| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
2020
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| Delaware | 11-3656261 | |||||||||||||||||||||||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||||||||||||||||||||
| 5615 High Point Drive | 75038 | |||||||||||||||||||||||||||||||||||||
| Irving, | TX | |||||||||||||||||||||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||||||||||||||||||||||||||
| 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 | ||||||||
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
Securities registered pursuant to Section 12(b) of the Act:
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Reconciliation Act Additionally, our internal data and estimates are based upon information obtained from our customers, our partners, trade and business organizations, publicly available information and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Estimates are difficult to develop and inherently uncertain, and we cannot assure you that they are accurate. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those detailed above and under “Part II, Item 1A. Risk Factors” of this Form 10-Q. December 31, 2018 SHAREHOLDERS’ EQUITYThroughout Quarterly Report on Form 10-Q the Company may use certain abbreviations, acronyms and terms whichin our other filings are described below:ACAACA Patient Protections and Affordable Care Act, as amended by the Health Care and Education ACO Accountable Care Organizationcare organizationADR Additional Documentation Requestdocumentation requestASCAIArtificial intelligence ASC Accounting Standards Codification ASO Administrative Service Onlyservice onlyASU Accounting Standards Update CHIPCARES ActCoronavirus Aid, Relief, and Economic Security Act CHIP Children's Health Insurance Program CMS Centers for Medicare & Medicaid Services CMS NHE CMS National Health Expenditures COB Coordination of benefitsBenefitsCOSO 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 AgentDSO Days sales outstanding 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, 20192020HIPAA Health Insurance Portability and Accountability Act of 1996 HITECH Health Information Technology for Economic and Clinical Health Act IRC Internal Revenue Code IRS U.S. Internal Revenue Service LIBOR or LIBO Rate Intercontinental Exchange London Interbank Offered Rate (or any successor rate determined in accordance with the Credit Agreement) MCO Managed Care Organizationcare organizationPBMMLPharmacy Benefit ManagerMachine learningPHINLPNatural language processing PBM Pharmacy benefit manager PHI Protected health information PIPHMPayment IntegrityPopulation Health ManagementPMPMPIPer Member Per MonthPayment IntegrityPMPYPMPMPer Member Per Yearmember per monthR&D CreditPMPYU.S. Research and Experimentation Tax Credit pursuant to IRC Section 41Per member per yearRAC Recovery Audit Contractor RFP Request for proposal ROU Right-of-use SECRPARobotic process automation SEC U.S. Securities and Exchange Commission Securities Act Securities Act of 1933, as amended Section 199 DeductionSG&AU.S. Production Activities Deduction pursuant to IRC Section 199SG&ASelling, general and administrative TPL Third-party liability TPMTotal Population ManagementU.S. GAAP United States Generally Accepted Accounting Principles 2006 Stock PlanVAHMS 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 asU.S. Department of February 16, 2017Veterans Affairs2016 Omnibus Plan HMS Holdings Corp. 2016 Omnibus Incentive Plan 2017 Tax Act Tax Cuts and Jobs Act of 2017 20182019 Form 10-KHMS Holdings Corp. Annual Report on Form 10-K for the year ended December 31, 201820192019 Omnibus Plan HMS Holdings Corp. 2019 Omnibus Incentive Plan 401(k) Plan HMS Holdings Corp. 401(k) Plan solutions and services,offerings, the benefits and synergies to be obtained from completed and future acquisitions, the future performance of companies we have acquired,investments and strategic relationships, including VitreosHealth, Inc. ("VitreosHealth"), MedAdvisor Limited ("MedAdvisor") and West Claims Recovery Services, LLC ("Accent"), our future expenses, interest rates and tax rates, 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.▪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 data sources and suppliers;▪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;▪our ability to generate sufficient cash to cover our interest and principal payments under our credit facility;▪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;▪accounting changes or revisions;▪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.
