See accompanying notes
to the unaudited consolidated financial statements.
See accompanying notes to the unaudited
consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31,
2016 and 2015
(unaudited)
HMS Holdings Corp, (the “Company”
or “HMS”) provides coordination of benefits services to government and private healthcare payers and sponsors to ensure
that the responsible party pays healthcare claims. Additionally, the Company’s payment integrity services ensure that healthcare
claims billed are accurate and appropriate. Together these various services help customers recover amounts from liable third parties;
prevent future improper payments; reduce fraud, waste and abuse; and ensure regulatory compliance.
The consolidated financial statements and notes herein
are unaudited. Accordingly, they do not include all of the information and notes required by United States Generally Accepted Accounting
Principles (“U.S. GAAP”) for complete financial statements. These statements include all adjustments (consisting of
normal recurring accruals) 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 consolidated financial statements should not be regarded as necessarily
indicative of results that may be expected for the entire year. It is suggested that these consolidated financial statements be
read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2015 which
were filed with the U.S. Securities and Exchange Commission (“SEC”) on February 29, 2016 as part of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”).
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, accrued expenses, estimated allowance for
appeals, 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 reporting periods. The Company’s actual results could
differ from those estimates.
These unaudited consolidated 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.
Certain reclassifications were made to
prior period amounts to conform to the current period presentation.
HMS is managed and operated as one business,
with a single management team that reports to the Chief Executive Officer. HMS does not operate separate lines of business with
respect to any of the Company’s product lines.
2.
|
Summary of Significant Accounting Policies
|
There have been no material changes to
the Company’s significant accounting policies that are referenced in the 2015 Form 10-K.
Recently Adopted Accounting Pronouncements
The Company adopted Accounting Standards
Updated (“ASU”) ASU 2015-03, “
Simplifying the Presentation of Debt Issuance Costs
” and ASU 2015-15,
“
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
”
(“ASU 2015-15”). The Company made a policy election to continue recording the deferred costs as an asset, as allowed
for revolving credit agreements. As the Company only has a line-of-credit arrangement, the adoption of the ASU’s had no change
in the Company’s accounting for debt issuance costs related to such line of credit and had no impact on the Company’s
consolidated financial statements.
Recently Issued Accounting Pronouncements
In addition to the recently issued accounting
pronouncements disclosed in the 2015 Form 10-K, the following guidance has been issued since the annual filing. There have been
no changes in the Company’s anticipated adoption of the previously disclosed pronouncements, except as noted above.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus
Net)
(“ASU 2016-08”). ASU 2016-08 requires the Company to recognize revenue in the gross amount of consideration
to which it expects to be entitled in exchange for those goods or services it transfers to a customer. It also requires the agent
to recognize revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging the specified
goods or services to be provided to the customer. ASU 2016-08 is effective for annual reporting periods beginning after December
15, 2017 and for interim reporting periods within such annual periods. The Company is currently evaluating the impact of adopting
this guidance.
In March 2016, as part of its Simplification
Initiative, the FASB issued ASU No. 2016-09
, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accountin
g, (“ASU 2016-09”) which finalizes Proposed ASU No. 2015-270 of the same name, and seeks to reduce
complexity in accounting standards. The areas for simplification in ASU No. 2016-09, involve several aspects of the accounting
for share-based payment transactions, including (1) accounting for income taxes, (2) classification of excess tax benefits on the
statement of cash flow, (3) forfeitures, (4) minimum statutory tax withholding requirements, (5) classification of employee taxes
paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, (6) the practical expedient
for estimating the expected term, and (7) intrinsic value. Application is effective for annual periods beginning after December
15, 2016, and for interim periods within those annual periods. The Company is currently evaluating the impact of adopting this
guidance.
In March 2016, the FASB issued ASU No.
