7$2.3 million and $4.5 million, respectively. For the six months ended June 30, 2018 and 2017, amortization expense related to intangible assets was $12.8 million and $9.7$6.1 million, respectively.
The Company assesses goodwill for impairment on an annual basis as of June 30th of each year or more frequently if an event occurs or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Assessment of goodwill impairment is at the HMS Holdings Corp. entity level as the Company operates as a single reporting unit. The Company completed the annual impairment test as of June 30, 2018 electing to perform the first step of the goodwill impairment test by comparing the fair value of the reporting unit with its carrying value, including goodwill. In calculating the fair value of the reporting unit, the Company utilized a weighting across three commonly accepted valuation approaches: an income approach, a guideline public company approach and a merger and acquisition approach. The income approach to determining fair value computes projections of the cash flows that the reporting unit is expected to generate converted into a present value equivalent through discounting. Significant assumptions in the income approach include income projections, a discount rate and a terminal growth value which are all level 3 inputs. The income projections include assumptions for revenue and expense growth which are based on internally developed business plans and largely reflect recent historical revenue and expense trends. The discount rateThere was based on a risk free rate plus a beta adjusted equity risk premium and specific company risk premium. The terminal growth value is Company specific and was determined analyzing inputs such as historical inflation and the GDP growth rate. The guideline public company approach and merger and acquisition approach are based on pricing multiples observed for similar publicly traded companies or similar market companies that were sold. The results of the annual impairment assessment provide that the fair value of the reporting unit was significantly in excess of the Company’s carrying value, including goodwill; therefore, no impairment was indicated and step two was not performed. If actual results are not consistent with our estimates or assumptions, the Company may be exposed to an impairment charge that could materially adversely impact our consolidated financial position and results of operations.
There were no impairment charges related to goodwill during the years ended December 31, 2017, 2016 or 2015. There were no changeschange in the carrying amount of goodwill for the six-monthsthree months ended June 30, 2018.
March 31, 2019.
| Accounts Payable, Accrued Expenses and Other Liabilities |
Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):
| March 31, 2019 | December 31, 2018 | |||||||||||||||
| June 30, 2018 | December 31, 2017 | |||||||||||||||
| Accounts payable, trade | $ | 10,741 | $ | 19,330 | $ | 12,325 | $ | 12,394 | ||||||||
| Accrued compensation and other | 26,448 | 24,072 | 16,236 | 42,833 | ||||||||||||
| Accrued operating expenses | 19,498 | 18,498 | 28,164 | 19,675 | ||||||||||||
| Current portion of lease liabilities | 6,353 | - | ||||||||||||||
| Total accounts payable, accrued expenses and other liabilities | $ | 56,687 | $ | 61,900 | $ | 63,078 | $ | 74,902 | ||||||||
6. | Income Taxes |
The Company’s effective tax rate increaseddecreased to 47.7%(9.3%) for the sixthree months ended June 30, 2018March 31, 2019 from 42.6%32.0% for the sixthree months ended June 30, 2017.March 31, 2018. The effective tax rate for sixthe three months ended June 30, 2018March 31, 2019 includes the discrete tax impactbenefits related to the settlement of the litigation described in Note 13, Commitments and Contingencies,net equity compensation deductions offset by interest on uncertain tax benefits and net stock compensation in addition to a net federal tax reform benefit comprised of a federal tax rate decrease, net of state impact, offset by tax increases for officer compensation deduction limits and loss of the domestic manufacturing deduction.benefits. For the sixthree months ended June 30, 2018,March 31, 2019, the differences between the federal statutory rate and our effective tax rate are discrete tax expense items related to the settlement of the litigation described in Note 13, Commitments and Contingencies, state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.
The effective tax rate for the six months ended June 30, 2018 represents the Company’s best estimate using information available to the Company as of August 6, 2018. The Company anticipates U.S. regulatory agencies will issue further regulations over the next nine months which may alter this estimate. The Company is still evaluating, among other things, the application of limitations for executive compensation related to contracts existing prior to November 2, 2017. The Company will refine its estimates to incorporate new or better information as it becomes available through the filing date of its 2017 U.S. income tax returns in the fourth quarter of 2018.
Included in Other Liabilitiesliabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits of approximately $8.7$5.0 million and $8.2$4.8 million, as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, (net of the federal benefit for state issues) that, if recognized, would favorably affect the Company’s future effective tax rate. Also included in Other Liabilitiesliabilities on the Consolidated Balance Sheets, are accrued liabilities for interest expense and penalties related to unrecognized tax benefits of $0.9 million and $0.6$0.7 million as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. HMS includes interest expense and penalties in the provision for income taxes in the unaudited Consolidated Statements of Income. The amount of interest expense (net of federal and state income tax benefits) and penalties in the unaudited Consolidated Statements of Income for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 was $0.3$0.2 million and an immaterial amount,$0.2 million, respectively. The Company believes it is reasonably possible that the amount of unrecognized tax benefits may decrease by $1.9$1.8 million over the next twelve months, due to the expiration of the statute of limitations in federal and various state jurisdictions.
HMS files income tax returns with the U.S. Federal government and various state, territory, and local jurisdictions. HMS is no longer subject to U.S. Federal income tax examinations for years before 2012. The Company is currently under audit by the Internal Revenue Service for years 2013 and 2014 and no assessments have been received.2013. HMS operates in a number of state and local jurisdictions. Accordingly, HMS is subject to state and local income tax examinations based on the various statutes of limitations in each jurisdiction. Previously recognized Texas refund claims are currently being examined by the state.