▪the course of the COVID-19 pandemic and the responses to the pandemic, and their effects on our business and operations, including those of our customers and partners, and general economic, business and market conditions;20182019 Form 10-K, and in other documents we file with the SEC.informationsources and cannot make any representation as to the accuracy or completeness of such information. None of the reports and other materials of third-party sources referred to in this Form 10-Q were prepared for use in, or in connection with, this Form 10-Q.HMS IntegritySourceElli®, Eliza®, EssetteEssette®, and ElliVitreosHealth®and Accent®. These and other trademarks of ours appearing in this Form 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. Other trademarks and trade names appearing in this Form 10-Q are the property of their respective owners. We do not intend our use or display of other companies' trademarks or trade names to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies. March 31,
2019 Assets (unaudited) Current assets: Cash and cash equivalents $ 219,857 $ 178,946 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 22,097 19,970 Income tax receivable 17,628 18,817 Deferred financing costs, net 564 564 Other current assets 249 240 Total current assets 465,190 425,309 Property and equipment, net 90,294 94,435 Goodwill 487,617 487,617 Intangible assets, net 64,801 67,140 Operating lease right-of-use assets 20,110 - Deferred financing costs, net 1,532 1,673 Other assets 3,110 2,344 Total assets $ 1,132,654 $ 1,078,518 Liabilities and Shareholders' Equity Current liabilities: Accounts payable, accrued expenses and other liabilities $ 63,078 $ 74,902 Estimated liability for appeals 24,043 21,723 Total current liabilities 87,121 96,625 Long-term liabilities: Revolving credit facility 240,000 240,000 Operating lease liabilities 18,677 - Net deferred tax liabilities 19,710 18,485 Other liabilities 6,758 10,012 Total long-term liabilities 285,145 268,497 Total liabilities 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; 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 453,080 425,748 Retained earnings 441,877 422,235 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 760,388 713,396 Total liabilities and shareholders' equity $ 1,132,654 $ 1,078,518 March 31,
2020December 31,
2019Assets (unaudited) Current assets: Cash and cash equivalents $ 148,033 $ 139,268 Accounts receivable, net 234,901 223,443 Prepaid expenses and other current assets 22,231 30,925 Income tax receivable 524 3,210 Deferred financing costs, net 564 564 Total current assets 406,253 397,410 Property and equipment, net 86,764 86,947 Goodwill 597,803 599,351 Intangible assets, net 128,170 131,849 Operating lease right-of-use assets 16,544 17,493 Deferred financing costs, net 968 1,109 Other assets 14,586 10,117 Total assets $ 1,251,088 $ 1,244,276 Liabilities and Shareholders' Equity Current liabilities: Accounts payable, accrued expenses and other liabilities $ 81,242 $ 97,747 Liability for appeals 3,906 3,570 Total current liabilities 85,148 101,317 Long-term liabilities: Revolving credit facility 240,000 240,000 Operating lease liabilities 13,839 14,881 Net deferred tax liabilities 26,527 25,587 Other liabilities 7,727 7,626 Total long-term liabilities 288,093 288,094 Total liabilities 373,241 389,411 Commitments and contingencies Shareholders' equity: Preferred stock -- $0.01 par value; 5,000,000 shares authorized; 0ne issued — — Common stock -- $0.01 par value; 175,000,000 shares authorized;102,073,527 shares issued and 88,410,333 shares outstanding at March 31, 2020; 101,766,468 shares issued and 88,103,566 shares outstanding at December 31, 2019 1,021 1,018 Capital in excess of par value 490,261 479,964 Retained earnings 522,141 509,459 Treasury stock, at cost: 13,663,194 shares at March 31, 2020 and December 31, 2019 (135,576) (135,576) Total shareholders' equity 877,847 854,865 Total liabilities and shareholders' equity $ 1,251,088 $ 1,244,276 Three Months Ended
March 31, 2019 2018 Revenue $ 147,953 $ 141,425 Cost of services: Compensation 57,452 56,079 Direct project and other operating expenses 20,199 16,648 Information technology 13,105 12,263 Occupancy 4,079 4,383 Amortization of acquisition related software and intangible assets 4,166 8,132 Total cost of services 99,001 97,505 Selling, general and administrative expenses 29,246 31,998 Total operating expenses 128,247 129,503 Operating income 19,706 11,922 Interest expense (2,849 ) (2,648 ) Interest income 1,114 120 Income before income taxes 17,971 9,394 Income taxes (1,671 ) 3,003 Net Income $ 19,642 $ 6,391 Basic income per common share: Net income per common share -- basic $ 0.23 $ 0.08 Diluted income per common share: Net income per common share -- diluted $ 0.22 $ 0.07 Weighted average shares: Basic 85,853 83,933 Diluted 88,614 85,682 Three Months Ended
March 31,2020 2019 Revenue $ 171,412 $ 147,953 Cost of services: Compensation 67,455 57,452 Direct project and other operating expenses 24,895 20,199 Information technology 14,903 13,105 Occupancy 4,362 4,079 Amortization of acquisition related software and intangible assets 5,505 4,166 Total cost of services 117,120 99,001 Selling, general and administrative expenses 35,839 29,246 Total operating expenses 152,959 128,247 Operating income 18,453 19,706 Interest expense (2,262) (2,849) Interest income 234 1,114 Other income 652 — Income before income taxes 17,077 17,971 Income taxes 4,395 (1,671) Net income $ 12,682 $ 19,642 Basic income per common share: Net income per common share -- basic $ 0.14 $ 0.23 Diluted income per common share: Net income per common share -- diluted $ 0.14 $ 0.22 Weighted average shares: Basic 88,202 85,853 Diluted 89,601 88,614 (in 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 Three Months Ended