2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which finalizes
Proposed ASU No. 2015-250 of the same name, and suggests guidance for stakeholders on identifying performance obligations and licenses
in customer contracts. The amendments in ASU No. 2016-10 impact entities with transactions that include contracts with customers
to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration, and
they require entities to recognize revenue by following certain steps, including: (1) identifying the contract(s) with a customer;
(2) identifying the performance obligations in a contract; (3) determining the transaction price; (4) allocating the transaction
price to the performance obligations in the contract; and (5) recognizing revenue when, or as, the entity satisfies a performance
obligation. The amendments are effective for annual reporting periods beginning after December 15, 2017, and for interim periods
within those annual periods. The Company is currently evaluating the impact of adopting this guidance.
In May 2016, the FASB issued ASU No. 2016-12
,
Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”).
The amendments clarify the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting
sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The amendments provide a practical
expedient for recognizing revenue from contracts that have been modified prior to the transition period to the new standard. ASU
2016-12 also states that a contract should be considered complete if all, or substantially all, of its revenue has been collected
prior to making the transition to the new standard. In addition, the update clarifies the disclosure requirements for retrospective
application of the standard. The amendments are effective for annual reporting periods beginning after December 15, 2017 and for
interim reporting periods within such annual periods. The Company is currently evaluating the impact of adopting this guidance.
3.
|
Accounts Receivable and Allowance for Doubtful Accounts:
|
The Company’s accounts receivable,
net, consist of the following as of March 31, 2016 and December 31, 2015
(in thousands)
:
|
|
March 31,
2016
|
|
December 31,
2015
|
Accounts receivable
|
|
$
|
170,953
|
|
|
$
|
173,995
|
|
Allowance for doubtful accounts
|
|
|
(5,157
|
)
|
|
|
(4,849
|
)
|
Accounts receivable, net
|
|
$
|
165,796
|
|
|
$
|
169,146
|
|
A summary of the activity in the allowance
for doubtful accounts is as follows
(in thousands)
:
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Balance--beginning of period
|
|
$
|
4,849
|
|
|
$
|
1,898
|
|
Provision--allowance for doubtful accounts
|
|
|
3,646
|
|
|
|
-
|
|
Charge-offs
|
|
|
(3,152
|
)
|
|
|
(420
|
)
|
Recoveries
|
|
|
(186
|
)
|
|
|
-
|
|
Balance--end of period
|
|
$
|
5,157
|
|
|
$
|
1,478
|
|
The Company’s accounts receivable
are net of the estimated liability for appeals, which is presented in Note 7.
4. Intangible Assets
Intangible assets consisted of the following
as of March 31, 2016 and December 31, 2015 (
in thousands
):
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Useful Life
(in years)
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
101,806
|
|
|
$
|
(61,087
|
)
|
|
$
|
40,719
|
|
|
|
5
|
-
|
10
|
|
Restrictive covenants
|
|
|
16,800
|
|
|
|
(14,419
|
)
|
|
|
2,381
|
|
|
|
3
|
-
|
7
|
|
Trade name
|
|
|
17,000
|
|
|
|
(10,835
|
)
|
|
|
6,165
|
|
|
|
3
|
-
|
5
|
|
Total
|
|
$
|
135,606
|
|
|
$
|
(86,341
|
)
|
|
$
|
49,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
101,806
|
|
|
$
|
(57,497
|
)
|
|
$
|
44,309
|
|
|
|
5
|
-
|
10
|
|
Restrictive covenants
|
|
|
16,800
|
|
|
|
(13,580
|
)
|
|
|
3,220
|
|
|
|
3
|
-
|
7
|
|
Trade name
|
|
|
17,000
|
|
|
|
(10,221
|
)
|
|
|
6,779
|
|
|
|
3
|
-
|
5
|
|
Total
|
|
$
|
135,606
|
|
|
$
|
(81,298
|
)
|
|
$
|
54,308
|
|
|
|
|
|
|
|
Amortization
expense of intangible assets is expected to approximate the following
(in thousands):
Year ending December 31,
|
|
|
Remainder of 2016
|
|
$
|
14,891
|
|
2017
|
|
|
16,613
|
|
2018
|
|
|
15,992
|
|
2019
|
|
|
1,582
|
|
2020
|
|
|
187
|
|
Thereafter
|
|
|
-
|
|
For the three months ended March 31, 2016
and 2015, amortization expense related to intangible assets was $5.0 million and $5.1 million, respectively.
