NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE AND SIX
MONTHS ENDED
JUNE 30, 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 and population health management 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, and our payment integrity services promote accuracy by fighting fraud, waste and abuse. Our population health management solutions consist of population risk analytics and care management and consumer engagement services that 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. As the Company previously disclosed, the standard had a material impact on its 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 there was no impact on its consolidated income statements. The Company continues to expect that any impact from its adoption of the new standard will be immaterial to its net income and its internal control framework for future periods.
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 continues to evaluate whether the adoption of this guidance will have any impact on the Company’s financial statements but does not expect that this guidance will have a material impact on the Company’s financial position, results of operations or internal control framework.
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
("ASU 2018-15"). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for which financial statements have not been
issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. This guidance is not expected to have a material impact on the Company’s financial position, results of operations or internal control framework.
2. Revenue Recognition
The Company’s revenue disaggregated by solution for the
three and six
months ended
June 30, 2019
and
2018
was as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
June 30, 2019
|
|
June 30, 2018
|
Coordination of Benefits
|
$
|
105,094
|
|
|
$
|
100,755
|
|
$
|
210,945
|
|
|
$
|
192,507
|
|
Payment Integrity
|
49,121
|
|
|
31,192
|
|
76,847
|
|
|
69,833
|
|
Population Health Management
|
13,967
|
|
|
14,844
|
|
28,343
|
|
|
25,876
|
|
Total
|
$
|
168,182
|
|
|
$
|
146,791
|
|
$
|
316,135
|
|
|
$
|
288,216
|
|
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 population health 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.
Population health 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 population health 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 adoption of ASC 606. Generally, population health 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
$4.9 million
as of
June 30, 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 and six
months ended
June 30, 2019
and
2018
was as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
June 30, 2019
|
|
June 30, 2018
|
June 30, 2019
|
|
June 30, 2018
|
Commercial
|
$
|
79,044
|
|
|
$
|
80,493
|
|
$
|
155,303
|
|
|
$
|
152,278
|
|
State
|
65,180
|
|
|
58,815
|
|
126,922
|
|
|
113,435
|
|
Federal
|
23,958
|
|
|
7,483
|
|
33,910
|
|
|
22,503
|
|
Total
|
$
|
168,182
|
|
|
$
|
146,791
|
|
$
|
316,135
|
|
|
$
|
288,216
|
|
A portion of the Company’s services are deferred and revenue is recognized at a later time. Deferred revenue was approximately
$5.9 million
and
$5.6 million
as of
June 30, 2019
and
December 31, 2018
, respectively, and is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. Approximately
$2.8 million
of the
December 31, 2018
balance was recognized in revenue during the quarter ended
June 30, 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)
:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Accounts receivable
|
$
|
212,740
|
|
|
$
|
220,455
|
|
Allowance
|
(12,808
|
)
|
|
(13,683
|
)
|
Accounts receivable, net
|
$
|
199,932
|
|
|
$
|
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)
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Balance--beginning of period
|
$
|
13,683
|
|
|
$
|
14,799
|
|
Provision
|
7,717
|
|
|
20,453
|
|
Charge-offs
|
(8,592
|
)
|
|
(21,569
|
)
|
Balance--end of period
|
$
|
12,808
|
|
|
$
|
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
|
June 30, 2019
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
68,290
|
|
|
$
|
(18,936
|
)
|
|
$
|
49,354
|
|
|
12.5
|
Intellectual property
|
21,700
|
|
|
(8,606
|
)
|
|
13,094
|
|
|
3.7
|
Trade names
|
136
|
|
|
(128
|
)
|
|
8
|
|
|
0.2
|
Restrictive covenants
|
133
|
|
|
(126
|
)
|
|
7
|
|
|
0.2
|
Total
|
$
|
90,259
|
|
|
$
|
(27,796
|
)
|
|
$
|
62,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six months ended June 30, 2019)
|
$
|
4,568
|
|
2020
|
7,613
|
|
2021
|
7,197
|
|
2022
|
7,197
|
|
2023
|
4,822
|
|
Thereafter
|
31,066
|
|
Total
|
$
|
62,463
|
|
For the
three months ended
June 30, 2019
and
2018
, amortization expense related to intangible assets was
$2.3 million
and
$6.7 million
, respectively. For the
six
months ended
June 30, 2019
and
2018
, amortization expense related to intangible assets was
$4.7 million
and
$12.8 million
, respectively.
There was
no
change in the carrying amount of goodwill for the
six
months ended
June 30, 2019
.
5. Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Accounts payable, trade
|
$
|
11,774
|
|
|
$
|
12,394
|
|
Accrued compensation and other
|
26,735
|
|
|
42,833
|
|
Accrued operating expenses
|
26,301
|
|
|
19,675
|
|
Current portion of lease liabilities
|
6,520
|
|
|
—
|
|
Total accounts payable, accrued expenses and other liabilities
|
$
|
71,330
|
|
|
$
|
74,902
|
|
6. Income Taxes
The Company’s effective tax rate
decreased
to
13.9%
for the
six months ended
June 30, 2019
from
47.7%
for the
six months ended
June 30, 2018
. The effective tax rate for the
six months ended
June 30, 2019
includes discrete tax benefits related to net equity compensation deductions offset by interest on uncertain tax benefits. For the
six months ended
June 30, 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 (net of the federal benefit for state issues) of approximately
$5.3 million
and
$4.8 million
, as of
June 30, 2019
and
December 31, 2018
, respectively, that, if recognized, would favorably affect the Company’s future effective tax rate. Also included in Other liabilities on the Consolidated Balance Sheets, are accrued liabilities for interest expense and penalties related to unrecognized tax benefits of
$1.0 million
and
$0.7 million
as of
June 30, 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
six months ended
June 30, 2019
and
2018
was
$0.3 million
and
$0.3 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 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”) contract 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) a liability for findings which have been previously adjudicated in favor of providers and (b) an estimated liability based on the amount of revenue that is subject to appeals and which are probable of being adjudicated in favor of providers following their successful appeal. The Company’s estimate is based on the Company’s historical experience. To the extent the amount to be returned to providers following a successful appeal exceeds or is less than the amount recorded, revenue in the applicable period would be reduced or increased by such amount. Any future changes or modifications to the Company's Medicare RAC contract or commercial health plan customer contracts may force the Company to apply different assumptions, which could materially affect both the Company’s revenue and estimated liability for appeals in future periods.
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
|
—
|
|
|
604
|
|
|
5,135
|
|
|
5,739
|
|
Appeals found in providers favor
|
—
|
|
|
(309
|
)
|
|
(4,825
|
)
|
|
(5,134
|
)
|
Release of liability
|
(19,380
|
)
|
|
—
|
|
|
—
|
|
|
(19,380
|
)
|
Balance at June 30, 2019
|
$
|
—
|
|
|
$
|
315
|
|
|
$
|
2,633
|
|
|
$
|
2,948
|
|
The Company’s original Medicare RAC contract with CMS expired on January 31, 2018. As a result of the original contract expiration, which historically had net settlement terms, the Company’s contractual obligation with respect to any appeals resolved in favor of providers subsequent to the expiration date ceased, and the Company released its estimated liability and increased revenue by
$8.4 million
during the first quarter of
2018
. The Company has determined, based on communications, that there is no further contractual obligation to CMS with respect to the original Medicare RAC contract as of June 30, 2019. Accordingly, the Company released its remaining
estimated liability of
$19.4 million
and net receivables. As a result of the release, there was a
$10.5
million increase to the Company's revenue for the three months ended June 30, 2019.
8. Credit Agreement
In
December 2017
, the Company entered into an amendment to its Amended and Restated Credit Agreement, as amended (the “Credit Agreement”) which, among other things, extended the maturity of its then existing
$500 million
revolving credit facility by
five years
to
December 2022
(the “Amended Revolving Facility”). The availability of funds under the Amended Revolving Facility includes sublimits for (a) up to
$50 million
for the issuance of letters of credit and (b) up to
$25 million
for swingline loans. In addition, the Company may increase the commitments under the Amended Revolving Facility and/or add one or more incremental term loan facilities, provided that such incremental facilities do not exceed in the aggregate the sum of (i) the greater of
$120 million
and
100%
of Consolidated EBITDA (as defined in the Credit Agreement) and (ii) an additional amount so long as our first lien leverage ratio (as defined in the Credit Agreement) on a pro forma basis is not greater than
3.00
:1.00, subject to obtaining commitments from lenders therefore and meeting certain other conditions.
As of
June 30, 2019
and
December 31, 2018
, the outstanding principal balance due on the Amended Revolving Facility was
$240 million
.
No
principal payments were made against the Amended Revolving Facility during the
six
months ended
June 30, 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, 2020.
