See accompanying
notes to the unaudited consolidated financial statements.
See accompanying notes to the unaudited
consolidated financial statements.
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
For the Three Months
Ended March 31, 2018 and 2017
(unaudited)
1.
|
Business and Summary of Significant Accounting
Policies
|
(a) Business
HMS is a leading provider of cost
containment solutions in the U.S. healthcare marketplace. We use innovative technology, extensive data services and powerful analytics
to deliver coordination of benefits, payment integrity and care management and consumer engagement solutions to help healthcare
payers improve financial performance and clinical outcomes. We provide coordination of benefits services to government and commercial
healthcare payers and sponsors to ensure that the responsible party pays healthcare claims. Our payment integrity services ensure
healthcare claims billed are accurate and appropriate, and our care management and consumer engagement technology helps risk-bearing
organizations to better engage with and manage the care delivered to their members. Together these various services help customers
recover erroneously paid amounts from liable third parties; prevent future improper payments; reduce fraud, waste and abuse; better
manage the care their members receive; engage healthcare consumers to improve clinical outcomes while increasing member satisfaction
and retention; and achieve regulatory compliance. We currently operate as one business segment with a single management team that
reports to our Chief Executive Officer.
The accompanying consolidated financial
statements and notes are unaudited. Accordingly, they do not include all of the information and notes required by 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 as of and for the year ended December 31, 2017
which were filed with the SEC as part of the 2017 Form 10-K. The consolidated balance sheet as of December 31, 2017 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 2017 Form 10-K other than as described below
with respect to revenue recognition.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued
ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606) (“ASU 2014-09”), which is the new comprehensive
revenue recognition standard that supersedes all existing revenue recognition guidance under U.S. GAAP. The Company adopted ASU
2014-09 on January 1, 2018 to all contracts using the modified retrospective method. The Company recognized the cumulative effect
of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The financial
information for comparative prior periods has not been restated and continues to be reported under the accounting standards in
effect for those periods. The affect of adopting ASU 2014-09 in the current reporting period as compared with the guidance that
was in effect before the change is immaterial. 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 revenue recognition
standard as necessary. The Company expects 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 August 2016, the FASB issued ASU
No. 2016-15,
Statements of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU
2016-15”)
.
ASU 2016-15 clarifies where certain cash receipts and cash payments are presented and classified in the
statement of cash flows. The amendments are effective for annual reporting periods beginning after December 15, 2017, and for interim
reporting periods within such annual periods. The Company adopted this guidance on January 1, 2018. The adoption of this guidance
did not have a material effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued
ASU No. 2017-01,
Business Combinations (Topic 805) – Clarifying the Definition of a Business
(“ASU 2017-01”).
ASU 2017-01 finalizes previous proposals regarding shareholder concerns that the definition of a business is applied too broadly.
The guidance assists entities with evaluating whether transactions should be accounted for as acquisitions of assets or of businesses.
The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods.
The Company adopted this guidance on January 1, 2018. The adoption of this guidance did not have a material effect on the Company’s
consolidated financial statements.
In May 2017, the FASB issued ASU
No. 2017-09,
Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting,
(“ASU 2017-09”).
ASU 2017-09 requires entities to apply modification accounting to changes made to a share-based payment award. The new guidance
specifies that entities will apply modification accounting to changes to a share-based payment award only if any of the following
are not the same immediately before and after the change: 1) The award’s fair value (or calculated value or intrinsic value,
if those measurement methods are used), 2) the award’s vesting conditions, and 3) the award’s classification as an
equity or liability instrument. ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within such annual periods, with early adoption permitted. The Company adopted this guidance on January 1, 2018.
The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Recently Issued
Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842)
(“ASU 2016-02”). ASU 2016-02 will require most lessees to recognize a majority of the company’s
leases on the balance sheet, which will increase reported assets and liabilities. 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 has not early adopted this guidance. The Company is currently developing a preliminary implementation plan. One major
element of this plan will involve reviewing historical lease agreements to quantify the impact of adoption. Depending on the results
of the Company’s review, there could be material changes to the Company’s financial position and/or results of operations.