March 31,2020 2019 Common Stock and paid-in capital Balance, beginning of period $ 480,982 $ 426,737 Exercise of stock options 125 23,139 Stock-based compensation expense 13,510 10,979 Vesting of restricted stock units, net of shares withheld for employee tax (3,335) (6,768) Balance, end of period 491,282 454,087 Retained earnings Balance, beginning of period 509,459 422,235 Net income 12,682 19,642 Balance, end of period 522,141 441,877 Treasury stock Balance, beginning of period (135,576) (135,576) Purchase of treasury stock — — Balance, end of period (135,576) (135,576) Total shareholders' equity $ 877,847 $ 760,388 Shares issued Balance, beginning of period 101,766,468 98,924,501 Exercise of stock options 13,561 1,443,685 Vesting of restricted stock units, net of shares withheld for employee tax 293,498 376,891 Balance, end of period 102,073,527 100,745,077 Treasury Stock Balance, beginning of period 13,663,194 13,663,194 Purchase of treasury stock — — Balance, end of period 13,663,194 13,663,194 Three Months Ended
March 31,Three Months Ended
March 31, 2019 2018 2020 2019 Operating activities: Operating activities: Net income $ 19,642 $ 6,391 Net income $ 12,682 $ 19,642 Adjustments to reconcile net income to net cash provided by operating activities: Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, equipment and software 7,930 7,345 Depreciation and amortization of property, equipment and software 8,024 7,930 Amortization of intangible assets 2,339 6,121 Amortization of intangible assets 3,679 2,339 Amortization of deferred financing costs 141 141 Amortization of deferred financing costs 141 141 Stock-based compensation expense 10,979 9,494 Stock-based compensation expense 13,510 10,979 Deferred income taxes 1,225 (777 ) Deferred income taxes 940 1,225 Noncash lease expense 1,196 - Noncash lease expense 949 1,196 Loss on disposal of assets - 72 Release of estimated liability for appeals - (8,436 ) Changes in operating assets and liabilities: Changes in operating assets and liabilities: Accounts receivable 1,977 2,328 Accounts receivable (9,910) 1,977 Prepaid expenses (2,127 ) 2,539 Other current assets (9 ) 469 Prepaid expenses and other current assets Prepaid expenses and other current assets 8,694 (2,136) Other assets (766 ) (25 ) Other assets (4,469) (766) Income taxes receivable 1,189 2,919 Income taxes receivable 2,686 1,189 Accounts payable, accrued expenses and other liabilities (15,995 ) (14,115 ) Accounts payable, accrued expenses and other liabilities (19,126) (15,995) Operating lease liabilities (1,519 ) - Operating lease liabilities (1,042) (1,519) Estimated liability for appeals 2,320 271 Liability for appeals Liability for appeals 336 2,320 Net cash provided by operating activities 28,522 14,737 Net cash provided by operating activities 17,094 28,522 Investing activities: Investing activities: Purchases of property and equipment (369 ) (791 ) Purchases of property and equipment (1,678) (369) Investment in capitalized software (3,621 ) (4,963 ) Investment in capitalized software (3,339) (3,621) Net cash used in investing activities (3,990 ) (5,754 ) Net cash used in investing activities (5,017) (3,990) Financing activities: Financing activities: Proceeds from exercise of stock options 23,139 144 Proceeds from exercise of stock options 125 23,139 Payments of tax withholdings on behalf of employees for net-share settlements (6,768 ) (2,587 ) Payments of tax withholdings on behalf of employees for net-share settlements (3,335) (6,768) Payments on capital lease obligations 8 - Payments on capital lease obligations (102) 8 Purchases of treasury stock - (5,955 ) Net cash provided by/(used in) financing activities 16,379 (8,398 ) Net cash (used in)/provided by financing activities Net cash (used in)/provided by financing activities (3,312) 16,379 Net increase in cash and cash equivalents 40,911 585 Net increase in cash and cash equivalents 8,765 40,911 Cash and Cash Equivalents Cash and Cash Equivalents Cash and cash equivalents at beginning of year 178,946 83,313 Cash and cash equivalents at beginning of year 139,268 178,946 Cash and cash equivalents at end of period $ 219,857 $ 83,898 Cash and cash equivalents at end of period $ 148,033 $ 219,857 Supplemental disclosure of cash flow information: Supplemental disclosure of cash flow information: Cash paid for income taxes/(refunds received), net of refunds $ (4,288 ) $ 626 Cash paid for income taxes/(refunds received), net of refunds $ 585 $ (4,288) Cash paid for interest $ 2,771 $ 2,055 Cash paid for interest $ 2,134 $ 2,771 Supplemental disclosure of non-cash activities: Supplemental disclosure of non-cash activities: Change in balance of accrued property and equipment purchases $ (201 ) $ 881 Change in balance of accrued property and equipment purchases $ (2,824) $ (201)
2019
The preparation of the Company’s unaudited Consolidated 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 Statements and the reported amounts of revenue and expenses during the reportingsuch interim periods. The Company’s actual results could differ from those estimates.
