HMSY HMS Holdings Corp

HMS Holdings Corp. (Nasdaq: HMSY) today announced financial results for the second quarter of 2018. Net loss for the quarter ended June 30, 2018 was ($3.4) million or ($0.04) per diluted share, compared to net income of $6.4 million or $0.07 per diluted share in the first quarter of 2018 and $6.5 million or $0.08 per diluted share in the prior year second quarter. The net loss for the quarter ended June 30, 2018 included an expense of $20.0 million related to the previously announced settlement on June 27, 2018 of litigation in connection with the earn-out portion of the purchase price for an acquisition the Company completed in 2010 (the “Settlement”).

Adjusted EPS in the second quarter of 2018 was $0.25 per diluted share compared to adjusted EPS of $0.22 per diluted share in the first quarter of 2018 and adjusted EPS of $0.16 per diluted share in the prior year second quarter. Adjusted EPS in the second quarter of 2018 includes an adjustment for the non-recurring Settlement expense. Adjusted EPS in the first quarter of 2018 included a net benefit of $0.05 per diluted share related to the reversal of the Company’s reserve liability for open or pending Medicare RAC appeals following expiration of the original Medicare RAC contract on January 31, 2018 (the “Reserve Release”).

Total revenue in the second quarter of 2018 was $146.8 million, compared to total revenue of $141.4 million in the first quarter of 2018 (which included the $8.4 million Reserve Release) and $133.3 million in the prior year second quarter. Adjusted EBITDA in the second quarter of 2018 was $40.0 million, compared to $34.9 million in the first quarter of 2018 and $30.5 million in the prior year second quarter. Adjusted EBITDA in the second quarter of 2018 includes an adjustment for the non-recurring Settlement expense. Adjusted EBITDA in the first quarter of 2018 included a net benefit of $6.3 million related to the Reserve Release.

"Over the past 18 months we have made investments in technology, undertaken extensive work to revamp new business implementations, continued to put in place new process improvement and cost containment initiatives across the enterprise, and heightened our focus on internal innovation. We have also expanded the solution set we offer payers, which now includes care management and consumer engagement services, and focused on exceptional execution. The success of these internal and external efforts is reflected in our second quarter financial results,” said Bill Lucia, Chairman and CEO. “We are extremely pleased with both our top line and bottom line performance, highlighted by record quarterly commercial revenue and a strong quarter for Eliza solutions.”

Commercial revenue increased 12.1% sequentially to a record $80.5 million in the second quarter of 2018, compared to $71.8 million in the first quarter of 2018 and $69.4 million in the prior year second quarter. Commercial revenue in the second quarter of 2018 included $13.7 million from Eliza, an increase of 41.2% compared to $9.7 million in the first quarter of 2018 and $7.6 million in the prior year second quarter following the close of the Eliza acquisition in April  2017. For comparison purposes, Eliza revenue for the full second quarter of 2017, including the portion of April 2017 prior to the acquisition, was approximately $10 million.

State government revenue increased 7.7% sequentially to $58.8 million in the second quarter of 2018, compared to $54.6 million in the first quarter of 2018 and $57.9 million in the prior year second quarter. Federal (including Medicare RAC) and other revenue was $7.5 million in the second quarter of 2018, compared to $15.0 million in the first quarter of 2018 (which included the $8.4 million Reserve Release) and $6.0 million in the prior year second quarter.

Coordination of benefits (COB) revenue was $100.8 million in the second quarter of 2018, compared to $91.7 million in the first quarter of 2018 and $98.5 million in the prior year second quarter. COB accounted for 68.7% of total revenue in the second quarter, compared to 64.9% in the first quarter of 2018 and 73.9% in the prior year second quarter.

Revenue from Analytical Services, which include Payment Integrity (PI), care management and consumer engagement solutions and Medicare RAC, was $46.0 million in the second quarter of 2018, compared to $49.7 million in the first quarter of 2018 (which included the $8.4 million Reserve Release) and $34.8 million in the prior year second quarter. PI revenue was $29.5 million in the second quarter of 2018, compared to $28.7 million in the first quarter of 2018 and $26.9 million in the prior year second quarter. Care management and consumer engagement revenue was $14.8 million in the second quarter of 2018, including Eliza revenue of $13.7 million and Essette revenue of $1.1 million, compared to $11.0 million in the first quarter of 2018 and $8.6 million in the prior year second quarter. Medicare RAC revenue was $1.7 million in the second quarter of 2018, compared to $10.0 million in the first quarter of 2018 (which included the $8.4 million Reserve Release) and ($0.7) million in the prior year second quarter.