| Estimated Liability For Appeals |
Under the Company’s contracts with certain commercial health plan customers and its Medicare RACRecovery Audit Contractor (“RAC”) contracts with CMSthe Centers for Medicare & Medicaid Services (“CMS”) (included within the Company’s analyticalpayment integrity services product revenue), providers have the right to appeal HMS claim findings and to pursue additional appeals if the initial appeal is found in favor of HMS’s customer. The appeal process established under the Medicare RAC contractcontracts with CMS includes five levels of appeals, and resolution of appeals can take substantial time to resolve. HMS records a) a(a) an actual return obligation liability for findings which have been previously adjudicated in favor of providers and b)(b) an estimated return obligation liability based on the amount of revenue that is subject to appeals and which are probable of being adjudicated in favor of providers following their successful appeal. The Company’s estimate is based on the Company’s historical experience. To the extent the amount to be returned to providers following a successful appeal exceeds or is less than the amount recorded, revenue in the applicable period would be reduced or increased by such amount. Any future changes to any of
The following roll-forward summarizes the Company’s customer contracts, including modifications to the Medicare RAC contract, may require the Company to apply different assumptions that could materially affect both the Company’s revenue and estimated liabilityactivity in Estimated Liability for appeals Appeals (in future periods.thousands):
| Original RAC contract | RAC 4 contract | Commercial contracts | Total | |||||||||||||
| Balance at December 31, 2018 | $ | 19,380 | $ | 20 | $ | 2,323 | $ | 21,723 | ||||||||
| Provision | - | 530 | 3,053 | 3,583 | ||||||||||||
| Appeals found in providers favor | - | (15 | ) | (1,248 | ) | (1,263 | ) | |||||||||
| Balance at March 31, 2019 | $ | 19,380 | $ | 535 | $ | 4,128 | $ | 24,043 |
The Company’s original Medicare RAC contract with CMS expired on January 31, 2018. As a result of the original contract expiration, the Company’s contractual obligation with respect to any appeals resolved in favor of providers subsequent to the expiration date have ceased and therefore the Company released its estimated return obligation liability and increased revenue by $8.4 million during the first quarter of 2018.
The Company continues to assess the remaining CMS liability for the original Medicare RAC liabilitycontract to determine management’s best estimate of liability for any findings which have been previously adjudicated prior to the expiration of the contract.
The total Any future changes or modifications to the Medicare RAC contracts or to the Company’s commercial customer contracts may require the Company to apply different assumptions that could materially affect both the Company’s revenue and estimated liability for appeals balance of $22.3 million and $30.8 million as of June 30, 2018 and December 31, 2017, respectively, includes $19.4 million and $19.3 million, respectively, of Medicare RAC claim findings which have been adjudicated in favor of providers, and $0.0 million and $8.5 million, respectively, of the Company’s estimate of the potential amount of Medicare RAC repayments that are probable of being adjudicated in favor of providers following a successful appeal. Additionally, the total estimated liability for appeals balance includes $2.9 million and $3.2 million related to commercial customers claim appeals. The provision included in the estimated liability for appeals is an offset to revenue in the Company’s Consolidated Statements of Income.future periods.
A summary of the activity in the estimated liability for appeals related to the Company’s original Medicare RAC contract was as follows (in thousands):
| June 30, 2018 | ||||
| Balance--beginning of period | $ | 8,544 | ||
| Provision | - | |||
| Appeals found in providers favor | (108 | ) | ||
| Release of liability | (8,436 | ) | ||
| Balance--end of period | $ | - | ||
| Credit Agreement |
In December 2017, the Company entered into an amendment to its Amended and Restated Credit Agreement, as amended (the “Credit Agreement”) which, among other things, extended the maturity of its then existing $500 million revolving credit facility by five years to December 2022 (the “Amended Revolving Facility”). The availability of funds under the Amended Revolving Facility includes sublimits for (a) up to $50 million for the issuance of letters of credit and (b) up to $25 million for swingline loans. In addition, the Company may increase the commitments under the Amended Revolving Facility and/or add one or more incremental term loan facilities, provided that such incremental facilities do not exceed in the aggregate the sum of (i) the greater of $120 million and 100% of Consolidated EBITDA (as defined in the Credit Agreement) and (ii) an additional amount so long as our first lien leverage ratio (as defined in the Credit Agreement) on a pro forma basis is not greater than 3.00:1.00, subject to obtaining commitments from lenders therefor and meeting certain other conditions.
As of June 30, 2018March 31, 2019 and December 31, 2017,2018, the outstanding principal balance due on the Amended Revolving Facility was $240.0 million. No principal payments were made against the Company’s Amended Revolving Facility during the sixthree months ended June 30, 2018.March 31, 2019.
Borrowings under the Amended Revolving Facility bear interest at a rate equal to, at the Company’s election (except with respect to swingline borrowings, which will accrue interest based only at the base rate), either:
| ▪ | a base rate determined by reference to the greatest of (a) the prime or base commercial lending rate of the administrative agent as in effect on the relevant date, (b) the federal funds effective rate plus 0.50% and (c) the one-month London Interbank Offered Rate (or any successor rate determined in accordance with the Credit Agreement) (“LIBO |
| ▪ | an adjusted LIBO Rate, equal to the LIBO Rate for the applicable interest period multiplied by the statutory reserve rate (equal to (x) one divided by (y) one minus the aggregate of the maximum reserve percentage (including any marginal, special, emergency or supplemental reserves) established by the Board of Governors of the Federal Reserve System of the United States), plus an interest margin ranging from 1.50% to 2.00% based on the Company’s consolidated leverage ratio for the applicable period. |
In addition to paying interest on the outstanding principal, the Company is required to pay unused commitment fees on the Amended Revolving Facility during the term of the Credit Agreement ranging from 0.375% to 0.250% per annum based on the Company’s consolidated leverage ratio and letter of credit fees equal to 0.125% per annum on the aggregate face amount of each letter of credit, as well as customary agency fees. As part of a contractual agreement with a customer, the Company has an outstanding irrevocable letter of credit for $6.5 million, which is issued against its revolving credit facility and expires June 30, 2019.
The Amended Revolving Facility is secured, subject to certain customary carve-outs and exceptions, by a first priority lien and security interest in substantially all tangible and intangible assets of the Company and certain subsidiaries of the Company. The Amended Revolving Facility contains certain restrictive covenants, which affect, among other things, the ability of the Company and its subsidiaries to incur indebtedness, create liens, make investments, sell or otherwise dispose of assets, engage in mergers or consolidations with other entities, and pay dividends or repurchase stock. The Company is also required to comply, on a quarterly basis, with two financial covenants: (i) a minimum interest coverage ratio of 3:00:1:00, and (ii) a maximum consolidated leverage ratio of 4.75:1.00 through December 2019 and 4.25:1.00 from and after January 2020. The consolidated leverage ratio is subject to a step-up to 5.25:1.00 for four full consecutive fiscal quarters following a permitted acquisition or similar investment. As of June 30, 2018,March 31, 2019, the Company was in compliance with all terms of the Credit Agreement.