10-K.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASU 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 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 this guidance on January 1, 2019, utilizing the optional transition method approach with an effective date of January 1, 2019. Consequently, financial information prior to the effective date was not updated and the disclosures 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 adoption. The Company elected the available practical expedients, including the practical expedient to not separate lease and non-lease components of its leases and the 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 leasing 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 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 years beginning after December 15, 2018, including interim periods within those fiscal 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. The Company adopted this guidance on January 1, 2020. When developing an estimate of the Company's expected credit losses, the Company considers all relevant information regarding the collectability of cash flows including historical information, customers' credit history and current financial conditions, industry trends and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
| Three Months Ended | Three Months Ended March 31, | |||||||||||||||||||||||||||||||||
| March 31, 2019 | March 31, 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Coordination of Benefits | $ | 105,851 | $ | 91,752 | Coordination of Benefits | $ | 118,056 | $ | 105,851 | |||||||||||||||||||||||||
| Payment Integrity | 27,726 | 38,641 | Payment Integrity | 39,308 | 27,726 | |||||||||||||||||||||||||||||
| Total Population Management | 14,376 | 11,032 | ||||||||||||||||||||||||||||||||
| Population Health Management | Population Health Management | 14,048 | 14,376 | |||||||||||||||||||||||||||||||
| Total | $ | 147,953 | $ | 141,425 | Total | $ | 171,412 | $ | 147,953 | |||||||||||||||||||||||||
Analytical services revenue consists of revenue for our payment integrity services and total population management 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 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 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 amount of recovery findings the Company identifies, a contingent or fixed transaction price/recovery percentage is allocated to each distinct
Total population
In connection with Coordination
2020. The Company has current period foreign income tax expense and includes global intangible low-taxed income as current period income tax expense, both of which are not material to the overall financial statements. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted in response to the novel coronavirus (COVID-19) pandemic. The CARES Act includes numerous provisions relating to, among other things, refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss amounts and carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Due to the recent enactment of the CARES Act, the Company is currently analyzing the potential impacts of this legislation on its financial position and results of operations. The 2020. 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 The weighted-average grant date fair value per share of the stock options granted during the three months ended March 31, 2020 and 2019 was $8.91 and 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. In March 2018, the Company provided certain documents and information in response to the CID. HMS has not received any further requests 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. 2019 2019 2019 2019 2019 reconciling items. options, net of payments of tax withholdings.20192020 and 20182019 was as follows (in thousands): Three Months Ended Three Months Ended
March 31, March 31, 2019 March 31, 2018 2020 2019 Commercial $ 76,259 $ 71,785 Commercial $ 88,750 $ 76,259 State 61,742 54,620 State 68,669 61,742 Federal 9,952 15,020 Federal 13,993 9,952 Total $ 147,953 $ 141,425 Total $ 171,412 $ 147,953 $6.5$6.4 million and $5.6$4.2 million as of March 31, 20192020 and December 31, 2018,2019, respectively, and is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. Approximately $1.4$1.0 million of the December 31, 20182019 balance was recognized in revenue during the quarterthree months ended March 31, 2019.3.Cash and cash equivalents $ 9,400 Accounts Receivablereceivable10,736 Prepaid expenses 129 Property and equipment 2,878 Intangible assets 68,400 Goodwill 79,997 Other assets 489 Accounts Receivable Allowancepayable and accrued liabilities(13,395) Total purchase price $ 158,634 The Company’snet, consistedand a decrease to goodwill of approximately $1.5 million. Substantially all the receivables acquired are expected to be collectible.Useful Life
(in years)Customer relationships 12 $ 67,000 Trade name 3 1,400 Fair value of intangibles acquired $ 68,400 following (in thousands): March 31,
2019 December 31,
2018 Accounts receivable $ 218,832 $ 220,455 Allowance (14,037 ) (13,683 ) Accounts receivable, net $ 204,795 $ 206,772 We record an accounts receivable allowancedate of acquisition was based on historical patternsa preliminary valuation.billing adjustments, length of operatingconsideration exchanged to the net tangible and collection cycleintangible assets acquired and customer negotiations, behaviors and payment patterns. Changes in these estimates are recorded to revenueliabilities assumed in the periodacquisition is based on estimated fair values as of change.September 16, 2019. The Company allocated the purchase price, net of cash acquired, to the following significant assets: intellectual property subject to amortization of $6.0 million, and goodwill of $30.2 million which represents the excess purchase price over the net identifiable tangible and intangible assets. There were no additional material allocations to assets and liabilities. The intangible assets are valued using various methods which require several judgments, including growth rates, discount rates, expected levels of revenues, earnings, cash flows and tax rates. The intangible assets are amortized over their estimated useful lives on a straight-line basis and are not expected to be deductible for tax purposes. The goodwill recognized from the acquisition was a result of expected synergies to be realized from future revenue growth, is a summary of the activitynot expected to be deductible for tax purposes, has an indefinite useful life and will be included in the accounts receivable allowance (Company’s annual impairment testing.thousands): March 31,
