NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2019 and 2018
(unaudited)
1.
|
|
Business and Summary
of Significant Accounting Policies
|
(a)
Business
The
terms “HMS,” “Company,” “we,” “us,” and “our” refer to HMS Holdings
Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise. HMS is an industry-leading provider of
cost containment solutions in the healthcare marketplace. We use healthcare data technology, analytics and engagement solutions,
to deliver coordination of benefits, payment integrity, population risk analytics, and care management and consumer engagement
solutions to help payers reduce costs, improve healthcare outcomes and enhance member experiences. We provide coordination of
benefits services to government and commercial healthcare payers to ensure that the correct party pays the claim. Our payment
integrity services promote accuracy by fighting fraud, waste and abuse, and our total population management solutions provide
risk-bearing organizations with reliable intelligence across their member populations to identify risks and improve patient engagement
and outcomes. Together these various services help move the healthcare system forward for our customers. We currently operate
as one business segment with a single management team that reports to the Chief Executive Officer.
The
Consolidated Financial Statements and accompanying Notes in this Form 10-Q are unaudited. Accordingly, they do not include all
of the information and notes required by generally accepted accounting principles (“U.S. GAAP”) for complete financial
statements. These statements include all adjustments (which include only normal recurring adjustments, except as disclosed) that
management considers necessary to present a fair statement of the Company’s results of operations, financial position and
cash flows. The results reported in these unaudited Consolidated Financial Statements should not be regarded as necessarily indicative
of results that may be expected for the entire year. It is suggested that these unaudited Consolidated Financial Statements be
read in conjunction with the Company’s consolidated financial statements and notes thereto as of and for the year ended
December 31, 2018, which were filed with the SEC as part of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018 (“2018 Form 10-K”). The consolidated balance sheet as of December 31, 2018 included herein was derived
from audited financial statements, but does not include all disclosures required by U.S. GAAP.
The
preparation of the Company’s unaudited Consolidated Financial 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 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.
(b)
Summary of Significant Accounting Policies
There
have been no material changes to the Company’s significant accounting policies that are referenced in the 2018 Form 10-K
other than as described below with respect to leases.
Recently
Adopted Accounting Pronouncements
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. Early adoption is permitted. The Company is currently evaluating
the impact on the Company’s financial statements of adopting this guidance but this guidance is not expected to have a material
impact on the Company’s financial position, results of operations or internal control framework.
The
Company’s revenue disaggregated by solution for the three months ended March 31, 2019 and 2018 was as follows
(in thousands)
:
|
|
Three
Months Ended
|
|
|
|
March
31, 2019
|
|
|
|
March
31, 2018
|
|
Coordination of Benefits
|
|
$
|
105,851
|
|
|
$
|
91,752
|
|
Payment Integrity
|
|
|
27,726
|
|
|
|
38,641
|
|
Total
Population Management
|
|
|
14,376
|
|
|
|
11,032
|
|
Total
|
|
$
|
147,953
|
|
|
$
|
141,425
|
|
Coordination
of benefits revenue is derived from contracts with state governments and Medicaid managed care plans that can span years with
the option to renew. Types of service contracts could include: (a) the identification of erroneously paid claims; (b) the delivery
of verified commercial insurance coverage information; (c) the identification of paid claims where another third party is liable;
and (d) the identification and enrollment of Medicaid members who have access to employer insurance. Most of these types of service
contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises
represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance
obligations is largely based on variable consideration where, based on the number of claims or amount of findings the Company
identified, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation.
The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its
service contracts. Key inputs and assumptions in determining variable consideration include identified pricing and expected recoveries
and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers.
Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when our services
are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance
obligations are satisfied within one to three years. Generally, coordination of benefit contract payment terms are not standardized
within the respective contract; however, payment is typically due on demand and there is a clear and distinct history of customers
making consistent payments.
Analytical
services 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 performance obligation. The Company utilizes
the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key
inputs and assumptions in determining variable consideration include identified pricing and expected recoveries and/or savings.
The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is
primarily recognized at a point in time when our customers realize economic benefits from our services when our services are completed.
However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are
satisfied within one to three years. Generally, payment integrity contract payment terms are not standardized within the respective
contract; however, invoice payment is typically due on demand and there is a clear and distinct history of customers making consistent
payments.