Interest expense and the commitment fees on the unused portion of the Company’s revolving credit facility were as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
| Interest expense | $ | 2,627 | $ | 1,469 | $ | 4,697 | $ | 2,843 | $ | 2,526 | $ | 2,070 | ||||||||||||
| Commitment fees | 239 | 333 | 477 | 711 | 156 | 239 | ||||||||||||||||||
As of June 30, 2018March 31, 2019 and December 31, 2017,2018, the unamortized balance of deferred origination fees and debt issuance costs were $2.5was $2.1 million and $2.8$2.2 million, respectively. For the sixthree month periods ended June 30,March 31, 2019 and 2018, and 2017, HMS amortized $0.3$0.1 million and $1.0$0.1 million, respectively, of interest expense related to the Company’s deferred origination fees and debt issue costs.
Although HMS expects that operating cash flows will continue to be a primary source of liquidity for the Company’s operating needs, the Amended Revolving Facility may be used for general corporate purposes, including, but not limited to acquisitions, if necessary.
| Earnings Per Share |
The following table reconciles the basic to diluted weighted average common shares outstanding using the treasury stock method (in thousands, except per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
| Net income | $ | (3,367 | ) | $ | 6,517 | $ | 3,024 | $ | 7,959 | $ | 19,642 | $ | 6,391 | |||||||||||
| Weighted average common shares outstanding-basic | 83,231 | 83,921 | 83,222 | 83,708 | 85,853 | 83,933 | ||||||||||||||||||
| Plus: net effect of dilutive stock options and restricted stock units | - | 1,905 | 1,615 | 1,826 | 2,761 | 1,749 | ||||||||||||||||||
| Weighted average common shares outstanding-diluted | 83,231 | 85,826 | 84,837 | 85,534 | 88,614 | 85,682 | ||||||||||||||||||
| Net (loss)/income per common share-basic | $ | (0.04 | ) | $ | 0.08 | $ | 0.04 | $ | 0.10 | |||||||||||||||
| Net (loss)/income per common share-diluted | $ | (0.04 | ) | $ | 0.08 | $ | 0.04 | $ | 0.09 | |||||||||||||||
| Net income per common share-basic | $ | 0.23 | $ | 0.08 | ||||||||||||||||||||
| Net income per common share-diluted | $ | 0.22 | $ | 0.07 | ||||||||||||||||||||
For the three months ended June 30,March 31, 2019 and 2018, the Company incurred a net loss; therefore, basic215,353 and dilutive earnings per share were the same and 2,552,862 stock options and restricted stock units representing 626,341 shares of common stock were excluded from consideration in the calculation of diluted net loss per share because the effect would have been anti-dilutive. For the three months ended June 30, 2017, 1,804,272 stock options and restricted stock units representing 51,836 shares of common stock were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.
For the six months ended June 30, 2018 and 2017, 2,738,783 and 1,888,2573,118,939 stock options, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive. For the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, restricted stock units representing 106,501120,516 and 63,24758,743 shares of common stock, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.
| Stock-Based Compensation |
| (a) | Stock-Based Compensation Expense |
Total stock-based compensation expense in the Company’s unaudited Consolidated Statements of Income related to the Company’s long-term incentive award plans was as follows (in thousands)::
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
| Cost of services-compensation | $ | 1,673 | $ | 1,462 | $ | 4,236 | $ | 3,503 | $ | 4,124 | $ | 2,563 | ||||||||||||
| Selling, general and administrative | 3,041 | 2,532 | 9,972 | 5,877 | 6,855 | 6,931 | ||||||||||||||||||
| Total | $ | 4,714 | $ | 3,994 | $ | 14,208 | $ | 9,380 | $ | 10,979 | $ | 9,494 | ||||||||||||
| (b) | Stock Options |
Stock-based compensation expense related to stock options was approximately $2.1$4.8 million and $1.7$4.0 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Stock-based compensation expense related to stock options was approximately $6.1 million and $3.9 million for the six months ended June 30, 2018 and 2017, respectively.
Presented below is a summary of stock option activity for the sixthree months ended June 30, 2018March 31, 2019 (in thousands, except for weighted average exercise price and weighted average remaining contractual terms):
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms | Aggregate Intrinsic Value | Number of Options | Weighted Average Exercise Price | Weighted Average- Remaining Contractual Terms | Aggregate- Intrinsic Value | |||||||||||||||||||||||||
| Outstanding balance at December 31, 2017 | 5,554 | $ | 17.35 | |||||||||||||||||||||||||||||
| Outstanding balance at December 31, 2018 | 4,402 | $ | 17.07 | |||||||||||||||||||||||||||||
| Granted | 1,010 | 19.58 | 560 | 39.52 | ||||||||||||||||||||||||||||
| Exercised | (151 | ) | 15.81 | (1,443 | ) | 16.03 | ||||||||||||||||||||||||||
| Forfeitures | (26 | ) | 16.43 | (134 | ) | 18.99 | ||||||||||||||||||||||||||
| Expired | (27 | ) | 22.14 | - | - | |||||||||||||||||||||||||||
| Outstanding balance at June 30, 2018 | 6,360 | 17.78 | 5.37 | 26,785 | ||||||||||||||||||||||||||||
| Expected to vest at June 30, 2018 | 1,633 | 17.68 | 8.00 | 6,449 | ||||||||||||||||||||||||||||
| Exercisable at June 30, 2018 | 3,877 | $ | 17.87 | 3.72 | 16,929 | |||||||||||||||||||||||||||
| Outstanding balance at March 31, 2019 | 3,385 | $ | 21.19 | 6.85 | $ | 33,767 | ||||||||||||||||||||||||||
| Expected to vest at March 31, 2019 | 1,061 | $ | 27.50 | 9.14 | $ | 6,486 | ||||||||||||||||||||||||||
| Exercisable at March 31, 2019 | 1,899 | $ | 16.67 | 5.14 | $ | 24,582 | ||||||||||||||||||||||||||
During the three months ended June 30,March 31, 2019 and 2018, and 2017, the Company issued 87,2301,443,685 and 132,1289,043 shares, respectively, of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $2.2$23.1 million and $2.0$0.1 million, respectively. The total intrinsic value of stock options exercised during the three months ended June 30,March 31, 2019 and 2018 and 2017 was $0.8$25.8 million and $0.6 million, respectively. During the six months ended June 30, 2018 and 2017, the Company issued 151,034 and 132,805 shares, respectively, of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $2.4 million and $2.0 million, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2018 and 2017 was $0.8 million and $0.6$0.01 million respectively.