2019 December 31,
2018 Balance--beginning of period $ 13,683 $ 14,799 Provision 5,411 20,453 Charge-offs (5,057 ) (21,569 ) Balance--end of period $ 14,037 $ 13,683 4.Intangible Assets and Goodwill Gross Carrying Amount Accumulated
Amortization Net Carrying Amount Weighted Average Amortization Period in Years March 31, 2019 Gross Carrying Amount Accumulated
AmortizationNet Carrying Amount Weighted Average Amortization Period in Years March 31, 2020 March 31, 2020 Customer relationships $ 68,290 $ (17,588 ) $ 50,702 12.7 Customer relationships $ 125,423 $ (14,172) $ 111,251 11.8 Trade names Trade names 1,400 (128) 1,272 2.7 Intellectual property 21,700 (7,638 ) 14,062 3.9 Intellectual property 27,700 (12,053) 15,647 3.8 Trade names 136 (117 ) 19 0.4 Restrictive covenants 133 (115 ) 18 0.4 Total $ 90,259 $ (25,458 ) $ 64,801 Total $ 154,523 $ (26,353) $ 128,170 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 Gross Carrying Amount Accumulated
AmortizationNet Carrying Amount Weighted Average Amortization Period in Years December 31, 2019 Customer relationships $ 135,290 $ (21,637) $ 113,653 12.1 Trade names 1,536 (147) 1,389 3.0 Intellectual property 27,700 (10,893) 16,807 3.7 Total $ 164,526 $ (32,677) $ 131,849 Year ending December 31, Amortization Year ending December 31, Amortization 2019 (excluding the three months ended March 31, 2019) $ 6,856 2020 7,664 2020 (excluding the three months ended March 31, 2020) 2020 (excluding the three months ended March 31, 2020) $ 11,016 2021 7,197 2021 14,247 2022 7,197 2022 14,197 2023 4,822 2023 11,405 2024 2024 10,330 Thereafter 31,065 Thereafter 66,975 Total $ 64,801 Total $ 128,170 20192020 and 2018,2019, amortization expense related to intangible assets was $3.7 million and $2.3 million, and $6.1 million, respectively.There was no changeBalance at December 31, 2019 $ 599,351 Accent acquisition (1,548) Balance at March 31, 2020 $ 597,803
These gains are reflected as a component of Other income in the accompanying Consolidated Statements of Income.5.Accounts Payable, Accrued Expenses and Other Liabilities March 31,
2019 December 31,
2018 March 31,
2020December 31,
2019Accounts payable, trade $ 12,325 $ 12,394 Accounts payable, trade $ 14,474 $ 12,246 Accrued compensation and other 16,236 42,833 Accrued compensation and other 19,533 36,827 Accrued operating expenses 28,164 19,675 Accrued operating expenses 40,704 42,045 Current portion of lease liabilities 6,353 - Current portion of lease liabilities 6,531 6,629 Total accounts payable, accrued expenses and other liabilities $ 63,078 $ 74,902 Total accounts payable, accrued expenses and other liabilities $ 81,242 $ 97,747 6.Income Taxesdecreasedincreased to (9.3%)25.7% for the three months ended March 31, 20192020 from 32.0%(9.3)% for the three months ended March 31, 2018.2019. The effective tax rate for the three months ended March 31, 20192020 includes immaterial discrete tax benefits related to net equity compensation deductions offset by interest on uncertain tax benefits.deductions. For the three months ended March 31, 2019,2020, the differences between the federal statutory rate and our effective tax rate are tax expense items related to state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.of approximately $5.0 million and $4.8 million, as of March 31, 2019 and December 31, 2018, respectively, (net of the federal benefit for state issues) of approximately $4.4 million and $4.2 million, as of March 31, 2020 and December 31, 2019, respectively, that, if recognized, would favorably affect the Company’s future effective tax rate. Also included in Other liabilities on the Consolidated Balance Sheets, are accrued liabilities for interest expense and penalties related to unrecognized tax benefits of $0.9$0.8 million and $0.7 million as of March 31, 20192020 and December 31, 2018,2019, 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 three months ended March 31, 2020 and 2019 and 2018 was $0.2$0.1 million and $0.2 million, respectively. The Company believes it is reasonably possible that the amount of unrecognized tax benefits may decrease by $1.8$1.6 million over the next twelve months, due to the expiration of the statute of limitations in federal and various state jurisdictions.territory, and local jurisdictions.jurisdictions and will file income tax returns in certain foreign jurisdictions in future periods as a result of its acquisition of VitreosHealth. HMS is generally no longer subject to U.S. Federal income tax examinations for years before 2013.2016. HMS operates in a number of state, local and localforeign jurisdictions. Accordingly, HMS is subject to state, local and localforeign income tax examinations based on the various statutes of limitations in each jurisdiction.7.Estimated Liability For Appealscontractscontract with the Centers for Medicare & Medicaid Services (“CMS”) (included within the Company’s payment integrity services 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 contracts with CMS includes five levels of appeals, and resolution of appeals can take substantial time to resolve. HMS records (a) an actual return obligation liability for findings which have been previously adjudicated in favor of providers and (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. following roll-forward summarizes the activity in Estimated Liability for Appeals (in 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 contract to determine management’s best estimate of liability for any findings which have been previously adjudicated prior to the expiration of the contract. 