The Company expects to complete the review of historical agreements and the overall assessment process by the end of the fourth
quarter of 2018.
In January 2017, the FASB issued
ASU No. 2017-04,
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”).
This amendment simplifies the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from
the goodwill impairment test. Step 2 measures goodwill impairment loss by comparing the implied fair value of a reporting unit’s
goodwill with the carrying amount of that goodwill. The amendment simplifies this approach by having the entity (1) perform its
annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding
that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment is effective
for public entities that are SEC filers prospectively for their annual, or any interim, goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for all entities for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. The Company is currently evaluating the impact on the Company’s financial
statements of adopting this guidance.
2.
|
Fair Value of Financial Instruments
|
Financial instruments (principally
cash and cash equivalents, accounts receivable, accounts payable and accrued expenses) are carried at cost, which approximates
fair value due to the short-term maturity of these instruments. The Company’s long-term credit facility is carried at cost,
which, due to the variable interest rate associated with the revolving credit facility, approximates its fair value. The Company
has no Level 1 or Level 2 financial instruments and there were no transfers between Level 1 or Level 2 financial instruments. Included
in Other liabilities on the unaudited Consolidated Balance Sheets at March 31, 2018 is a $35,000 contingent consideration liability
classified as Level 3 which remains unchanged from December 31, 2017. The liability is valued using a Monte Carlo simulation and
includes unobservable inputs such as expected levels of revenues and discount rates. Changes in the unobservable inputs of this
instrument could result in a significant change in the fair value measurement.
The Company’s revenue disaggregated
by product for the three-months ended March 31 is as follows
(in thousands)
:
|
|
2018
|
|
2017
|
Coordination of benefits
|
|
$
|
91,752
|
|
|
$
|
88,491
|
|
Analytical services
|
|
|
49,673
|
|
|
|
25,242
|
|
Total
|
|
$
|
141,425
|
|
|
$
|
113,733
|
|
Coordination of benefits
Coordination of benefits revenue
is derived from contracts with state governments and Medicaid managed care plans that typically span 3 to 5 years with the
option to renew. Types of services within these 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 affordable employer
insurance. Most of these contracts contain multiple tasks/deliverables, all of which are not separately identifiable as they
are highly interrelated and indistinct within the context of the contract. Therefore, each type of service represents a
single, distinct performance obligation. 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. Revenue is recognized when,
or as, the performance obligation is satisfied. Due to the timing and volume
of information provided from our customers, range of performance obligations and the differing consideration associated
with each type of contract, revenue may be recognized in varying increments. 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
The Company’s analytical services
revenue consists mostly of payment integrity services but also care management and consumer engagement services.
Payment integrity
services revenue is derived from contracts with federal and state governments, commercial health plans and other at-risk
entities that can span several years with the option to renew. Types of services within these 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 contracts contain multiple
tasks/deliverables, all of which are not separately identifiable as they are highly interrelated and indistinct within the
context of the contract. Therefore, each type of service represents a single, distinct performance obligation. 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. Revenue is recognized when, or as, the performance obligation is satisfied. Due to the timing and volume of information provided from our customers, range of performance
obligations and the differing consideration associated with each type of contract, revenue may be recognized in varying
increments. Generally, payment integrity 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.
Care management and consumer
engagement services revenue is derived from contracts with health plans and other risk-bearing entities that can span several
years with the option to renew. Types of services within these contracts could include: (a) programs designed to improve
member engagement; and (b) outreach services designed to improve clinical outcomes. Most of these contracts contain multiple
tasks/deliverables, all of which are not separately identifiable as they are highly interrelated and indistinct within the
context of the contract. Therefore, each type of service represents a single, distinct performance obligation. Revenue
derived from these services is largely based on consideration associated with prices per order/transfer and PMPM/PMPY fees
and is generally recognized monthly/yearly based on the services performed; therefore, the amount of variable consideration
does not often need to be estimated for these agreements. Additionally, certain care management and consumer engagement
services 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. However, upon adoption of ASU 2014-09 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 as 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 $1.4 million as of January 1, 2018 for the cumulative
impact of adopting ASU 2014-09. A portion of the Company’s care management and consumer engagement services are
deferred and revenue is recognized over time. Deferred revenue of this nature was approximately $5.0 million and $6.4 million
as of March 31, 2018 and December 31, 2017 and is included in Accounts payable, accrued expenses and other liabilities in the
Consolidated Balance Sheets. Generally, care management and consumer engagement 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.