|
5.
|
Accounts Payable, Accrued Expenses and Other Liabilities
|
Accounts payable, accrued expenses and other liabilities as
of March 31, 2016 and December 31, 2015 consisted of the following
(in thousands)
:
|
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
7,199
|
|
|
$
|
7,790
|
|
Accrued compensation and other
|
|
|
10,335
|
|
|
|
21,948
|
|
Accrued operating expenses
|
|
|
16,868
|
|
|
|
21,923
|
|
Total accounts payable, accrued expenses and other liabilities
|
|
$
|
34,402
|
|
|
$
|
51,661
|
|
The Company’s effective tax rate
increased to 42.0% for the three months ended March 31, 2016 from 41.7% for the three months ended March 31, 2015, primarily due
to changes in interest on prior state unrecognized tax benefits and permanent differences.
During the three months ended March 31,
2016, the Company utilized an immaterial amount in tax deductions arising from stock-based compensation.
As of March 31, 2016 and 2015, the total
amount of unrecognized tax benefits was approximately $1.9 million and $1.4 million, respectively (net of the federal benefit for
state issues) that, if recognized, would favorably affect the Company’s future effective tax rate. As of March 31, 2016 and
2015, the accrued liability for interest expense and penalties related to unrecognized tax benefits was $0.6 million and $0.3 million,
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, 2016 and 2015 was $0.2 million and an immaterial amount, respectively.
The Company believes it is reasonably possible that the amount of unrecognized tax benefits may decrease, by $1.6 million during
2016, due to the expiration of the statute of limitations in various state jurisdictions.
HMS files income tax returns with the U.S.
Federal government and various state and local jurisdictions. HMS is no longer subject to U.S. Federal income tax examinations
for years before 2012. HMS operates in a number of state and local jurisdictions, most of which have never audited the Company’s
records. Accordingly, HMS is subject to state and local income tax examinations based upon the various statutes of limitations
in each jurisdiction. HMS is currently being examined by the Internal Revenue Service and the State of New York.
|
7.
|
Estimated Liability for Appeals and Estimated Allowance for Appeals
|
The Company provides services under contracts
that contain various fee structures, including contingency fee and fixed fee arrangements. Revenue is recognized when a contract
exists, services have been provided to the customer, the fee is fixed and determinable, and collectability is reasonably assured.
In addition, the Company has contracts with the federal government which are generally cost-plus or time and material based. Revenue
on cost-plus contracts is recognized based on costs incurred plus the negotiated fee earned. Revenue on time and materials contracts
is recognized based on hours worked and expenses incurred.
Under the Company’s Medicare Recovery
Audit Contractor (“RAC”) contract with the Centers for Medicare & Medicaid Services (“CMS”), (held
by its wholly owned subsidiary HealthDataInsights, Inc.) and certain contracts for commercial health plan customers, HMS recognizes
revenue when claims are sent to the customer for offset against future claims payments. Providers and health plan customers have
the right to appeal a claim and may pursue additional appeals if the initial appeal is found in favor of the customer. HMS accrues
an estimated liability for appeals based on the amount of revenue that is subject to appeals, closures or other adjustments and
which HMS estimate are probable of being returned to providers following a successful appeal. The Company’s estimates are
based on the Company’s historical experience with appeals. The estimated liability for appeals represents the Company’s
estimate of the potential amount of repayments related to appeals of claims, closures and other adjustments for which revenue
was previously collected.
A summary of the activity in the estimated liability for appeals
and estimated allowance for appeals is as follows
(in thousands)
:
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Balance--beginning of period
(1)
|
|
$
|
39,692
|
|
|
$
|
41,623
|
|
Provision
|
|
|
998
|
|
|
|
2,321
|
|
Appeals found in providers favor
|
|
|
(4,729
|
)
|
|
|
(1,485
|
)
|
Balance--end of period
(2)
|
|
$
|
35,961
|
|
|
$
|
42,459
|
|
(1)
For the three months ended December 31,
2015 and 2014 included within the estimated allowance for appeals found in favor of providers, $6,614 million and $4,824 million,
respectively was activity associated with the Medicare RAC contract.