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 in future periods.8.Credit Agreementits Amended and Restatedthe 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"Amended Revolving Facility”Facility"). The.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 the lenders therefor and meeting certain other conditions.20192020 and December 31, 2018,2019, the outstanding principal balance due on the Amended Revolving Facility was $240.0$240 million. NoNaN principal payments were made against the Amended Revolving Facility during the three months ended March 31, 2019.▪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 Rate”) plus 1.00%, plus an interest margin ranging from 0.50% to 1.00% based on the Company’s consolidated leverage ratio for the applicable period; or▪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.its revolving credit facilitythe Amended Revolving Facility and expires June 30, 2019.2020.4.75:1.00 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 March 31, 2019,2020, the Company was in compliance with all terms of the Credit Agreement.revolving credit facilityAmended Revolving Facility were as follows (in thousands): Three Months Ended March 31, Three Months Ended
March 31, 2019 2018 2020 2019 Interest expense $ 2,526 $ 2,070 Interest expense $ 1,925 $ 2,526 Commitment fees 156 239 Commitment fees 160 156 20192020 and December 31, 2018,2019, the unamortized balance of deferred origination fees and debt issuance costs was $2.1$1.6 million and $2.2$1.7 million, respectively. For the three month20192020 and 2018,2019, HMS amortized $0.1 million and $0.1 million, respectively, of interest expense related to the Company’s deferred origination fees and debt issue costs.9.Earnings Per Share Three Months Ended
March 31,Three Months Ended
March 31, 2019 2018 2020 2019 Net income $ 19,642 $ 6,391 Net income $ 12,682 $ 19,642 Weighted average common shares outstanding-basic 85,853 83,933 Weighted average common shares outstanding-basic 88,202 85,853 Plus: net effect of dilutive stock options and restricted stock units 2,761 1,749 Plus: net effect of dilutive stock options and restricted stock units 1,399 2,761 Weighted average common shares outstanding-diluted 88,614 85,682 Weighted average common shares outstanding-diluted 89,601 88,614 Net income per common share-basic $ 0.23 $ 0.08 Net income per common share-diluted $ 0.22 $ 0.07 Net income per common share -- basic Net income per common share -- basic $ 0.14 $ 0.23 Net income per common share -- diluted Net income per common share -- diluted $ 0.14 $ 0.22 2018, 215,353 and 3,118,939 stock options, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive. For the three months ended March 31, 2019 and 2018,(ii) restricted stock units representing 120,5165,053 and 58,743120,516 shares of the Company's common stock, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.10.Stock-Based Compensation(a)Stock-Based Compensation Expense Three Months Ended March 31, Three Months Ended
March 31, 2019 2018 2020 2019 Cost of services-compensation $ 4,124 $ 2,563 Cost of services-compensation $ 3,849 $ 4,124 Selling, general and administrative 6,855 6,931 Selling, general and administrative 9,661 6,855 Total $ 10,979 $ 9,494 Total $ 13,510 $ 10,979 (b)Stock OptionsStock-basedand $4.0 million for the three months ended March 31, 2019 and 2018, respectively.20192020 (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 Outstanding balance at December 31, 2018 4,402 $ 17.07 Number of Options Weighted
Average
Exercise
PriceWeighted
Average-
Remaining
Contractual
TermsAggregate
Intrinsic
ValueOutstanding balance at December 31, 2019 Outstanding balance at December 31, 2019 2,411 $ 23.43 Granted 560 39.52 Granted 1,028 27.34 Exercised (1,443 ) 16.03 Exercised (14) 8.97 Forfeitures (134 ) 18.99 Forfeitures — — Expired - - Expired — — 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 Outstanding balance at March 31, 2020 Outstanding balance at March 31, 2020 3,425 $ 24.68 7.93 $ 12,430 Expected to vest at March 31, 2020 Expected to vest at March 31, 2020 1,363 $ 28.72 9.34 $ 1,267 Exercisable at March 31, 2020 Exercisable at March 31, 2020 1,613 $ 20.31 6.42 $ 10,612 20192020 and 2018,2019, the Company issuedreceived proceeds of $0.1 million and $23.1 million, respectively, for the issuance of 13,561 and 1,443,685 and 9,043 shares respectively, of the Company’s common stock upon the exercise of outstanding stock options, and received proceeds of $23.1 million and $0.1 million, respectively. The total intrinsic value of stock options exercised during the three months ended March 31, 2020 and 2019 was $0.2 million and 2018 was $25.8 million, and $0.01 million respectively.2019,2020, there was approximately $8.4$7.9 million of total unrecognized compensation cost related to stock options outstanding, which is expected to be recognized over a weighted average period of 1.441.6 years.2018 was $13.82, and $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: Three Months Ended
March 31, Three Months Ended
March 31, 2019 2018 2020 2019 Expected dividend yield 0 % 0 % Expected dividend yield 0 % 0 % Risk-free interest rate 2.5 % 2.7 % Risk-free interest rate 1.2 % 2.5 % Expected volatility 40.9 % 42.5 % Expected volatility 41.1 % 40.9 % Expected life (years) 6.4 6.0 Expected life (years) 6.3 6.4 2018 was $11.3 million, respectively. $2.1 million, respectively. (c)Restricted Stock UnitsStock-based2019, stock-based compensation expense related to restricted stock units was approximately $7.9 million and $6.1 million, and $5.5 million for the three months ended March 31, 2019 and 2018, respectively.2019 2020 (in thousands, except for weighted average grant date fair value per unit): Number of
Units Weighted Average
Grant Date Fair
Value per Unit Outstanding balance at December 31, 2018 1,488 $ 17.60 Number of
UnitsWeighted Average
Grant Date Fair