The Amended Revolving Facility is secured, subject to certain customary carve-outs and exceptions, by a first priority lien and security interest in substantially all tangible and intangible
assets of the Company and certain subsidiaries of the Company. The Amended Revolving Facility contains certain restrictive covenants, which affect, among other things, the ability of the Company and its subsidiaries to incur indebtedness, create liens, make investments, sell or otherwise dispose of assets, engage in mergers or consolidations with other entities, and pay dividends or repurchase stock. The Company is also required to comply, on a quarterly basis, with two financial covenants: (i) a minimum interest coverage ratio of
3
:00:1:00, and (ii) a maximum consolidated leverage ratio of
4.75
:1.00 through
December 2019
and
4.25
:1.00 from and after January 2020. The consolidated leverage ratio is subject to a step-up to
5.25
:1.00 for four full consecutive fiscal quarters following a permitted acquisition or similar investment. As of
June 30, 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 Amended Revolving Facility were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
2019
|
|
2018
|
Interest expense
|
$
|
2,524
|
|
|
$
|
2,627
|
|
$
|
5,050
|
|
|
$
|
4,697
|
|
Commitment fees
|
160
|
|
|
239
|
|
316
|
|
|
477
|
|
As of
June 30, 2019
and
December 31, 2018
, the unamortized balance of deferred origination fees and debt issuance costs was
$2.0 million
and
$2.2 million
, respectively. For the
six
month periods ended
June 30, 2019
and
2018
, HMS amortized
$0.3 million
and
$0.3 million
, respectively, of interest expense related to the Company’s deferred origination fees and debt issue costs.
9. Earnings Per Share
The following table reconciles the basic to diluted weighted average common shares outstanding using the treasury stock method
(in thousands, except per share amounts)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
2019
|
|
2018
|
Net income/(loss)
|
$
|
29,100
|
|
|
$
|
(3,367
|
)
|
$
|
48,742
|
|
|
$
|
3,024
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
85,956
|
|
|
83,231
|
|
86,524
|
|
|
83,222
|
|
Plus: net effect of dilutive stock options and restricted stock units
|
1,902
|
|
|
—
|
|
2,319
|
|
|
1,615
|
|
Weighted average common shares outstanding-diluted
|
87,858
|
|
|
83,231
|
|
88,843
|
|
|
84,837
|
|
Net income/(loss) per common share -- basic
|
$
|
0.34
|
|
|
$
|
(0.04
|
)
|
$
|
0.56
|
|
|
$
|
0.04
|
|
Net income/(loss) per common share -- diluted
|
$
|
0.33
|
|
|
$
|
(0.04
|
)
|
$
|
0.55
|
|
|
$
|
0.04
|
|
For the
three months ended
June 30, 2019
,
588,379
stock options and restricted stock units representing
227,604
shares of the Company's common stock were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive. For the
three months ended
June 30, 2018
, the Company incurred a net loss. As a result, there was no difference
between the Company's basic and diluted earnings per share and
2,552,862
stock options and restricted stock units representing
626,341
shares of the Company's common stock were excluded from consideration in the calculation of diluted net loss per share because the effect would have been anti-dilutive.
For the
six
months ended
June 30, 2019
and
2018
, (i)
394,886
and
2,738,783
stock options, respectively, and (ii) restricted stock units representing
151,279
and
106,501
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) Long-Term Incentive Award Plans
The Company grants stock options and restricted stock units to HMS employees and non-employee directors of the Company under the HMS Holdings Corp. 2019 Omnibus Incentive Plan (the “2019 Omnibus Plan”), as approved by the Company’s shareholders on May 22, 2019. The 2019 Omnibus Plan replaces and supersedes the HMS Holdings Corp. 2016 Omnibus Incentive Plan. Awards granted under the 2019 Omnibus Plan generally vest over one to four years. Subject to certain exceptions, the exercise price of stock options granted under the 2019 Omnibus Plan may not be less than the fair market value of a share of stock on the grant date, which is determined based on the closing price of the Company’s common stock reported on the Nasdaq Global Select Market on that date, and the term of a stock option may not exceed ten years.
(b) Stock-Based Compensation Expense
Total stock-based compensation expense in the Company’s unaudited Consolidated Statements of Income related to the Company’s long-term incentive award plans was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
2019
|
|
2018
|
Cost of services-compensation
|
$
|
2,720
|
|
|
$
|
1,673
|
|
$
|
6,843
|
|
|
$
|
4,236
|
|
Selling, general and administrative
|
2,082
|
|
|
3,041
|
|
8,938
|
|
|
9,972
|
|
Total
|
$
|
4,802
|
|
|
$
|
4,714
|
|
$
|
15,781
|
|
|
$
|
14,208
|
|
(c) Stock Options
For the
three
months ended
June 30, 2019
and
2018
, stock-based compensation expense related to stock options was approximately
$2.0 million
and
$2.1 million
, respectively. For the
six
months ended
June 30, 2019
and
2018
, stock-based compensation expense related to stock options was approximately
$6.8 million
and
$6.1
million, respectively.