(2)
For the three months ended March 31, 2016
and 2015 included within the estimated allowance for appeals found in favor of providers, $5,348 million and $5,473 million,
respectively was activity associated with the Medicare RAC contract.
8. Credit Agreement
In
May
2013, HMS entered into a $500 million five-year, amended and restated revolving credit agreement (“Credit Agreement”)
with certain financial institutions and Citibank, N.A. as Administrative Agent
. No
principal payments were made against the Company’s revolving credit facility during the three months ended March 31, 2016
and 2015. The $197.8 million principal balance of the Company’s revolving credit facility is due in May 2018.
The Credit Agreement provides for an initial
$500 million revolving credit facility, and, under specified circumstances, the revolving credit facility can be increased or one
or more incremental term loan facilities can be added, provided that the incremental credit facilities do not exceed in the aggregate
the sum of (a) $75 million plus (b) an additional amount not less than $25 million, so long as the Company’s total secured
leverage ratio, calculated giving pro forma effect to the requested incremental borrowing and other customary and appropriate pro
forma adjustment events, including any permitted acquisitions, is no greater than 2.5:1.0. The amount available to borrow is based
on certain borrowing base calculations found in the Company’s Credit Agreement. The Credit Agreement is collateralized by
the Company’s assets.
The Credit Agreement contains certain customary
representations and warranties, affirmative and negative covenants and events of default. The Credit Agreement requires HMS to
comply, on a quarterly basis, with certain principal financial covenants, including a maximum consolidated leverage ratio of 3.25:1.00
and a minimum interest coverage ratio of 3.00:1.00. As of March 31, 2016, HMS was in compliance with all of the terms of the Credit
Agreement.
The interest rates applicable to the revolving credit facility are,
at the Company’s option, either (i) the LIBOR multiplied by the statutory reserve rate plus an interest margin ranging from
1.50% to 2.25% based on HMS’s consolidated leverage ratio, or (ii) a base rate (which is equal to the greatest of (a) Citibank’s
prime rate, (b) the federal funds effective rate plus 0.50% and (iii) the one-month LIBOR plus 1.00% plus an interest margin ranging
from 0.50% to 1.25% based on the Company’s consolidated leverage ratio). The applicable interest rate was 2.36% at March
31, 2016. HMS pays an unused commitment fee on the revolving credit facility during the term of the Credit Agreement ranging from
0.375% to 0.50% per annum based on the Company’s consolidated leverage ratio.
HMS’s obligations under the Credit
Agreement may be accelerated upon the occurrence of an event of default, which includes customary events of default including,
without limitation, payment defaults, failures to perform affirmative covenants, failure to refrain from actions or omissions prohibited
by negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency related defaults,
defaults relating to judgments, defaults due to certain ERISA related events and a change of control default.
The interest expense and the commitment
fees on the unused portion of the Company’s revolving credit facility are as follows
(in thousands)
:
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Interest expense
|
|
$
|
1,178
|
|
|
$
|
1,027
|
|
Commitment fees
|
|
$
|
378
|
|
|
$
|
372
|
|
As of March 31, 2016 and December 31, 2015,
the unamortized balance of deferred origination fees and debt issue costs were $4.4 million and $4.9 million, respectively. For
both the three month periods ended March 31, 2016 and 2015, HMS amortized $0.5 million 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 revolving credit facility
may be used for general corporate purposes, including acquisitions, if necessary.
As part of the Company’s contractual
agreement with a customer, HMS has an outstanding irrevocable letter of credit for $3.0 million, which HMS established against
the revolving credit facility. The expiration date of the letter of credit is June 30, 2016.
9. Earnings Per Share
Basic income per share is calculated
by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share
is calculated by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding
during the period. The Company’s dilutive common share equivalents consist of stock options and restricted stock awards and
units.