Value per UnitOutstanding balance at December 31, 2019 Outstanding balance at December 31, 2019 1,239 $ 21.37 Granted 408 34.43 Granted 693 23.78 Vesting of restricted stock units, net of units withheld for taxes (377 ) 16.88 Vesting of restricted stock units, net of units withheld for taxes (293) 22.67 Units withheld for taxes (193 ) 16.88 Units withheld for taxes (141) 22.67 Forfeitures (63 ) 17.58 Forfeitures (1) 24.36 Outstanding balance at March 31, 2019 1,263 $ 25.43 Outstanding balance at March 31, 2020 Outstanding balance at March 31, 2020 1,497 $ 21.60 2019, 1,027,1862020, 1,224,176 restricted stock units remained unvested and there was approximately $16.7$18.3 million of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average vesting period of 1.431.6 years.11.LeasesThe 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 liabilitiesaccounts 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 12.Commitments and Contingenciesfor informationfrom the government in connection with this CID.The Company has moved to dismiss the complaint. OnIn May 2, 2019, the Court held a hearingheard oral arguments on the Company’sCompany's motion to dismiss. The motion remains pending before the Court. The Company continues to believe that this claim is without merit and intends to vigorously defend this matter.13.Subsequent Eventsaccompanying Notes thereto included in Part I, Item 1. The historical results set forth in Items 1 and 2 of Part I of this Form 10-Q should not be taken as necessarily indicative of our future operations or financial results.provides a broad range of cost containmentour mission is to make healthcare work better for everyone. We deliver healthcare technology, analytics and engagement solutions to helpthat advance the healthcare payers and at-risk providerssystem by helping healthcare organizations reduce costs, improve health outcomes and enhance memberconsumer experiences. Using industry-leading technology, analyticsOur comprehensive solutions include a broad range of payment accuracy and engagementpopulation health management services that offer value throughout the healthcare continuum. Through our solutions, we deliver coordinationsave billions of benefits, payment integrity and total population management solutions through our operating subsidiaries to move the healthcare system forwarddollars annually for our customers. We arecustomers while helping consumers lead healthier lives. HMS is managed and operateoperates as one business segment with a single management team that reports to the Chief Executive Officer. 
2019,2020, 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 160 private employers;▪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.20182019 Form 10-K, there have been no material changes to our critical accounting policies other than with respect to leases as described in Notes 1 and 11 to the unaudited Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. With respect topolicies. Information regarding our critical accounting policies other than those for leases, refer to the discussioncan be found in our 20182019 Form 10-K under “Critical Accounting Policies and Estimates” in Part II, Item 7 and “Business and Summary of Significant Accounting Policies” in Note 1 to the Consolidated Financial Statements under Part II, Item 8.20192020 and March 31, 2018▪Revenue of $148.0 million increased $6.6 million, or 4.7% over the same quarter in 2018; and
2019▪Operating income of $19.7 million increased by $7.8 million as compared to operating income of $11.9 million in the same quarter of the prior year.
▪ Revenue of $171.4 million increased $23.4 million, or 15.9% over the same quarter in 2019; and20192020 to March 31, 2018 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 % Three Months Ended dollars in millions March 31, $ Change % Change 2020 2019 2020 vs 2019 Revenue $ 171.4 $ 148.0 $ 23.4 15.9 % Cost of services: Compensation 67.5 57.5 10.0 17.4 Direct project and other operating expenses 24.9 20.2 4.7 23.3 Information technology 14.9 13.1 1.8 13.7 Occupancy 4.3 4.1 0.2 4.9 Amortization of acquisition related software and intangible assets 5.5 4.1 1.4 34.1 Total cost of services 117.1 99.0 18.1 18.3 Selling, general and administrative expenses 35.8 29.3 6.5 22.2 Total operating expenses 152.9 128.3 24.6 19.2 Operating income 18.5 19.7 (1.2) (6.1) Interest expense (2.3) (2.8) 0.5 (17.9) Interest income 0.2 1.0 (0.8) (80.0) Other income 0.7 — 0.7 100.0 Income before income taxes 17.1 17.9 (0.8) 4.5 Income taxes 4.4 (1.7) 6.1 (358.8) Net income $ 12.7 $ 19.6 $ (6.9) (35.2) % 
20192020 vs. 20182019,2020, revenue was $148.0$171.4 million, an increase of $6.6$23.4 million or 4.7%15.9% compared to revenue of $141.4$148.0 million for the prior year quarter.▪By solution, which consists of coordination of benefits and analytical services, and included in analytical services are our payment integrity and total population management solutions:oCoordination of benefits revenue increased $14.2 million or 15.5% which was attributable to incremental services and yield increases provided to existing customers in our cost avoidance and post payment recovery business. oPayment integrity revenue decreased $11.0 million or 28.4% primarily due to a $7.4 million decrease in Medicare RAC revenue and a $3.6 million decrease related to timing of replaced edits and customer approvals for new edits.oTotal population management revenue increased $3.4 million or 30.9% due to growth in the Eliza business.▪By market:oCommercial health plan market revenue increased $4.5 million or 6.3%, which was primarily attributable to growth in the Eliza business and incremental services and yield increases provided to existing customers in our cost avoidance business.oFederal government market revenue decreased $5.0 million or 33.3% compared to the prior year quarter due to the $8.4 million Medicare RAC reserve release.oState government market revenue grew by $7.1 million or 13.0%, which was attributable to expanded scopes and yield improvements.