Total
population management revenue is derived from contracts with health plans and other risk-bearing entities that can span years with the option to renew. Types of service contracts could include: (a) programs designed to improve member engagement;
and (b) outreach services designed to improve clinical outcomes. Most of these types of service contracts contain multiple promises,
all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance
obligation for the types of services we offer. Revenue derived from these services is largely based on consideration associated
with prices per order/transfer and PMPM/PMPY fees. The Company believes the output method is a reasonable measure of progress
for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1)
our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to
the customer of the services performed under the contract. The Company has elected the right to invoice practical expedient for
recognition of revenue related to its performance obligations when the amount we have the right to invoice the customer corresponds
directly with the value to the customer. Additionally, certain total population management contracts have distinct performance
obligations related to software license and implementation fees which have historically been recognized as revenue ratably over
the life of the contract. Lastly, we have a limited number of fixed fee arrangements where revenue is recognized over time as
performance obligations are satisfied within one to three years. Upon adoption of ASC 606, revenue for software licenses is recognized
at the beginning of the license period when control is transferred as the license is installed and revenue for implementation
fees is recognized when control is transferred over time as the implementation is being performed. As the performance obligation
is deemed to have been satisfied and control transferred to our customers for software licenses and implementation fees on or
before December 31, 2017, the Company recorded a decrease to deferred revenue and an increase to opening retained earnings of
$1.1 million, net of tax, as of January 1, 2018 for the cumulative impact of adopting ASC 606. Generally, total population management
contract payment terms are stated within the contract and are due within an explicitly stated time period (e.g., 30, 45, 60 days)
from the date of invoice. A portion of the payment received may relate to future performance obligations and will result in an
increase to deferred revenue until the obligation has been met.
In connection with Coordination of Benefits and certain Payment
Integrity services, lockboxes and their associated bank accounts are setup to support recoveries and remittances. Generally, these
bank accounts are for the benefit of the Company’s customers. Customer cash held in Company bank accounts
for the benefit of the customer was approximately $5.4 million as of March 31, 2019. This amount is included in cash and
cash equivalents and other current liabilities on the accompanying consolidated balance sheet.
The Company’s
revenue disaggregated by market for the three months ended March 31, 2019 and 2018 was as follows (
in thousands
):
|
|
Three
Months Ended
|
|
|
|
March
31, 2019
|
|
|
|
March
31, 2018
|
|
Commercial
|
|
$
|
76,259
|
|
|
$
|
71,785
|
|
State
|
|
|
61,742
|
|
|
|
54,620
|
|
Federal
|
|
|
9,952
|
|
|
|
15,020
|
|
Total
|
|
$
|
147,953
|
|
|
$
|
141,425
|
|
A
portion of the Company’s services are deferred and revenue is recognized at a later time. Deferred revenue was approximately
$6.5 million and $5.6 million as of March 31, 2019 and December 31, 2018, respectively, and is included in Accounts payable, accrued
expenses and other liabilities in the Consolidated Balance Sheets. Approximately $1.4 million of the December 31, 2018 balance
was recognized in revenue during the quarter ended March 31, 2019.
Contract
modifications are routine in nature and often done to account for changes in the contract specifications or requirements. In most
instances, contract modifications are for services that are not distinct, and, therefore, modifications are accounted for as part
of the existing contract. The Company has elected to use the practical expedient to expense the incremental costs of obtaining
a contract if the amortization period of the asset that the Company would have otherwise recognized is one year or less.
3.