As of June 30, 2018,March 31, 2019, there was approximately $9.6$8.4 million of total unrecognized compensation cost related to stock options outstanding, which is expected to be recognized over a weighted average period of 2.31.44 years.
The weighted-average grant date fair value per share of the stock options granted during the sixthree months ended June 30,March 31, 2019 and 2018 was $13.82 and 2017 was $7.52 and $7.73,$6.83, respectively. HMS estimated the fair value of each stock option grant on the date of grant using a Black-Scholes option pricing model and weighted–average assumptions set forth in the following table:
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
| Expected dividend yield | 0% | 0% | 0 | % | 0 | % | ||||||||||
| Risk-free interest rate | 2.68% | 1.74% | 2.5 | % | 2.7 | % | ||||||||||
| Expected volatility | 42.43% | 44.23% | 40.9 | % | 42.5 | % | ||||||||||
| Expected life (years) | 6.00 | 5.00 | 6.4 | 6.0 | ||||||||||||
The total tax benefits recognized on stock-based compensation related to stock options for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 was $2.5$11.3 million and $3.6$2.1 million, respectively.
| (c) | Restricted Stock Units |
Stock-based compensation expense related to restricted stock units was approximately $2.6$6.1 million and $2.2$5.5 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Stock-based compensation expense related to restricted stock units was approximately $8.1 million and $5.5 million for the six months ended June 30, 2018 and 2017, respectively.
Presented below is a summary of restricted stock units activity for the sixthree months ended June 30, 2018March 31, 2019 (in thousands, except for weighted average grant date fair value per unit):
| Number of Units | Weighted Average Grant Date Fair Value per Unit | Number of Units | Weighted Average Grant Date Fair Value per Unit | |||||||||||||
| Outstanding balance at December 31, 2017 | 1,346 | $ | 17.65 | |||||||||||||
| Outstanding balance at December 31, 2018 | 1,488 | $ | 17.60 | |||||||||||||
| Granted | 761 | 16.72 | 408 | 34.43 | ||||||||||||
| Vesting of restricted stock units, net of units withheld for taxes | (364 | ) | 16.93 | (377 | ) | 16.88 | ||||||||||
| Units withheld for taxes | (161 | ) | 16.93 | (193 | ) | 16.88 | ||||||||||
| Forfeitures | (26 | ) | 16.89 | (63 | ) | 17.58 | ||||||||||
| Outstanding balance at June 30, 2018 | 1,556 | $ | 19.98 | |||||||||||||
| Outstanding balance at March 31, 2019 | 1,263 | $ | 25.43 | |||||||||||||
For the three months ended June 30, 2018 and 2017, HMS granted 62,259 and 536,023 restricted stock units, respectively, with an aggregate fair market value of $0.9 million and $10.2 million, respectively. For the six months ended June 30, 2018 and 2017, HMS granted 761,083 and 539,657 restricted stock units, respectively, with an aggregate fair market value of $12.7 million and $10.3 million, respectively.
As of June 30, 2018, 1,330,734March 31, 2019, 1,027,186 restricted stock units remained unvested and there was approximately $13.9$16.7 million of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average vesting period of 1.381.43 years.
| 11. | Leases |
The Company determines if an arrangement is a lease at inception. Operating leases are reported on the Company’s consolidated balance sheet within operating lease ROU assets, operating lease liabilities and accounts payable, accrued expenses and other liabilities. Finance leases are reported on the Company’s consolidated balance sheets within other assets, other liabilities and accounts payable, accrued expenses and other liabilities.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the information available at the lease’s commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For certain real estate and equipment leases, the Company has lease agreements with lease and non-lease components, which are generally accounted for as a single component.
The Company primarily leases real estate, information technology equipment and data centers on terms that expire on various dates through 2026, some of which include options to extend the lease for up to 10 years. We evaluate whether to include the option period in the calculation of the ROU asset and lease liability on a lease-by-lease basis.
As of March 31, 2019, all operating and finance leases that create significant rights and obligations for the Company have commenced.
The components of lease expense for the three months ended March 31, 2019 were as follows (in thousands):
| Three Months Ended March 31, 2019 | ||||
| Operating lease cost | $ | 1,656 | ||
| Finance lease cost: | ||||
| Amortization of right-of-use assets | $ | 8 | ||
| Interest on lease liabilities | $ | 1 | ||
| Total finance lease cost | $ | 9 | ||
Supplemental cash flow and other information related to leases for the three months ended March 31, 2019 were as follows (in thousands):
| Three Months Ended March 31, 2019 | ||||
| Cash paid for amounts included in measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 1,833 | ||
| Operating cash flows from finance leases | $ | 1 | ||
| Financing cash flows from finance leases | $ | 8 | ||
| Right-of-use assets obtained in exchange for new lease liabilities: | ||||
| Operating leases | $ | 219 | ||
| Finance leases | $ | 238 | ||
Supplemental balance sheet information related to leases as of March 31, 2019 consisted of the following (in thousands):
| March 31, 2019 | ||||
| Operating Leases | ||||
| Operating lease right-of-use assets | $ | 20,110 | ||
| Other current liabilities | $ | 6,247 | ||
| Operating lease liabilities | $ | 18,677 | ||
| Total operating lease liabilities | $ | 24,924 | ||
| Finance Leases | ||||
| Other Assets | $ | 334 | ||
| Other current liabilities | $ | 106 | ||
| Other long-term liabilities | $ | 229 | ||
| Total finance leases liabiities | $ | 335 |
The weighted-average remaining lease term for operating and finance leases are 4.5 years and 3 years, respectively. Weighted-average discount rates amount to 5.7% and 5.0% for operating and finance leases, respectively.