20192020 vs. 20182019,2020, total cost of services was $99.0$117.1 million, an increase of $1.5$18.1 million or 1.5%18.3% compared to $97.5$99.0 million for the prior year quarter.▪Compensation expense increased by $1.4 million primarily due to a reduction in capitalized software related projects. ▪Direct project and other operating costs increased by $3.6 million due to increased labor and services utilized to support revenue generating activities.▪Amortization of acquisition related software and intangible assets decreased by $4.0 million due to certain intangible assets becoming fully amortized in prior periods. 
20192020 vs. 20182019,2020, SG&A expense was $29.3$35.8 million, a decreasean increase of $2.7$6.5 million or 8.4%22.2% compared to $32.0$29.3 million for the prior year quarter.▪Compensation expense in 2019 decreased by $2.0 million due to a reduction in payroll related costs, variable compensation and fringe benefits. ▪In the first quarter of 2019, other operating expenses decreased by $0.8 million.20192020 vs. 2018decreasedincreased to (9.3%)25.7% for the three months ended March 31, 20192020 compared to 32.0%(9.3)% for the three months ended March 31, 2018.2019. The effective tax rate for the three months ended March 31, 2019 includes2020 included an immaterial amount of discrete tax benefits related to net equity compensation deductions offset by interest on uncertain tax benefits.deductions. Excluding the above mentioned immaterial discrete tax items, and net federal tax reform benefit, our normalized effective tax rate would approximate 27%25.7% for the three months ended March 31, 2019.2020. For the three months ended March 31, 2019,2020, the differences between the federal statutory rate and our effective tax rate are tax expense items related to state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.24 March 31,
2019 December 31,
2018 Cash and cash equivalents $ 219,857 $ 178,946 Working capital $ 378,069 $ 328,684 Available borrowings under credit facility $ 253,500 $ 253,500 March 31, 2020 December 31, 2019 Cash and cash equivalents $ 148,033 $ 139,268 Working capital $ 321,105 $ 296,093 Available borrowings under credit facility $ 253,500 $ 253,500 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 Three Months Ended
March 31,2020 2019 Net cash provided by operating activities $ 17,094 $ 28,522 Net cash used in investing activities (5,017) (3,990) Net cash (used in)/provided by financing activities (3,312) 16,379 Net increase in cash and cash equivalents $ 8,765 $ 40,911 sourcesources of cash hashave 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 include, but are not limited to, acquisitions, strategic investments, capital investments, compensation expenses, data processing, direct project and other operating costs, SG&A expenses and other expenses.▪the working capital requirements of our operations;▪investments in our business;▪business development activities; and▪repurchases of common stock.uncertainty.uncertainty, particularly in light of the rapidly changing market and economic conditions created by the COVID-19 pandemic. 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 investments 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.2520192020 was $28.5$17.1 million, a $13.8$11.4 million increasedecrease compared to net cash provided by operating activities of $14.7$28.5 million for the three months ended March 31, 2018.2019. The increasedecrease was primarily related to an increasea $6.9 million decrease in net income of $13.2and a $7.9 million and increases in reconciling items of $9.9 million. These increases were offset by decreasesdecrease resulting from changes in operating assets and liabilities of approximately $9.3 million.20192020 was $4.0$5.0 million, an $1.8a $1.0 million decreaseincrease compared to net cash used in investing activities of $5.8$4.0 million for the three months ended March 31, 2018.2019. The decreaseincrease was primarily relatedattributable to reductions in purchases of property and equipment and investment in capitalized software.provided by/(used in)in financing activities for the three months ended March 31, 20192020 was $16.4$3.3 million, a $24.8$19.7 million increasedecrease compared to net cash used inprovided by financing activities of $8.4$16.4 million for the three months ended March 31, 2018.2019. The increasedecrease was primarily related to a $19.6 million decrease in proceeds from the exercise of stock options.20182019 Form 10-K.“Recently Issued“Summary of Significant Accounting Pronouncements Not Yet Adopted”Policies” 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 Risk20182019 Form 10-K.Item 4.Controls and Procedures2019.2020. 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.2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.1211 to the unaudited Consolidated Financial Statements of this Form 10-Q is incorporated herein by reference.Item 1A.Risk Factors20182019 Form 10-K, under the headings “Business” of Part I, Item 1, “Risk Factors” of Part I, Item 1A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II, Item 7 and “Quantitative and Qualitative Disclosures About Market 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. ThereOther than the risk factor set forth below, there has been no material change in the Company’s risk factors from those described in our 20182019 Form 10-K.These
The effects of the COVID-19 pandemic could disrupt our operations and adversely affect our business, financial condition, results of operations and cash flows.Item 6.Exhibits28101.INS101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document _________________________†Indicates a management contract or compensatory plan, contract or arrangement104 *The certifications attached hereto asCover Page Interactive Data File (formatted in Inline XBRL and contained in 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 Exchange Act101)
* 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 Exchange ActDate:Date: May 10, 201911, 2020HMS HOLDINGS CORP. By: By:/s/ William C. Lucia William C. Lucia
President and Chief Executive Officer
(Principal Executive Officer)By: By:/s/ Jeffrey S. Sherman Jeffrey S. Sherman
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)30