|
|
Accounts Receivable
and Accounts Receivable Allowance
|
The Company’s
accounts receivable, net, consisted of the 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 allowance based on historical patterns of billing adjustments, length of operating and collection
cycle and customer negotiations, behaviors and payment patterns. Changes in these estimates are recorded to revenue in the period
of change. The following is a summary of the activity in the accounts receivable allowance
(in 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
|
Intangible
assets consisted of the following (
in thousands, except for weighted average amortization period
):
|
|
|
Gross
Carrying Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Carrying Amount
|
|
|
|
Weighted
Average Amortization Period in Years
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
68,290
|
|
|
$
|
(17,588
|
)
|
|
$
|
50,702
|
|
|
|
12.7
|
|
Intellectual property
|
|
|
21,700
|
|
|
|
(7,638
|
)
|
|
|
14,062
|
|
|
|
3.9
|
|
Trade names
|
|
|
136
|
|
|
|
(117
|
)
|
|
|
19
|
|
|
|
0.4
|
|
Restrictive
covenants
|
|
|
133
|
|
|
|
(115
|
)
|
|
|
18
|
|
|
|
0.4
|
|
Total
|
|
$
|
90,259
|
|
|
$
|
(25,458
|
)
|
|
$
|
64,801
|
|
|
|
|
|
|
|
|
Gross
Carrying Amount
|
|
|
|
Accumulated
Amortization
|
|
|
|
Net
Carrying Amount
|
|
|
|
Weighted
Average Amortization Period in Years
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
156,790
|
|
|
$
|
(104,740
|
)
|
|
$
|
52,050
|
|
|
|
12.8
|
|
Intellectual property
|
|
|
21,700
|
|
|
|
(6,670
|
)
|
|
|
15,030
|
|
|
|
4.1
|
|
Trade names
|
|
|
16,246
|
|
|
|
(16,215
|
)
|
|
|
31
|
|
|
|
0.7
|
|
Restrictive
covenants
|
|
|
263
|
|
|
|
(234
|
)
|
|
|
29
|
|
|
|
0.7
|
|
Total
|
|
$
|
194,999
|
|
|
$
|
(127,859
|
)
|
|
$
|
67,140
|
|
|
|
|
|
Amortization
expense of intangible assets is expected to approximate the following
(in thousands):
Year
ending December 31,
|
|
Amortization
|
2019 (excluding the three
months ended March 31, 2019)
|
|
$
|
6,856
|
|
2020
|
|
|
7,664
|
|
2021
|
|
|
7,197
|
|
2022
|
|
|
7,197
|
|
2023
|
|
|
4,822
|
|
Thereafter
|
|
|
31,065
|
|
Total
|
|
$
|
64,801
|
|
For
the three months ended March 31, 2019 and 2018, amortization expense related to intangible assets was $2.3 million and $6.1 million,
respectively.
There
was no change in the carrying amount of goodwill for the three months ended March 31, 2019.
5.
|
|
Accounts Payable,
Accrued Expenses and Other Liabilities
|
Accounts
payable, accrued expenses and other liabilities consisted of the following
(in thousands)
:
|
|
|
March
31,
2019
|
|
|
|
December
31,
2018
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
12,325
|
|
|
$
|
12,394
|
|
Accrued compensation and other
|
|
|
16,236
|
|
|
|
42,833
|
|
Accrued operating expenses
|
|
|
28,164
|
|
|
|
19,675
|
|
Current
portion of lease liabilities
|
|
|
6,353
|
|
|
|
-
|
|
Total
accounts payable, accrued expenses and other liabilities
|
|
$
|
63,078
|
|
|
$
|
74,902
|
|
The
Company’s effective tax rate decreased to (9.3%) for the three months ended March 31, 2019 from 32.0% for the three months
ended March 31, 2018. The effective tax rate for the three months ended March 31, 2019 includes discrete tax benefits related
to net equity compensation deductions offset by interest on uncertain tax benefits. For the three months ended March 31, 2019,
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.
Included
in Other liabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits 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)
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 million and $0.7 million as of March 31, 2019 and December 31, 2018, respectively. HMS includes interest expense and penalties
in the provision for income taxes in the unaudited Consolidated Statements of Income. The amount of interest expense (net of federal
and state income tax benefits) and penalties in the unaudited Consolidated Statements of Income for the three months ended March
31, 2019 and 2018 was $0.2 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 million over the next twelve months, due to the expiration of the statute of
limitations in federal and various state jurisdictions.
HMS
files income tax returns with the U.S. Federal government and various state, territory, and local jurisdictions. HMS is no longer
subject to U.S. Federal income tax examinations for years before 2013. HMS operates in a number of state and local jurisdictions.
Accordingly, HMS is subject to state and local income tax examinations based on the various statutes of limitations in each jurisdiction.
7.
|
|
Estimated Liability
For Appeals
|
Under
the Company’s contracts with certain commercial health plan customers and its Medicare Recovery Audit Contractor (“RAC”)
contracts 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.
The 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.