Sublease income for the three months ended March 31, 2019 and 2018 was $0.5 million and $0.4 million, respectively.
Maturities of lease liabilities were as follows (in thousands):
| Year ended December 31, | Operating Leases | Finance Leases | ||||||
| 2019 (excluding the three months ended March 31, 2019) | $ | 5,575 | $ | 90 | ||||
| 2020 | 7,272 | 120 | ||||||
| 2021 | 5,568 | 120 | ||||||
| 2022 | 3,275 | 29 | ||||||
| 2023 | 3,034 | - | ||||||
| Thereafter | 3,560 | - | ||||||
| Total lease payments | 28,284 | 359 | ||||||
| Less: Imputed interest | (3,360 | ) | (24 | ) | ||||
| Total lease obligation | $ | 24,924 | $ | 335 |
| Commitments and Contingencies |
In July 2012, Dennis Demetre and Lori Lewis (the “Plaintiffs”), filed an action in the Supreme Court of the State of New York against HMS Holdings Corp., claiming an undetermined amount of damages alleging that various actions by HMS unlawfully deprived the Plaintiffs of the acquisition earn-out portion of the purchase price for Allied Management Group Special Investigation Unit (“AMG”) under the applicable Stock Purchase Agreement (the “SPA”) and that HMS had breached certain contractual provisions under the SPA. The Plaintiffs filed a second amended complaint with two causes of action for breach of contract and one cause of action for breach of implied covenant of good faith and fair dealing. HMS asserted a counterclaim against Plaintiffs for breach of contract based on contractual indemnification costs, including attorneys’ fees arising out of the Company’s defense of AMG in Kern Health Systems v. AMG, Dennis Demetre and Lori Lewis (the “California Action”), which are recoverable under the SPA. In June 2016, Kern Health Systems and AMG entered into a settlement agreement that resolved all claims in the California Action. In July 2017, the Court issued a decision on the Company’s motion for partial summary judgment and granted the motion in part, dismissing one of Plaintiffs’ breach of contract causes of action against HMS. On November 3, 2017, following a jury trial, a verdict was returned in favor of the Plaintiffs on a breach of contract claim, and the jury awarded $60 million in damages to the Plaintiffs. On March 14, 2018, the Court held a hearing on the Company’s post-trial motion for an order granting it judgment notwithstanding the verdict or, alternatively, setting aside the jury’s award of damages. On June 27, 2018, prior to the Court issuing a decision on the motion, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with the Plaintiffs, John Alfred Lewis and Christopher Brandon Lewis. Pursuant to the terms of the Settlement Agreement, the Company paid $20 million to resolve all matters in controversy pertaining to the lawsuit. On July 5, 2018, the Court entered an order to discontinue the lawsuit pursuant to the Stipulation of Discontinuance with Prejudice filed by the parties.
In February 2018, the Company received a Civil Investigative Demand (“CID”) from the Texas Attorney General, purporting to investigate possible unspecified violations of the Texas Medicaid Fraud Prevention Act. TheIn March 2018, the Company has provided certain documents and information in March 2018 in response to the CID and continues to cooperate with the government.CID. HMS has not received any further requests for information in connection with this CID.
In September 2018, a former employee filed an action in the New York County Supreme Court entitled Christopher Frey v. Health Management Systems, Inc. alleging retaliation under New York law. The complaint seeks recovery of an unspecified amount of monetary damages, including back pay and other compensatory and equitable relief. The Company has moved to dismiss the complaint. On May 2, 2019, the Court held a hearing on the Company’s motion to dismiss. The Company continues to believe that this claim is without merit and intends to vigorously defend this matter.
From time to time, HMS may be subject to investigations, legal proceedings and other disputes arising in the ordinary course of the Company’s business, including but not limited to regulatory audits, billing and contractual disputes, employment-related matters and post-closing disputes related to acquisitions. Due to the Company’s contractual relationships, including those with federal and state government entities, HMS’s operations, billing and business practices are subject to scrutiny and audit by those entities and other multiple agencies and levels of government, as well as to frequent transitions and changes in the personnel responsible for oversight of the Company’s contractual performance. HMS may have contractual disputes with its customers arising from differing interpretations of contractual provisions that define the Company’s rights, obligations, scope of work or terms of payment, and with associated claims of liability for inaccurate or improper billing for reimbursement of contract fees, or for sanctions or damages for alleged performance deficiencies. Resolution of such disputes may involve litigation or may require that HMS accept some amount of loss or liability in order to avoid customer abrasion, negative marketplace perceptions and other disadvantageous results that could affect the Company’s business, financial condition, results of operations and cash flows.
HMS records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, HMS does not establish an accrued liability.
| Subsequent Events |
In connection with the preparation of these unaudited Consolidated Financial Statements, an evaluation of subsequent events was performed through the date of filing and there were no events that have occurred that would require adjustments to the financial statements or disclosure.disclosures.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of HMS. You should read this discussion and analysis in conjunction with the other sections of this Form 10-Q, including the Cautionary Note Regarding Forward-Looking Statements appearing prior to Part I and the unaudited Consolidated Financial Statements and accompanying Notes theretoincluded in Part I, Item 1. The historical results set forth in Part I, ItemItems 1 and Item 2 of Part I of this Form 10-Q should not be taken as necessarily indicative of our future operations or financial results.
Business Overview
HMS isprovides a leading providerbroad range of cost containment solutions in the U.S.to help healthcare marketplace.payers and at-risk providers reduce costs, improve health outcomes and enhance member experiences. Using innovativeindustry-leading technology, as well as extensive data servicesanalytics and powerful analytics,engagement solutions, we deliver coordination of benefits, payment integrity and caretotal population management and consumer engagement solutions through our operating subsidiaries to helpmove the healthcare payers improve financial performancesystem forward for our customers. We are managed and clinical outcomes. Together our various services help our customers recover improper payments; prevent future improper payments; reduce fraud, waste and abuse; better manageoperate as one business segment with a single management team that reports to the care that their members receive; engage healthcare consumers to improve clinical outcomes and increase retention; and achieve regulatory compliance.Chief Executive Officer.