Presented below is a summary of stock option activity for the
six
months ended
June 30, 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
|
622
|
|
|
38.72
|
|
|
|
|
|
Exercised
|
(1,686
|
)
|
|
16.01
|
|
|
|
|
|
Forfeitures
|
(140
|
)
|
|
19.31
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding balance at June 30, 2019
|
3,198
|
|
|
$
|
21.79
|
|
|
6.86
|
|
$
|
37,514
|
|
Expected to vest at June 30, 2019
|
1,045
|
|
|
$
|
28.12
|
|
|
8.98
|
|
$
|
7,507
|
|
Exercisable at June 30, 2019
|
1,728
|
|
|
$
|
16.91
|
|
|
5.13
|
|
$
|
26,745
|
|
During the
three
months ended
June 30, 2019
and
2018
, the Company received proceeds of
$3.9 million
and
$2.2 million
, respectively, for the issuance of
242,723
and
87,230
shares of common stock upon the exercise of outstanding stock options, respectively. The total intrinsic value of stock options exercised during the
three
months ended
June 30, 2019
and
2018
was
$3.7 million
and
$0.8 million
, respectively. During the
six
months ended
June 30, 2019
and
2018
, the Company received proceeds of
$27.0 million
and
$2.4 million
, respectively, for the issuance of
1,686,408
and
151,034
shares of common stock upon the exercise of outstanding stock options, respectively. The total intrinsic value of stock options exercised during the
six
months ended
June 30, 2019
and
2018
was
$29.4 million
and
$0.8 million
, respectively.
As of
June 30, 2019
, there was approximately
$6.4 million
of total unrecognized compensation cost related to stock options outstanding, which is expected to be recognized over a weighted average period of
1.3 years
.
The weighted-average grant date fair value per share of the stock options granted during the
six
months ended
June 30, 2019
and
2018
was
$13.82
and
$7.52
, respectively. HMS estimated the fair value of each stock option grant on the date of grant using a Black-Scholes option pricing model and weighted–average assumptions set forth in the following table:
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
Risk-free interest rate
|
2.5
|
%
|
|
2.7
|
%
|
Expected volatility
|
40.9
|
%
|
|
42.4
|
%
|
Expected life (years)
|
6.35
|
|
|
6.00
|
|
The total tax benefits recognized on stock-based compensation related to stock options for the
six
months ended
June 30, 2019
and
2018
was
$12.4 million
and
$2.5 million
, respectively.
(d) Restricted Stock Units
For the
three
months ended
June 30, 2019
and
2018
, stock-based compensation expense related to restricted stock units was approximately
$2.8 million
and
$2.6 million
, respectively. For the
six
months ended
June 30, 2019
and
2018
, stock-based compensation expense related to restricted stock units was approximately
$8.9 million
and
$8.1 million
, respectively.
Presented below is a summary of restricted stock units activity for the
six
months ended
June 30, 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
|
460
|
|
|
34.10
|
|
Vesting of restricted stock units, net of units withheld for taxes
|
(403
|
)
|
|
16.49
|
|
Units withheld for taxes
|
(200
|
)
|
|
16.49
|
|
Forfeitures
|
(82
|
)
|
|
18.92
|
|
Outstanding balance at June 30, 2019
|
1,263
|
|
|
$
|
25.74
|
|
For the three months ended
June 30, 2019
and
2018
, HMS granted
51,546
and
62,259
restricted stock units, respectively, with an aggregate fair market value of
$1.6
million and
$0.9
million, respectively. For the six months ended
June 30, 2019
and
2018
, HMS granted
459,985
and
761,083
restricted stock units, respectively, with an aggregate fair market value of
$15.7
million and
$12.7
million, respectively.
As of
June 30, 2019
,
1,003,051
restricted stock units remained unvested and there was approximately
$14.3 million
of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average vesting period of
1.38
years.