In
December 2017, the Company entered into an amendment to its Amended and Restated Credit Agreement, as amended (the “Credit
Agreement”) which, among other things, extended the maturity of its then existing $500 million revolving credit facility
by five years to December 2022 (the “Amended Revolving Facility”). The availability of funds under the Amended Revolving
Facility includes sublimits for (a) up to $50 million for the issuance of letters of credit and (b) up to $25 million for swingline
loans. In addition, the Company may increase the commitments under the Amended Revolving Facility and/or add one or more incremental
term loan facilities, provided that such incremental facilities do not exceed in the aggregate the sum of (i) the greater of $120
million and 100% of Consolidated EBITDA (as defined in the Credit Agreement) and (ii) an additional amount so long as our first
lien leverage ratio (as defined in the Credit Agreement) on a pro forma basis is not greater than 3.00:1.00, subject to obtaining
commitments from lenders therefor and meeting certain other conditions.
As
of March 31, 2019 and December 31, 2018, the outstanding principal balance due on the Amended Revolving Facility was $240.0 million.
No principal payments were made against the Amended Revolving Facility during the three months ended March 31, 2019.
Borrowings
under the Amended Revolving Facility bear interest at a rate equal to, at the Company’s election (except with respect to
swingline borrowings, which will accrue interest based only at the base rate), either:
▪
|
a base rate determined by reference
to the greatest of (a) the prime or base commercial lending rate of the administrative agent as in effect on the relevant
date, (b) the federal funds effective rate plus 0.50% and (c) the one-month London Interbank Offered Rate (or any successor
rate determined in accordance with the Credit Agreement) (“LIBO 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.
|
In
addition to paying interest on the outstanding principal, the Company is required to pay unused commitment fees on the Amended
Revolving Facility during the term of the Credit Agreement ranging from 0.375% to 0.250% per annum based on the Company’s
consolidated leverage ratio and letter of credit fees equal to 0.125% per annum on the aggregate face amount of each letter of
credit, as well as customary agency fees. As part of a contractual agreement with a customer, the Company has an outstanding irrevocable
letter of credit for $6.5 million, which is issued against its revolving credit facility and expires June 30, 2019.
The
Amended Revolving Facility is secured, subject to certain customary carve-outs and exceptions, by a first priority lien and security
interest in substantially all tangible and intangible assets of the Company and certain subsidiaries of the Company. The Amended
Revolving Facility contains certain restrictive covenants, which affect, among other things, the ability of the Company and its
subsidiaries to incur indebtedness, create liens, make investments, sell or otherwise dispose of assets, engage in mergers or
consolidations with other entities, and pay dividends or repurchase stock. The Company is also required to comply, on a quarterly
basis, with two financial covenants: (i) a minimum interest coverage ratio of 3:00:1:00, and (ii) a maximum consolidated leverage
ratio of 4.75:1.00 through December 2019 and 4.25:1.00 from and after January 2020. The consolidated leverage ratio is subject
to a step-up to 5.25:1.00 for four full consecutive fiscal quarters following a permitted acquisition or similar investment. As
of March 31, 2019, the Company was in compliance with all terms of the Credit Agreement.
Interest
expense and the commitment fees on the unused portion of the Company’s revolving credit facility were as follows (
in
thousands
):
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
|
2018
|
|
Interest expense
|
|
$
|
2,526
|
|
|
$
|
2,070
|
|
Commitment
fees
|
|
|
156
|
|
|
|
239
|
|
As
of March 31, 2019 and December 31, 2018, the unamortized balance of deferred origination fees and debt issuance costs was $2.1
million and $2.2 million, respectively. For the three month periods ended March 31, 2019 and 2018, 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.
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,
|
|
|
|
2019
|
|
|
|
2018
|
|
Net
income
|
|
$
|
19,642
|
|
|
$
|
6,391
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
|
|
85,853
|
|
|
|
83,933
|
|
Plus:
net effect of dilutive stock options and restricted stock units
|
|
|
2,761
|
|
|
|
1,749
|
|
Weighted average common shares outstanding-diluted
|
|
|
88,614
|
|
|
|
85,682
|
|
Net
income per common share-basic
|
|
$
|
0.23
|
|
|
$
|
0.08
|
|
Net
income per common share-diluted
|
|
$
|
0.22
|
|
|
$
|
0.07
|
|
For
the three months ended March 31, 2019 and 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, restricted stock units representing 120,516 and 58,743 shares of 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
|
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,
|
|
|
2019
|
|
2018
|
Cost of services-compensation
|
|
$
|
4,124
|
|
|
$
|
2,563
|
|
Selling,
general and administrative
|
|
|
6,855
|
|
|
|
6,931
|
|
Total
|
|
$
|
10,979
|
|
|
$
|
9,494
|
|
Stock-based
compensation expense related to stock options was approximately $4.8 million and $4.0 million for the three months ended March
31, 2019 and 2018, respectively.