Capital expenditures in the second quarter of 2018 were $6.8 million, compared to $5.8 million in the first quarter of 2018 and $7.0 million in the prior year second quarter.

“Based on our strong financial performance through the first half of the year, we are raising our full year 2018 revenue guidance to a range of $575 - $585 million and our adjusted EBITDA guidance to a range of $143 - $148 million. Both take into account the impact of the $8.4 million Reserve Release in Q1 2018 and the $20 million Settlement in Q2 2018,” said Jeff Sherman, CFO. “Our second quarter results and revised full year outlook clearly demonstrate the leveragability inherent in our business model, as adjusted EBITDA of $75 million year-to-date is nearly 50% ahead of the first half of 2017.”

Outlook for FY 2018 – As Revised

• Total Company Revenue of $575 – 585 million (was $560 – 570 million)*
• Net Income of $23 – 26 million (was $29 – 33 million)*
• Adjusted EBITDA of $143 – 148 million (was $128 – 133 million)*
• Operating Margin Expansion of 50 – 75 bps, excluding the Reserve Release and Settlement (was Approximately 50 bps)
• Capital Expenditures of approximately $33 million (unchanged)
• Net Interest Expense of $11 million (was $12 million)
• An Effective Annual Tax Rate of 28 – 30% (unchanged, but projected to be at the top of the range)*
• Income Taxes of $10 – 12 million (was $12 – 13 million)
• Depreciation and Amortization of $58 million (was $55 million)
• Stock Based Compensation Expense of $21 million (was $20 million)

*Reflects impact of the $8.4 million Reserve Release in Q1 2018 and the $20 million Settlement in Q2 2018

For additional information about the Company’s second quarter 2018 financial results, see the Q2 2018 Investor Presentation available on the HMS Investor Relations Website at http://investor.hms.com/events-and-presentations.

Webcast and Conference Call Information

HMS will report its preliminary second quarter 2018 financial and operating results via webcast at 7:30 AM CT / 8:30 AM ET on August 3, 2018. The webcast may also include discussion of HMS developments, forward-looking statements and other material information about business and financial matters. The webcast can be accessed via phone at (877) 303–7208 or (224) 357–2389 for international participants, or on the HMS Investor Relations website at http://investor.hms.com/events-and-presentations. The webcast will also be archived and available for replay beginning at approximately 11:00 AM CT / 12:00 PM ET on August 3, 2018 at http://investor.hms.com/events-and-presentations. This press release and the financial statements contained herein are also available on the HMS Investor Relations website at http://investor.hms.com/releases.cfm.

About HMS

HMS is a leading provider of cost containment solutions in the U.S. healthcare marketplace. Using innovative technology as well as extensive data services and powerful analytics, the Company delivers coordination of benefits, payment integrity, care management, consumer engagement and risk stratification solutions to help healthcare payers improve financial performance and clinical outcomes. Together our various services help customers recover improper payments; prevent future improper payments; reduce fraud, waste and abuse; better manage the care their members receive; engage healthcare consumers to improve clinical outcomes and increase retention; and achieve  regulatory compliance. The Company serves commercial health plans, state government agencies, federal programs, at-risk providers, pharmacy benefit managers, employers and other healthcare payers and sponsors. The Company also serves as a subcontractor for certain business outsourcing and technology firms.

Trademarks

HMS, Eliza, Essette and the HMS logo are registered trademarks of HMS Holdings Corp. and/or its affiliates.  Other names may be trademarks of their respective owners.

Non-GAAP Financial Measures

The Company reports and discusses its operating results using financial measures consistent with accounting principles generally accepted in the United States ("GAAP"). From time to time, in press releases, financial presentations, earnings conference calls or otherwise, the Company may disclose certain non-GAAP financial measures. The non-GAAP financial measures presented in this press release should not be viewed as alternatives or substitutes for the Company's reported GAAP results. A reconciliation to the most directly comparable GAAP financial measure is set forth in the tables that accompany this press release.