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
March 31,
|
|
|
2016
|
|
2015
|
Net income
|
|
$
|
4,560
|
|
|
$
|
3,522
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
|
|
84,033
|
|
|
|
88,246
|
|
Plus: net effect of dilutive stock options
|
|
|
85
|
|
|
|
181
|
|
Plus: net effect of dilutive restricted stock awards and units
|
|
|
361
|
|
|
|
197
|
|
Weighted average common shares outstanding-diluted
|
|
|
84,479
|
|
|
|
88,624
|
|
Net income per common share-basic
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
Net income per common share-diluted
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
For the three months ended March 31, 2016
and 2015, 4,321,528 and 2,940,897 stock options, respectively, were not included in the diluted earnings per share calculation
because the effect would have been anti-dilutive.
10. Stock-Based Compensation
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
March 31,
|
|
|
2016
|
|
2015
|
Cost of services-compensation
|
|
$
|
1,931
|
|
|
$
|
1,341
|
|
Selling, general and administrative
|
|
|
2,309
|
|
|
|
1,904
|
|
Total
|
|
$
|
4,240
|
|
|
$
|
3,245
|
|
Stock Options
The Company’s stock option activity
for the three months ended March 31, 2016
(in thousands, except for weighted average exercise price and weighted average remaining
contractual term)
:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Terms
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2015
|
|
|
5,030
|
|
|
$
|
17.37
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
983
|
|
|
|
13.90
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10
|
)
|
|
|
2.85
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(27
|
)
|
|
|
18.88
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(69
|
)
|
|
|
24.63
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
5,907
|
|
|
|
16.73
|
|
|
|
5.21
|
|
|
|
6,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at March 31, 2016
|
|
|
3,830
|
|
|
|
15.77
|
|
|
|
6.21
|
|
|
|
2,508
|
|
Exercisable at March 31, 2016
|
|
|
1,990
|
|
|
$
|
18.59
|
|
|
|
3.23
|
|
|
$
|
3,944
|
|
For awards subject to service-based vesting
conditions, HMS recognizes stock-based compensation expense, net of estimated forfeitures, equal to the grant date fair value of
stock options on a straight-line basis over the requisite service period, which is generally the vesting term. For awards subject
to both performance and service-based vesting conditions, HMS recognizes stock-based compensation expense using the straight-line
recognition method when it is probable that the performance condition will be achieved. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The fair value of each option grant with
service-based vesting conditions was estimated using a Black-Scholes option-pricing valuation model. The performance share awards
granted in 2016 and 2015 are market condition awards as attainment is based on the performance of the Company’s common stock
for the relevant performance period. These awards were valued on the date of grant using a Monte Carlo simulation model.
Expected volatilities are calculated based
on the historical volatility of the Company’s common stock. Management monitors stock option exercises and employee termination
patterns to estimate forfeiture rates within the valuation model. Separate groups of employees that have similar historical exercise
behavior are considered separately for valuation purposes. The expected holding period of options represents the period of time
that options granted are expected to be outstanding. The expected terms of options granted are based on the Company’s historical
experience for similar types of stock option awards. The risk-free interest rate is based on U.S. Treasury Notes.
The weighted average grant-date fair value
per share of the stock options granted during the three months ended March 31, 2016 and 2015 was $5.45 and $5.89, respectively.
HMS estimated the fair value of each stock option grant on the date of grant using a Black-Scholes option-pricing model and the
weighted-average assumptions set forth in the following table:
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Risk-free interest rate
|
|
|
1.20%
|
|
|
|
1.44%
|
|
Expected volatility
|
|
|
43.89%
|
|
|
|
38.29%
|
|
Expected life (in years)
|
|
|
4.90
|
|
|
|
4.88
|
|
During the three months ended March 31,
2016 and 2015, HMS issued 0.01 million shares and 0.4 million shares, respectively, of the Company’s common stock upon the
exercise of outstanding stock options and received proceeds of $0.03 million and $3.3 million, respectively.
For the three months ended March 31, 2016
and 2015, stock-based compensation expense for stock options was $2.0 million and $1.4 million, respectively.