We serve state Medicaid programs, commercial health plans, federal government health agencies, government and private employers, CHIPs and other healthcare payers and sponsors.payers. We also serve as a subcontractor for certain business outsourcing and technology firms. As of June 30, 2018,March 31, 2019, our customer base included the following:
| ▪ | over 40 state Medicaid programs; |
| ▪ | approximately 325 health plans, including 23 of the top 25 health plans nationally (based on membership) in support of their multiple lines of business, including Medicaid managed care, Medicare Advantage and group and individual health; |
| ▪ | over |
| ▪ | CMS, the Centers for Disease Control and Prevention, and the Department of Veterans Affairs; and |
| ▪ | PBMs, third-party administrators and other risk-bearing entities, including independent practice associations, hospital systems, ACOs and specialty care organizations. |
Critical Accounting Policies and Estimates
Since the date of our 20172018 Form 10-K, there have been no material changes to our critical accounting policies other than with respect to revenue recognitionleases as described in Notes 1 and 311 to the unaudited Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. With respect to our accounting policies other than revenue recognition,those for leases, refer to the discussion in our 20172018 Form 10-K under “Critical Accounting Policies and Estimates” in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations7 and “Business and Summary of Significant Accounting Policies” in Note 1 to the Consolidated Financial Statements under Part II, Item 8.
RESULTS
As of and for the three months ended June 30,March 31, 2019 and March 31, 2018 and June 30, 2017
| ▪ | Revenue of |
| ▪ | Operating |
Comparison of Three Months Ended June 30,March 31, 2019 to March 31, 2018 to June 30, 2017
| dollars in millions | | Three Months Ended June 30, | | $ Change | | % Change | ||||||||||
| 2018 | 2017 | 2018 vs 2017 | ||||||||||||||
| Revenue | $ | 146.8 | $ | 133.3 | $ | 13.5 | 10.1 | % | ||||||||
| Cost of Services : | ||||||||||||||||
| Compensation | 55.2 | 51.9 | 3.3 | 6.4 | ||||||||||||
| Information technology | 14.2 | 11.3 | 2.9 | 25.7 | ||||||||||||
| Occupancy | 4.0 | 4.2 | (0.2 | ) | (4.8 | ) | ||||||||||
| Direct project costs | 10.9 | 10.1 | 0.8 | 7.9 | ||||||||||||
| Other operating costs | 7.0 | 6.6 | 0.4 | 6.1 | ||||||||||||
| Amortization of acquisition related software and intangible assets | 9.7 | 7.3 | 2.4 | 32.9 | ||||||||||||
| Total Cost of Services | 101.0 | 91.4 | 9.6 | 10.5 | ||||||||||||
| Selling, general and administrative expenses | 26.5 | 27.6 | (1.1 | ) | (4.0 | ) | ||||||||||
| Settlement expense | 20.0 | - | 20.0 | - | ||||||||||||
| Total Operating Expenses | 147.5 | 119.0 | 28.5 | 23.9 | ||||||||||||
| Operating (loss)/income | (0.7 | ) | 14.3 | (15.0 | ) | (104.9 | ) | |||||||||
| Interest expense | (3.1 | ) | (2.3 | ) | (0.8 | ) | 34.8 | |||||||||
| Interest income | 0.2 | - | 0.2 | - | ||||||||||||
| (Loss)/income before income taxes | (3.6 | ) | 12.0 | (15.6 | ) | (130.0 | ) | |||||||||
| Income taxes | (0.2 | ) | 5.5 | (5.7 | ) | (103.6 | ) | |||||||||
| Net (loss)/income | (3.4 | ) | 6.5 | (9.9 | ) | (152.3 | )% | |||||||||
| Three Months Ended | ||||||||||||||||
| dollars in millions | March 31, | $ Change | % Change | |||||||||||||
| 2019 | 2018 | 2019 vs 2018 | ||||||||||||||
| Revenue | $ | 148.0 | $ | 141.4 | $ | 6.6 | 4.7 | % | ||||||||
| Cost of Services : | ||||||||||||||||
| Compensation | 57.5 | 56.1 | 1.4 | 2.5 | ||||||||||||
| Direct project and other operating costs | 20.2 | 16.6 | 3.6 | 21.7 | ||||||||||||
| Information technology | 13.1 | 12.3 | 0.8 | 6.5 | ||||||||||||
| Occupancy | 4.1 | 4.4 | (0.3 | ) | (6.8 | ) | ||||||||||
| Amortization of acquisition related software and intangible assets | 4.1 | 8.1 | (4.0 | ) | (49.4 | ) | ||||||||||
| Total Cost of Services | 99.0 | 97.5 | 1.5 | 1.5 | ||||||||||||
| Selling, general and administrative expenses | 29.3 | 32.0 | (2.7 | ) | (8.4 | ) | ||||||||||
| Total Operating Expenses | 128.3 | 129.5 | (1.2 | ) | (0.9 | ) | ||||||||||
| Operating income | 19.7 | 11.9 | 7.8 | 65.5 | ||||||||||||
| Interest expense | (2.8 | ) | (2.6 | ) | (0.2 | ) | 7.7 | |||||||||
| Interest income | 1.0 | 0.1 | 0.9 | 900.0 | ||||||||||||
| Income before income taxes | 17.9 | 9.4 | 8.5 | 90.4 | ||||||||||||
| Income taxes | (1.7 | ) | 3.0 | (4.7 | ) | (156.7 | ) | |||||||||
| Net Income | 19.6 | 6.4 | 13.2 | 206.3 | % | |||||||||||
Revenue (in millions)
Three Months Ended June 30March 31 – 20182019 vs. 20172018
During the three months ended June 30, 2018,March 31, 2019, revenue was $146.8$148.0 million, an increase of $13.5$6.6 million or 10.1%4.7% compared to revenue of $133.3$141.4 million for the prior year quarter.
| ▪ | By |
| o | Coordination of benefits revenue increased |
| o | ||
| o | Total population management revenue increased |
| ▪ | By market: |
| o | Commercial health plan market revenue increased |
| o | Federal government market revenue |
| o | State government market revenue grew by |
Total Cost of Services (in millions)
Three Months Ended June 30March 31 – 20182019 vs. 20172018
During the three months ended June 30, 2018,March 31, 2019, total cost of services was $101.0$99.0 million, an increase of $9.6$1.5 million or 10.5%1.5% compared to $91.4$97.5 million for the prior year quarter.