The Company believes that the non-GAAP financial measures presented in this press release provide useful information to the Company's management, investors, and other interested parties about the Company's operating performance because they allow them to understand and compare the Company's operating results during the current periods to the prior periods in a more consistent manner. The non-GAAP measures presented in this press release may not be comparable to similarly titled measures used by other companies. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and reflect an additional way of viewing aspects of the Company's operations that, when viewed with GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provides a more complete understanding of the results of operations and trends affecting the Company's business. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to financial measures calculated in accordance with GAAP.

Safe Harbor Statement

The financial results in this press release reflect preliminary results, which are not final until the Company’s Form 10-Q for the quarter ended June 30, 2018 is filed with the Securities and Exchange Commission. This press release contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such statements relate to our current expectations, projections and assumptions about our business, the economy and future events or conditions. They do not relate strictly to historical or current facts. Forward‐looking statements can be identified by words such as “aims,” “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “likely,” “may,” “plans,” “projects,” “seeks,” “targets,” “will,” “would,” “could,” “should,” and similar expressions and references to guidance, although some forward-looking statements may be expressed differently. In particular, these include statements relating to future actions, business plans, objectives and prospects, and future operating or financial performance, including our updated guidance for full year 2018. Factors or events that could cause actual results to differ may emerge from time to time and are difficult to predict. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results may differ materially from past results and those anticipated, estimated or projected. We caution you not to place undue reliance upon any of these forward-looking statements. 

Factors that could cause or contribute to such differences, include, but are not limited to: 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; 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; significant competition relating to solutions and services; 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 information and 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, or to borrow, obtain financing, maintain liquidity or use credit; unexpected changes in tax laws, regulations or guidance and unexpected changes in our effective tax rates; unanticipated increases in the number or amount of claims for which we are self-insured; our ability to develop, implement and maintain effective internal control over financial reporting; 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; and other factors, risks and uncertainties described in our most recent Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. With respect to our projected effective annual tax rate for 2018, this reflects our current reasonable estimate of the income tax effects of the recently enacted tax legislation, however these are provisional amounts subject to adjustment during the one-year measurement period. Any forward-looking statements are made as of the date of this press release. Except as may be required by law, we disclaim any obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

Investor Contact:		Media Contact:
Dennis Oakes		Lacey Hautzinger
SVP, Investor Relations		Sr. Director, External Communications
dennis.oakes@hms.com		lacey.hautzinger@hms.com
212-857-5786		469-284-7240

 

HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
				Three Months Ended June 30,							Six Months Ended June 30,
					2018				2017			2018				2017
Revenue				$	146,791			$	133,313		$	288,216			$	247,046
Cost of services:
Compensation					55,188				51,853			111,267				100,773
Information technology					14,240				11,281			26,503				21,064
Occupancy					4,014				4,230			8,397				7,777
Direct project expenses					10,908				10,101			20,991				20,544
Other operating expenses					7,051				6,562			13,616				13,765
Amortization of acquisition related software and intangible assets					9,621				7,372			17,753				13,658
Total cost of services					101,022				91,399			198,527				177,581
Selling, general and administrative expenses					26,532				27,553			58,530				51,161
Settlement expense					20,000				-			20,000				-
Total operating expenses					147,554				118,952			277,057				228,742
Operating (loss)/income					(763	)			14,361			11,159				18,304
Interest expense					(3,034	)			(2,339	)		(5,682	)			(4,625	)
Interest income					188				33			308				188
(Loss)/income before income taxes					(3,609	)			12,055			5,785				13,867
Income taxes					(242	)			5,538			2,761				5,908
Net (loss)/income				$	(3,367	)		$	6,517		$	3,024			$	7,959
Basic income per common share:
Net (loss)/income per common share -- basic				$	(0.04	)		$	0.08		$	0.04			$	0.10
Diluted income per common share:
Net (loss)/income per common share -- diluted				$	(0.04	)		$	0.08		$	0.04			$	0.09
Weighted average shares:
Basic					83,231				83,921			83,222				83,708
Diluted					83,231				85,826			84,837				85,534

 

HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
						June 30, 2018				December 31, 2017
Assets						(unaudited)
Current assets:
Cash and cash equivalents						$	88,127			$	83,313
Accounts receivable, net of allowance of $14,322 and $14,799,
at June 30, 2018 and December 31, 2017, respectively							193,114				189,460
Prepaid expenses							16,526				16,589
Income tax receivable							7,216				1,892
Deferred financing costs, net							564				564
Other current assets							266				836
Total current assets							305,813				292,654
Property and equipment, net							93,369				98,581
Goodwill							487,617				487,617
Intangible assets, net							78,708				91,482
Deferred financing costs, net							1,955				2,237
Other assets							2,618				2,589
Total assets						$	970,080			$	975,160
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable, accrued expenses and other liabilities						$	56,687			$	61,900
Estimated liability for appeals							22,252				30,787
Total current liabilities							78,939				92,687
Long-term liabilities:
Revolving credit facility							240,000				240,000
Net deferred tax liabilities							18,089				21,989
Deferred rent							4,539				4,852
Other liabilities							9,874				9,403
Total long-term liabilities							272,502				276,244
Total liabilities							351,441				368,931
Commitments and contingencies
Shareholders' equity:
Preferred stock -- $0.01 par value; 5,000,000 shares authorized; none issued							—				—
Common stock -- $0.01 par value; 175,000,000 shares authorized;
97,051,108 shares issued and 83,387,914 shares outstanding at June 30, 2018;
96,536,251 shares issued and 83,256,858 shares outstanding at December 31, 2017							970				965
Capital in excess of par value							382,630				368,721
Retained earnings							370,615				366,164
Treasury stock, at cost: 13,663,194 shares at June 30, 2018
and 13,279,393 shares at December 31, 2017							(135,576	)			(129,621	)
Total shareholders' equity							618,639				606,229
Total liabilities and shareholders' equity						$	970,080			$	975,160

HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
							Six Months Ended June 30,
								2018				2017
	Operating activities:
	Net income						$	3,024			$	7,959
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization of property, equipment and software							16,758				12,927
	Amortization of intangible assets							12,774				9,740
	Amortization of deferred financing costs							282				1,042
	Stock-based compensation expense							14,208				9,380
	Deferred income taxes							(3,900	)			1,265
	Change in fair value of contingent consideration							-				500
	Release of estimated liability for appeals							(8,436	)			-
	Changes in operating assets and liabilities:
	Accounts receivable							(3,654	)			(9,039	)
	Prepaid expenses							63				149
	Other current assets							570				526
	Other assets							(29	)			149
	Income taxes receivable / (payable)							(5,324	)			(6,180	)
	Accounts payable, accrued expenses and other liabilities							(2,546	)			(8,196	)
	Estimated liability for appeals							(99	)			518
	Net cash provided by operating activities							23,691				20,740
	Investing activities:
	Acquisition of a business, net of cash acquired							-				(171,174	)
	Purchases of property and equipment							(2,455	)			(8,881	)
	Investment in capitalized software							(10,173	)			(6,626	)
	Net cash used in investing activities							(12,628	)			(186,681	)
	Financing activities:
	Proceeds from exercise of stock options							2,390				1,986
	Payments of tax withholdings on behalf of employees for net-share settlement for stock-based compensation							(2,684	)			(2,874	)
	Payments on capital lease obligations							-				(5	)
	Proceeds from credit facility							-				42,204
	Purchases of treasury stock							(5,955	)			-
	Net cash (used in)/provided by financing activities							(6,249	)			41,311
	Net increase (decrease) in cash and cash equivalents							4,814				(124,630	)
	Cash and Cash Equivalents
	Cash and cash equivalents at beginning of year							83,313				175,999
	Cash and cash equivalents at end of period						$	88,127			$	51,369
	Supplemental disclosure of cash flow information:
	Cash paid for income taxes						$	11,472			$	10,656
	Cash paid for interest						$	4,916			$	3,451
	Supplemental disclosure of non-cash activities:
	Change in balance of accrued property and equipment purchases						$	1,082			$	(1,313	)

 

HMS HOLDINGS CORP. AND SUBSIDIARIES (in thousands) (unaudited)

Reconciliation of Net (Loss)/Income to EBITDA and Adjusted EBITDA

As summarized in the following table, earnings before interest, taxes, depreciation and amortization, stock-based compensation expense and settlement expense (adjusted EBITDA) was $40.0 million for the second quarter of 2018.