Excess tax benefit from the exercise of
stock options for the three months ended March 31, 2016 was $0.01 million and for the year ended December 31, 2015 was $1.6 million,
respectively.
The total intrinsic value of options exercised
(the difference in the market price of the Company’s common stock on the exercise date and the price paid by the optionees
to exercise the options) for the three months ended March 31, 2016 and 2015 was approximately $0.1 million and $5.4 million, respectively.
As of March 31, 2016, there was approximately
$17.6 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to stock options outstanding,
which is expected to be recognized over a weighted average period of 1.47 years.
Restricted Stock Units
HMS non-employee members of the Company’s
Board of Directors and certain employees have received restricted stock units under the Fourth Amended and Restated 2006 Stock
Plan (the “2006 Stock Plan”). The fair value of restricted stock units is estimated based on the closing sale price
of the Company’s common stock on the NASDAQ Global Select Market on the date of issuance. The total number of restricted
stock units expected to vest is adjusted by estimated forfeiture rates.
For the three months ended March 31, 2016,
HMS granted 562,645 restricted stock units with an aggregate fair market value of $7.8 million.
For the three months ended March 31, 2016
and 2015, stock-based compensation expense for restricted stock units was $2.2 million and $1.8 million, respectively.
As of March 31, 2016, 1,348,340 restricted
stock units remained unvested and there was approximately $18.7 million of unamortized compensation cost related to these restricted
stock units, which is expected to be recognized over the remaining weighted-average vesting period of 1.51 years.
A summary of the status of the Company’s
restricted stock units and of changes in restricted stock units outstanding under the 2006 Stock Plan for the three months ended
March 31, 2016 is as follows
(in thousands, except for weighted average grant date fair value per unit)
:
|
|
Number of
Units
|
|
Weighted Average
Grant Date Fair
Value per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding balance at December 31, 2016
|
|
|
1,154
|
|
|
$
|
18.85
|
|
|
|
|
|
Granted
|
|
|
563
|
|
|
|
13.94
|
|
|
|
|
|
Vesting of restricted stock units, net of shares withheld for taxes
|
|
|
(133
|
)
|
|
|
19.23
|
|
|
|
|
|
Shares withheld for taxes
|
|
|
(73
|
)
|
|
|
19.23
|
|
|
|
|
|
Forfeitures
|
|
|
(22
|
)
|
|
|
18.68
|
|
|
|
|
|
Outstanding balance at March 31, 2016
|
|
|
1,489
|
|
|
$
|
16.92
|
|
|
$
|
21,366
|
|
11.
Commitments and Contingencies
Kern Health Systems
:
In August 2011, in the Superior Court of the State of California, County of Los Angeles, Kern Health Systems (“KHS”)
sought to recover in excess of $7.0 million exclusive of interest, attorneys’ fees and costs, against HMS’s wholly
owned subsidiary Allied Management Group Special Investigation Unit, Inc. (“AMG”) and two of AMG’s former owners
Dennis Demetre and Lori Lewis (collectively, the “Defendants”), jointly and severally, on causes of action for breach
of contract, professional negligence, intentional misrepresentation, negligent misrepresentation and unfair business practices
under the California Business and Professions Code. In June 2014, the jury issued its verdict in favor of all the Defendants on
all causes of action except negligent misrepresentation. On that cause of action, due to an error in the special verdict form,
the jury awarded damages to KHS in the sum of $1.38 million, while also finding that KHS failed to prove the required elements
of the claim. However, the court denied the Defendants’ motion to vacate the jury’s verdict and resulting judgment.
The court further awarded each side certain costs but denied AMG recovery of its attorneys’ fees sought in the sum of approximately
$2.4 million. In August 2014, AMG filed a notice of appeal based on the award of damages to KHS on the negligent misrepresentation
claim, and the denial of AMG’s request for attorneys’ fees. Following completion of briefing and oral argument on the
appeal, on April 25, 2016, the California Court of Appeal reversed the judgment and remanded the matter to the trial court with
directions to enter a new judgment in favor of the Defendants on all causes of action and to award the Defendants their reasonable
attorneys’ fees. The decision is set to become final on May 25, 2016. Although there are risks and uncertainties related
to any litigation, including appeals, HMS did not record an obligation as the Company believes it was probable that AMG would prevail
on the appeal of this matter. Pending the appeal process, HMS was required to obtain a surety bond in the amount of 150% of the
final judgment amount, or approximately $2.2 million, which was collateralized by a cash deposit and is reflected in other current
assets on the Company’s Consolidated Balance Sheet as of March 31, 2016.