▪ | Compensation expense increased by | |
| ▪ | ||
| ▪ | Amortization of acquisition related software and intangible assets |
Selling, General and Administrative expenses (in millions)
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Three Months Ended June 30March 31 – 20182019 vs. 20172018
During the three months ended June 30, 2018,March 31, 2019, SG&A expense was $26.5$29.3 million, a decrease of $1.1$2.7 million or (4.0%)8.4% compared to $27.6$32.0 million for the prior year quarter.
| ▪ |
| ▪ | In the |
Income Taxes
Three Months Ended June 30March 31 – 20182019 vs. 20172018
The Company’s effective tax rate decreased to 6.7%(9.3%) for the three months ended June 30, 2018March 31, 2019 compared to 45.9%32.0% for the three months ended June 30, 2017.March 31, 2018. The effective tax rate for the three months ended June 30, 2018March 31, 2019 includes discrete tax expensebenefits related to the settlement of the litigation described in Note 13, Commitments and Contingencies,net equity compensation deductions offset by interest on uncertain tax benefits and net stock compensation in addition to a net federal tax reform benefit comprised of a federal tax rate decrease, net of state impact, offset by tax increases for officer compensation deduction limits and loss of the domestic manufacturing deduction.benefits. Excluding the above mentioned discrete tax expenseitems and net federal tax reform benefit, our effective tax rate would approximate 37.9%27% for the three months ended June 30, 2018.March 31, 2019. For the three months ended June 30, 2018,March 31, 2019, the differences between the federal statutory rate and our effective tax rate are discrete tax expense items related to the settlement, state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.
As of and for the six months ended June 30, 2018 and June 30, 2017
Comparison of Six Months Ended June 30, 2018 to June 30, 2017
| dollars in millions | | Six Months Ended June 30, | | $ Change | | % Change | ||||||||||
| 2018 | 2017 | 2018 vs 2017 | ||||||||||||||
| Revenue | $ | 288.2 | $ | 247.0 | $ | 41.2 | 16.7 | % | ||||||||
| Cost of Services : | ||||||||||||||||
| Compensation | 111.3 | 100.8 | 10.5 | 10.4 | ||||||||||||
| Information technology | 26.5 | 21.1 | 5.4 | 25.6 | ||||||||||||
| Occupancy | 8.4 | 7.8 | 0.6 | 7.7 | ||||||||||||
| Direct project costs | 21.0 | 20.5 | 0.5 | 2.4 | ||||||||||||
| Other operating costs | 13.5 | 13.8 | (0.3 | ) | (2.2 | ) | ||||||||||
| Amortization of acquisition related software and intangible assets | 17.8 | 13.6 | 4.2 | 30.9 | ||||||||||||
| Total Cost of Services | 198.5 | 177.6 | 20.9 | 11.8 | ||||||||||||
| Selling, general and administrative expenses | 58.5 | 51.2 | 7.3 | 14.3 | ||||||||||||
| Settlement expense | 20.0 | - | 20.0 | - | ||||||||||||
| Total Operating Expenses | 277.0 | 228.8 | 48.2 | 21.1 | ||||||||||||
| Operating Income | 11.2 | 18.2 | (7.0 | ) | (38.5 | ) | ||||||||||
| Interest expense | (5.7 | ) | (4.6 | ) | (1.1 | ) | 23.9 | |||||||||
| Interest income | 0.3 | 0.2 | 0.1 | 50.0 | ||||||||||||
| Income before income taxes | 5.8 | 13.8 | (8.0 | ) | (58.0 | ) | ||||||||||
| Income taxes | 2.8 | 5.9 | (3.1 | ) | (52.5 | ) | ||||||||||
| Net Income | $ | 3.0 | $ | 7.9 | $ | (4.9 | ) | (62.0 | )% | |||||||
Revenue (in millions)
Six Months Ended June 30 – 2018 vs. 2017
During the six months ended June 30, 2018, revenue was $288.2 million, an increase of $41.2 million or 16.7% compared to revenue of $247.0 million for the prior year period.
Total Cost of Services (in millions)
Six Months Ended June 30 – 2018 vs. 2017
During the six months ended June 30, 2018, total cost of services was $198.5 million, an increase of $20.9 million or 11.8% compared to $177.6 million for the prior year period.
| |||
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Selling, General and Administrative expenses (in millions)
Six Months Ended June 30 – 2018 vs. 2017
During the six months ended June 30, 2018, SG&A expense was $58.5 million, an increase of $7.3 million or 14.3% compared to $51.2 million for the prior year period.
Income Taxes
Six Months Ended June 30 – 2018 vs. 2017
The Company’s effective tax rate increased to 47.7% for the six months ended June 30, 2018 compared to 42.6% for the six months ended June 30, 2017. The effective rate for the six months ended June 30, 2018 includes discrete tax expense related to the settlement of the litigation described in Note 13, Commitments and Contingencies, interest on uncertain tax benefits and net stock compensation in addition to a net federal tax reform benefit comprised of a federal tax rate decrease, net of state impact, offset by tax increases for officer compensation deduction limits and loss of the domestic manufacturing deduction. Excluding the above mentioned discrete tax expense and net federal tax reform benefit, our effective tax rate would approximate 38.2% for the six months ended June 30, 2018. For the six months ended June 30, 2018, the differences between the federal statutory rate and our effective tax rate are state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Liquidity and Capital Resources
The following tables should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Form 10-Q.