		Three Months Ended
		June 30, 2018				March 31, 2018			June 30, 2017
Net (Loss)/income		$	(3,367	)		$	6,391		$	6,517
Net interest expense			2,846				2,528			2,306
Income taxes			(242	)			3,003			5,538
Depreciation and amortization of property and equipment and intangible assets			16,066				13,466			12,105
Earnings before interest, taxes, depreciation and amortization  (EBITDA)			15,303				25,388			26,466
Stock based compensation expense			4,714				9,494			3,994
Settlement expense			20,000				-			-
Adjusted EBITDA		$	40,017			$	34,882		$	30,460

As summarized in the following table, earnings before interest, taxes, depreciation and amortization, stock-based compensation expense and settlement expense (adjusted EBITDA) was $74.9 million for the first half of 2018.  

		Six Months Ended
		June 30, 2018			June 30, 2017
Net Income		$	3,024		$	7,959
Net interest expense			5,374			4,437
Income taxes			2,761			5,908
Depreciation and amortization of property and equipment and intangible assets			29,532			22,667
Earnings before interest, taxes, depreciation and amortization  (EBITDA)			40,691			40,971
Stock based compensation expense			14,208			9,380
Settlement expense			20,000			-
Adjusted EBITDA		$	74,899		$	50,351

HMS HOLDINGS CORP. AND SUBSIDIARIES (in thousands, except per share amounts) (unaudited)

Reconciliation of Net (Loss)/income to GAAP EPS (Diluted) and Adjusted EPS (Diluted)

As summarized in the following table, diluted earnings per share adjusted for stock-based compensation expense, settlement expense, amortization of acquisition related software and intangible assets and for the related taxes (adjusted EPS) was $0.25 for the second quarter of 2018.

		Three Months Ended
		June 30, 2018				March 31, 2018				June 30, 2017
Net (Loss)/income		$	(3,367	)		$	6,391			$	6,517
Stock-based compensation expense			4,714				9,494				3,994
Settlement expense			20,000				-				-
Amortization of acquisition related software and intangible assets			9,621				8,132				7,372
Income tax related to adjustments (1)			(10,404	)			(5,505	)			(4,319	)
Adjusted net income		$	20,564			$	18,512			$	13,564
Weighted average common shares, basic or diluted			83,231				85,682				85,826
Diluted GAAP EPS		$	(0.04	)		$	0.07			$	0.08
Diluted adjusted EPS		$	0.25			$	0.22			$	0.16

As summarized in the following table, diluted earnings per share adjusted for stock-based compensation expense, settlement expense, amortization of acquisition related software and intangible assets and for the related taxes (adjusted EPS) was $0.46 for the first half of 2018.  

		Six Months Ended
		June 30, 2018				June 30, 2017
Net Income		$	3,024			$	7,959
Stock-based compensation expense			14,208				9,380
Settlement expense			20,000				-
Amortization of acquisition related software and intangible assets			17,753				13,658
Income tax related to adjustments (1)			(15,744	)			(8,754	)
Adjusted net income		$	39,241			$	22,243
Weighted average common shares, diluted			84,837				85,534
Diluted GAAP EPS		$	0.04			$	0.09
Diluted adjusted EPS		$	0.46			$	0.26

(1) Tax effect of adjustments is computed as the pre-tax effect of the adjustments multiplied by the forecasted adjusted annual effective tax rate at period end.

HMS HOLDINGS CORP. AND SUBSIDIARIES (in millions)

Reconciliation of Projected 2018 Net Income to Projected 2018 EBITDA and Adjusted EBITDA

As summarized in the following table, the Company currently estimates net income of between approximately $23 million and $26 million and adjusted EBITDA of between approximately $143 million and $148 million for 2018.

			Twelve Months Ending December 31, 2018
			Estimated Range
			Current Guidance						Prior Guidance
			Low			High			Low			High
	Net Income		$	23		$	26		$	29		$	33
	Net interest expense			11			11			12			12
	Income taxes			10			12			12			13
	Depreciation and amortization of property and equipment and intangible assets			58			58			55			55
	Earnings before interest, taxes, depreciation and amortization  (EBITDA)		$	102			107		$	108			113
	Stock based compensation expense			21			21			20			20
	Settlement expense			20			20			-			-
	Adjusted EBITDA		$	143		$	148		$	128		$	133