Dennis Demetre and Lori
Lewis
: 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 unlawfully
deprived the Plaintiffs of the acquisition earn-out portion of the purchase price of 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 asserts a counterclaim for breach of contract arising out of the Plaintiffs’ failure to indemnify the
Company for costs, including attorneys’ fees arising out of the Company’s defense of the
Kern Health Systems
matter
described above. In January 2016, HMS moved for summary judgment on (i) its remaining counterclaim for breach of contract against
the Plaintiffs and (ii) the Plaintiffs’ breach of contract causes of action against HMS. Oral argument on the motions for
summary judgement is set for June 22, 2016. A trial date has not been set. HMS believes it has a meritorious defense and will continue
to defend this matter vigorously. As such, HMS has not accrued for any loss contingencies related to this matter because no assessment
can been made as to the likely outcome of this lawsuit or whether the outcome will be material to the Company.
Restrictive Covenants,
Trade Secret, Contract and other Causes of Action in Texas and New York
: HMS was the plaintiff in lawsuits filed in August
2014, entitled
HMS Holdings Corp., et al. v. Public Consulting Group, Inc., James Gambino and Jason Ramos
, in the District
Court of Dallas County, Texas, and
HMS Holdings Corp., et al. v. Matthew Arendt, Sean Curtin and Danielle Lange
, in the
New York State Supreme Court, Albany County. In July 2015, HMS filed a third related lawsuit, entitled
HMS Holdings Corp., et
al. v. Elena Moiseenko and Joseph Flora
, in the New York State Supreme Court, Albany County. These suits allege that, in violation
of their respective contractual, statutory and common law obligations to the Company, defendants PCG, Flora and former HMS employees
Gambino, Ramos, Arendt, Curtin, Lange and Moiseenko unlawfully misappropriated HMS’s confidential, proprietary and trade
secret information and committed other wrongdoing. The lawsuits seek damages and injunctive relief and assert causes of action
including breach of contract, breach of fiduciary duty and misappropriation of trade secrets. HMS has sought injunctions in all
three lawsuits.
On April 27, 2016, the Company entered
into settlement agreements with PCG and various individuals that fully resolve the matters in controversy in these lawsuits. Pursuant
to terms of the settlement agreement between HMS and PCG, PCG agreed that for a period of seven years from the date of the settlement
agreement, PCG will not develop, plan, market, provide, offer, advise with respect to, assist with, sell, or otherwise perform,
directly or indirectly, any TPL services, including, but not limited to, coordination of benefits, credit balance audits and dependent
eligibility audits. PCG further agreed to withdraw any pending TPL bids, bid protests or contract negotiations, which includes
the withdrawal of its pending TPL bid with the New Jersey Department of Human Services. HMS and the New Jersey Department of Human
Services have entered into an amendment to extend the current TPL contract through May 31, 2016. The settlements also result in
the dismissal of all pending cases or appeals between the parties and includes full, mutual releases of PCG, HMS and their affiliates
from any and all pending and future claims related to the lawsuits.
In addition, in August 2015, the New York
State Office of Medicaid Inspector General (“OMIG”) awarded HMS the new Medicaid Third Party Liability Match and Recovery
Services contract, which PCG challenged by filing a protest with the New York Office of the State Comptroller. In March 2016,
OMIG denied PCG’s protest and HMS’s new contract was approved with an effective date of April 7, 2016.
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 and employment-related matters. 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.
12. Subsequent Events
In connection with the preparation of these
unaudited Consolidated Financial Statements, an evaluation of subsequent events was performed through the date of issuance and
there were no other events that have occurred that would require adjustments to the financial statements or disclosure.