11
. Leases
The Company determines if an arrangement is a lease at inception. Operating leases are reported on the Company’s consolidated balance sheet within Operating lease right-of-use 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
June 30, 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 and six
months ended
June 30, 2019
were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2019
|
|
|
|
|
Operating lease cost
|
$
|
1,658
|
|
|
$
|
3,314
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
$
|
30
|
|
|
$
|
38
|
|
Interest on lease liabilities
|
$
|
4
|
|
|
$
|
5
|
|
Total finance lease cost
|
$
|
34
|
|
|
$
|
43
|
|
Supplemental cash flow and other information related to leases for the
six
months ended
June 30, 2019
were as follows (
in thousands
):
|
|
|
|
|
|
Six Months Ended
June 30, 2019
|
|
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
3,700
|
|
Operating cash flows from finance leases
|
$
|
4
|
|
Financing cash flows from finance leases
|
$
|
36
|
|
Right-of-use assets obtained in exchange for new lease liabilities:
|
|
Operating leases
|
$
|
163
|
|
Finance leases
|
$
|
331
|
|
Supplemental balance sheet information related to leases as of
June 30, 2019
consisted of the following (
in thousands
):
|
|
|
|
|
|
June 30, 2019
|
Operating Leases
|
|
Operating lease right-of-use assets
|
$
|
18,940
|
|
|
|
Other current liabilities
|
$
|
6,301
|
|
Operating lease liabilities
|
$
|
17,245
|
|
Total operating lease liabilities
|
$
|
23,546
|
|
|
|
Finance Leases
|
|
Other Assets
|
$
|
656
|
|
|
|
Other current liabilities
|
$
|
219
|
|
Other long-term liabilities
|
$
|
440
|
|
Total finance leases liabilities
|
$
|
659
|
|
As of June 30, 2019, the weighted-average remaining lease term for operating and finance leases was
4.5 years
and
3 years
, respectively. As of June 30, 2019, the weighted-average discount rates were
5.7%
and
5.0%
for operating and finance leases, respectively.
Sublease income for the
six
months ended
June 30, 2019
and
2018
was
$1.1 million
and
$0.8 million
, respectively.
Maturities of lease liabilities were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
Operating Leases
|
|
Finance Leases
|
2019 (excluding the six months ended June 30, 2019)
|
$
|
3,728
|
|
|
$
|
123
|
|
2020
|
7,308
|
|
|
245
|
|
2021
|
5,605
|
|
|
245
|
|
2022
|
3,313
|
|
|
91
|
|
2023
|
3,073
|
|
|
—
|
|
Thereafter
|
3,578
|
|
|
—
|
|
Total lease payments
|
26,605
|
|
|
704
|
|
Less: Imputed interest
|
3,059
|
|
|
45
|
|
Total lease obligation
|
$
|
23,546
|
|
|
$
|
659
|
|
12
. Commitments and Contingencies
In July 2012, Dennis Demetre and Lori Lewis (the “Plaintiffs”), filed an action in the Supreme Court of the State of New York against HMS Holdings Corp., claiming an undetermined amount of damages alleging that various actions by HMS unlawfully deprived the Plaintiffs of the acquisition earn-out portion of the purchase price for Allied Management Group Special Investigation Unit, Inc. (“AMG”) under the applicable Stock Purchase Agreement (the “SPA”) and that HMS had breached certain contractual provisions under the SPA. The Plaintiffs filed a second amended complaint with
two causes of action for breach of contract and one cause of action for breach of implied covenant of good faith and fair dealing. HMS asserted a counterclaim against Plaintiffs for breach of contract based on contractual indemnification costs, including attorneys’ fees arising out of the Company’s defense of AMG in Kern Health Systems v. AMG, Dennis Demetre and Lori Lewis (the “California Action”), which are recoverable under the SPA. In June 2016, Kern Health Systems and AMG entered into a settlement agreement that resolved all claims in the California Action. In July 2017, the Court issued a decision on the Company’s motion for partial summary judgment and granted the motion in part, dismissing one of Plaintiffs’ breach of contract causes of action against HMS. On November 3, 2017, following a jury trial, a verdict was returned in favor of the Plaintiffs on a breach of contract claim, and the jury awarded
$60 million
in damages to the Plaintiffs. On March 14, 2018, the Court held a hearing on the Company’s post-trial motion for an order granting it judgment notwithstanding the verdict or, alternatively, setting aside the jury’s award of damages. On June 27, 2018, prior to the Court issuing a decision on the motion, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with the Plaintiffs, John Alfred Lewis and Christopher Brandon Lewis. Pursuant to the terms of the Settlement Agreement, the Company paid
$20 million
to resolve all matters in controversy pertaining to the lawsuit. On July 5, 2018, the Court entered an order to discontinue the lawsuit pursuant to the Stipulation of Discontinuance with Prejudice filed by the parties.
In February 2018, the Company received a Civil Investigative Demand (“CID”) from the Texas Attorney General, purporting to investigate possible unspecified violations of the Texas Medicaid Fraud Prevention Act. 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.
13. Subsequent Events
As of June 30, 2019, the Company held common stock of InstaMed Holdings, Inc. On July 24, 2019, JP Morgan Chase & Co acquired one hundred percent of InstaMed Holdings, Inc., resulting in the sale of the Company's investment. As a result, the Company received proceeds of
$9.8 million
for the sale of the investment in the subsequent period.