Our cash and cash equivalents, working capital and available borrowings under our credit facility (based upon the borrowing base and financial covenants in our Credit Agreement) were as follows (in thousands):
| June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
| Cash and cash equivalents | $ | 88,127 | $ | 83,313 | $ | 219,857 | $ | 178,946 | ||||||||
| Working capital | $ | 226,874 | $ | 199,967 | $ | 378,069 | $ | 328,684 | ||||||||
| Available borrowings under credit facility | $ | 254,600 | $ | 254,600 | $ | 253,500 | $ | 253,500 | ||||||||
AThe following is a summary of our cash flows was as follows (in thousands):
| Six Months Ended June 30, | ||||||||
| 2018 | 2017 | |||||||
| Net cash provided by operating activities | $ | 23,691 | $ | 20,740 | ||||
| Net cash used in investing activities | (12,628 | ) | (186,681 | ) | ||||
| Net cash (used in)/provided by financing activities | (6,249 | ) | 41,311 | |||||
| Net increase (decrease) in cash and cash equivalents | $ | 4,814 | $ | (124,630 | ) | |||
| Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Net cash provided by operating activities | $ | 28,522 | $ | 14,737 | ||||
| Net cash used in investing activities | (3,990 | ) | (5,754 | ) | ||||
| Net cash provided by/(used in) financing activities | 16,379 | (8,398 | ) | |||||
| Net increase in cash and cash equivalents | $ | 40,911 | $ | 585 | ||||
Cash and cash equivalents at June 30, 2018 and net cash provided by operating activities for the six months ended June 30, 2018, included a non-recurring cash outflow of $20 million for the settlement expense.
Our principal source of cash has been our cash flow from operations and our $500 million five-year revolving credit facility. Other sources of cash include proceeds from the exercise of stock options and tax benefits associated with stock option exercises. The primary uses of cash are capital investments, acquisitions, compensation expenses, information technology,data processing, direct project and other operating costs, SG&A expenses and other expense and repurchases of our common stock.expenses.
We believe that expected cash flows from operations, available cash and cash equivalents, and funds available under our revolving credit facility will be sufficient to meet our liquidity requirements for the following year, which include:
| ▪ | the working capital requirements of our operations; |
| ▪ | investments in our business; |
| ▪ | business development activities; and |
| ▪ | repurchases of common |
Any projections of future earnings and cash flows are subject to substantial uncertainty. We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to meet working capital requirements, fund acquisitions or repay our indebtedness under the Credit Agreement. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions as well as our financial condition and results of operations at the time we seek additional financing.
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Cash Flows from Operating Activities
Net cash provided by operating activities for the sixthree months ended June 30, 2018March 31, 2019 was $23.7$28.5 million, ana $13.8 million increase of $3.0 million as compared to net cash provided by operating activities of $20.7$14.7 million for the sixthree months ended June 30, 2017.March 31, 2018. The increase in operating cash flow iswas primarily attributablerelated to decreases in accounts payable, accounts receivable, and deferred income taxes net income. These were partially offset by the release of estimated liability for appeals and an increase in depreciationnet income of $13.2 million and amortizationincreases in reconciling items of $9.9 million. These increases were offset by decreases in operating assets and stock compensation expense. Net cash provided by operating activities for the six months ended June 30, 2018 also included a non-recurring cash outflowliabilities of $20 million for the settlement expense.approximately $9.3 million.
Cash Flows from Investing Activities
Net cash used in investing activities for the sixthree months ended June 30, 2018March 31, 2019 was $12.6$4.0 million, a $174.2an $1.8 million decrease compared to net cash used in investing activities of $186.7$5.8 million for the sixthree months ended June 30, 2017.March 31, 2018. The decrease was primarily related to the $171.2 million acquisitionreductions in purchases of Elizaproperty and equipment and investment in the prior year period.capitalized software.
Cash Flows from Financing Activities
Net cash (usedprovided by/(used in)/provided by financing activities for the sixthree months ended June 30, 2018March 31, 2019 was $6.2$16.4 million, a $47.5$24.8 million decreaseincrease compared to net cash provided byused in financing activities of $41.3$8.4 million for the sixthree months ended June 30, 2017.March 31, 2018. The decrease isincrease was primarily related to proceeds from our revolving credit facilitythe exercise of $42.2 million in the prior year.stock options.
Contractual Obligations
There have been no material changes outside the ordinary course of business in our contractual obligations as presented in our 20172018 Form 10-K.
Recently Issued Accounting Pronouncements
The information set forth under the caption “Recently Issued Accounting Pronouncements”Pronouncements Not Yet Adopted” in Note 1 to the unaudited Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes to the market risks discussed in Item 7A to Part II of our 20172018 Form 10-K.
| Item 4. | Controls and Procedures |
We are responsible for maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2018.March 31, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that their objectives were met as of the end of the period covered by this Form 10-Q.
There have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation of our controls performed during the three months ended June 30, 2018,March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 1. | Legal Proceedings |
The information set forth under the caption “Commitments and Contingencies” in Note 1312 to the unaudited Consolidated Financial Statements of this Form 10-Q is incorporated herein by reference.
| Item 1A. | Risk Factors |
In addition to the information set forth in this Form 10-Q, the risks that are discussed in the 2017our 2018 Form 10-K, under the headings “Part“Business” of Part I, Item 1. Business,” “Part1, “Risk Factors” of Part I, Item 1A. Risk Factors”1A, “Management’s Discussion and “PartAnalysis of Financial Condition and Results of Operations” of Part II, Item 7A. Quantitative7 and “Quantitative and Qualitative Disclosures About Market Risk,”Risk” of Part II, Item 7A, should be carefully considered as such risks could materially affect the Company’s business, financial condition or future results. There has been no material change in the Company’s risk factors from those described in the 2017our 2018 Form 10-K.
These risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may have a material adverse effect on the Company’s business, financial condition or future results.
| Item 6. | Exhibits |
The Exhibitsexhibits may include agreements to which the Company is a party or has a beneficial interest. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other actual information about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties, and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties, and covenants in the agreements may have been used for the purpose of allocating risk between parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof.
Where an exhibit is filed by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified after the description of the exhibit.
| 32.2 | Section 1350 Certification of the Principal Financial Officer of HMS Holdings Corp., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
28
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
_________________________
| † | Indicates a management contract or compensatory plan, contract or arrangement |
| * | The certifications attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished with this Form 10-Q and shall not be deemed “filed” by the Company for purposes of Section 18 of the |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: | HMS HOLDINGS CORP. | |||
| By: | /s/ William C. Lucia | |||
| William C. Lucia | ||||
| President and Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| By: | /s/ Jeffrey S. Sherman | |||
| Jeffrey S. Sherman | ||||
| Executive Vice President, Chief Financial Officer and Treasurer | ||||
(Principal Financial Officer) | ||||
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