Presented
below is a summary of stock option activity for the three months ended March 31, 2019 (
in thousands, except for weighted average
exercise price and weighted average remaining contractual terms
):
|
|
|
Number
of Options
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
Weighted
Average-
Remaining
Contractual
Terms
|
|
|
|
Aggregate-
Intrinsic
Value
|
|
Outstanding balance at December 31, 2018
|
|
|
4,402
|
|
|
$
|
17.07
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
560
|
|
|
|
39.52
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,443
|
)
|
|
|
16.03
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(134
|
)
|
|
|
18.99
|
|
|
|
|
|
|
|
|
|
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
|
|
During
the three months ended March 31, 2019 and 2018, the Company issued 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, 2019 and 2018 was $25.8 million and
$0.01 million respectively.
As
of March 31, 2019, there was approximately $8.4 million of total unrecognized compensation cost related to stock options outstanding,
which is expected to be recognized over a weighted average period of 1.44 years.
The
weighted-average grant date fair value per share of the stock options granted during the three months ended March 31, 2019 and
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,
|
|
|
|
2019
|
|
|
|
2018
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
2.5
|
%
|
|
|
2.7
|
%
|
Expected volatility
|
|
|
40.9
|
%
|
|
|
42.5
|
%
|
Expected
life (years)
|
|
|
6.4
|
|
|
|
6.0
|
|
The
total tax benefits recognized on stock-based compensation related to stock options for the three months ended March 31, 2019 and
2018 was $11.3 million and $2.1 million, respectively.
(c)
|
|
Restricted Stock
Units
|
Stock-based
compensation expense related to restricted stock units was approximately $6.1 million and $5.5 million for the three months ended
March 31, 2019 and 2018, respectively.
Presented
below is a summary of restricted stock units activity for the three months ended March 31, 2019
(in thousands, except for weighted
average grant date fair value per unit):
|
|
|
Number
of
Units
|
|
|
|
Weighted
Average
Grant Date Fair
Value per Unit
|
|
Outstanding balance at December 31, 2018
|
|
|
1,488
|
|
|
$
|
17.60
|
|
Granted
|
|
|
408
|
|
|
|
34.43
|
|
Vesting of restricted stock units, net
of units withheld for taxes
|
|
|
(377
|
)
|
|
|
16.88
|
|
Units withheld for taxes
|
|
|
(193
|
)
|
|
|
16.88
|
|
Forfeitures
|
|
|
(63
|
)
|
|
|
17.58
|
|
Outstanding
balance at March 31, 2019
|
|
|
1,263
|
|
|
$
|
25.43
|
|
As
of March 31, 2019, 1,027,186 restricted stock units remained unvested and there was approximately $16.7 million of unrecognized
compensation cost related to restricted stock units, which is expected to be recognized over a weighted average vesting period
of 1.43 years.
The
Company determines if an arrangement is a lease at inception. Operating leases are reported on the Company’s consolidated
balance sheet within operating lease ROU assets, operating lease liabilities and accounts payable, accrued expenses and other
liabilities. Finance leases are reported on the Company’s consolidated balance sheets within other assets, other liabilities
and accounts payable, accrued expenses and other liabilities.
Operating
lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments
over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, we use the Company’s
incremental borrowing rate based on the information available at the lease’s commencement date in determining the present
value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and
initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain
that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease
term. For certain real estate and equipment leases, the Company has lease agreements with lease and non-lease components, which
are generally accounted for as a single component.
The
Company primarily leases real estate, information technology equipment and data centers on terms that expire on various dates
through 2026, some of which include options to extend the lease for up to 10 years. We evaluate whether to include the option
period in the calculation of the ROU asset and lease liability on a lease-by-lease basis.
As of
March 31, 2019, all operating and finance leases that create significant rights and obligations for the Company have commenced.
The components
of lease expense for the three months ended March 31, 2019 were as follows (
in thousands
):
|
|
|
Three
Months Ended March 31, 2019
|
|
|
|
|
Operating
lease cost
|
|
$
|
1,656
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of
right-of-use assets
|
|
$
|
8
|
|
Interest
on lease liabilities
|
|
$
|
1
|
|
Total finance lease
cost
|
|
$
|
9
|
|
Supplemental
cash flow and other information related to leases for the three months ended March 31, 2019 were as follows (
in thousands
):
|
|
|
Three
Months Ended March 31, 2019
|
|
|
|
|
Cash paid for amounts included in measurement
of lease liabilities:
|
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
1,833
|
|
Operating cash flows
from finance leases
|
|
$
|
1
|
|
Financing cash flows
from finance leases
|
|
$
|
8
|
|
Right-of-use assets obtained in exchange
for new lease liabilities:
|
|
|
|
|
Operating leases
|
|
$
|
219
|
|
Finance
leases
|
|
$
|
238
|
|
Supplemental
balance sheet information related to leases as of March 31, 2019 consisted of the following (
in thousands
):
|
|
|
March
31, 2019
|
|
Operating Leases
|
|
|
|
|
Operating
lease right-of-use assets
|
|
$
|
20,110
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
6,247
|
|
Operating
lease liabilities
|
|
$
|
18,677
|
|
Total operating
lease liabilities
|
|
$
|
24,924
|
|
|
|
|
|
|
Finance
Leases
|
|
|
|
|
Other Assets
|
|
$
|
334
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
106
|
|
Other
long-term liabilities
|
|
$
|
229
|
|
Total finance leases
liabiities
|
|
$
|
335
|
|
The
weighted-average remaining lease term for operating and finance leases are 4.5 years and 3 years, respectively. Weighted-average
discount rates amount to 5.7% and 5.0% for operating and finance leases, respectively.
Sublease
income for the three months ended March 31, 2019 and 2018 was $0.5 million and $0.4 million, respectively.
Maturities
of lease liabilities were as follows (
in thousands
):
Year
ended December 31,
|
|
|
Operating
Leases
|
|
|
|
Finance
Leases
|
|
2019 (excluding the three
months ended March 31, 2019)
|
|
$
|
5,575
|
|
|
$
|
90
|
|
2020
|
|
|
7,272
|
|
|
|
120
|
|
2021
|
|
|
5,568
|
|
|
|
120
|
|
2022
|
|
|
3,275
|
|
|
|
29
|
|
2023
|
|
|
3,034
|
|
|
|
-
|
|
Thereafter
|
|
|
3,560
|
|
|
|
-
|
|
Total lease payments
|
|
|
28,284
|
|
|
|
359
|
|
Less:
Imputed interest
|
|
|
(3,360
|
)
|
|
|
(24
|
)
|
Total
lease obligation
|
|
$
|
24,924
|
|
|
$
|
335
|
|
12.
|
|
Commitments and
Contingencies
|
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 for information in connection
with this CID.
In
September 2018, a former employee filed an action in the New York County Supreme Court entitled Christopher Frey v. Health Management
Systems, Inc. alleging retaliation under New York law. The complaint seeks recovery of an unspecified amount of monetary damages,
including back pay and other compensatory and equitable relief. The Company has moved to dismiss the complaint. On May 2, 2019,
the Court held a hearing on the Company’s motion to dismiss. The Company continues to believe that this claim is without
merit and intends to vigorously defend this matter.
From
time to time, HMS may be subject to investigations, legal proceedings and other disputes arising in the ordinary course of the
Company’s business, including but not limited to regulatory audits, billing and contractual disputes, employment-related
matters and post-closing disputes related to acquisitions. Due to the Company’s contractual relationships, including those
with federal and state government entities, HMS’s operations, billing and business practices are subject to scrutiny and
audit by those entities and other multiple agencies and levels of government, as well as to frequent transitions and changes in
the personnel responsible for oversight of the Company’s contractual performance. HMS may have contractual disputes with
its customers arising from differing interpretations of contractual provisions that define the Company’s rights, obligations,
scope of work or terms of payment, and with associated claims of liability for inaccurate or improper billing for reimbursement
of contract fees, or for sanctions or damages for alleged performance deficiencies. Resolution of such disputes may involve litigation
or may require that HMS accept some amount of loss or liability in order to avoid customer abrasion, negative marketplace perceptions
and other disadvantageous results that could affect the Company’s business, financial condition, results of operations and
cash flows.
HMS records
accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably
estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual
and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both
probable and estimable, HMS does not establish an accrued liability.
In
connection with the preparation of these unaudited Consolidated Financial Statements, an evaluation of subsequent events was performed
through the date of filing and there were no events that have occurred that would require adjustments to the financial statements
or disclosures.