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.
4.
|
Accounts Receivable and Accounts Receivable Allowance
|
The Company’s accounts receivable, net, consisted
of the following
(in thousands)
:
|
|
March
31,
2018
|
|
December
31,
2017
|
Accounts receivable
|
|
$
|
201,503
|
|
|
$
|
204,259
|
|
Allowance
|
|
|
(14,371
|
)
|
|
|
(14,799
|
)
|
Accounts receivable,
net
|
|
$
|
187,132
|
|
|
$
|
189,460
|
|
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. A summary of the activity
in the accounts receivable allowance was as follows
(in thousands)
:
|
|
March 31,
2018
|
|
December 31,
2017
|
Balance--beginning of period
|
|
$
|
14,799
|
|
|
$
|
10,772
|
|
Provision
|
|
|
5,011
|
|
|
|
20,233
|
|
Charge-offs
|
|
|
(5,439
|
)
|
|
|
(16,206
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
Balance--end of period
|
|
$
|
14,371
|
|
|
$
|
14,799
|
|
5.
|
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, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
159,290
|
|
|
$
|
(93,677
|
)
|
|
$
|
65,613
|
|
|
|
11.3
|
|
Trade names
|
|
|
16,246
|
|
|
|
(14,470
|
)
|
|
|
1,776
|
|
|
|
1
|
|
Intellectual property
|
|
|
21,700
|
|
|
|
(3,796
|
)
|
|
|
17,904
|
|
|
|
5.2
|
|
Restrictive
covenants
|
|
|
263
|
|
|
|
(195
|
)
|
|
|
68
|
|
|
|
1.3
|
|
Total
|
|
$
|
197,499
|
|
|
$
|
(112,138
|
)
|
|
$
|
85,361
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Weighted
Average
Amortization
Period
(in years)
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
159,290
|
|
|
$
|
(89,106
|
)
|
|
$
|
70,184
|
|
|
|
11.3
|
|
Trade names
|
|
|
16,246
|
|
|
|
(13,916
|
)
|
|
|
2,330
|
|
|
|
1
|
|
Intellectual property
|
|
|
21,700
|
|
|
|
(2,874
|
)
|
|
|
18,826
|
|
|
|
5.2
|
|
Restrictive
covenants
|
|
|
263
|
|
|
|
(121
|
)
|
|
|
142
|
|
|
|
1.3
|
|
Total
|
|
$
|
197,499
|
|
|
$
|
(106,017
|
)
|
|
$
|
91,482
|
|
|
|
|
|
Amortization expense of intangible assets is expected
to approximate the following
(in thousands):
Year
ending December 31,
|
|
|
2018
|
|
$
|
17,735
|
|
2019
|
|
|
9,258
|
|
2020
|
|
|
7,804
|
|
2021
|
|
|
7,477
|
|
2022
|
|
|
7,197
|
|
Thereafter
|
|
|
35,890
|
|
Total
|
|
$
|
85,361
|
|
For the three months ended March
31, 2018 and 2017 amortization expense related to intangible assets was $6.1 million and $4.3 million, respectively.
There were no changes in the carrying
amount of goodwill for the quarter ended March 31, 2018.
6.
|
Accounts Payable, Accrued Expenses and Other Liabilities
|
Accounts payable, accrued expenses and other liabilities
consisted of the following
(in thousands)
:
|
|
March
31,
2018
|
|
December
31,
2017
|
Accounts payable, trade
|
|
$
|
10,416
|
|
|
$
|
19,330
|
|
Accrued compensation and other
|
|
|
16,341
|
|
|
|
24,072
|
|
Accrued operating
expenses
|
|
|
18,688
|
|
|
|
18,498
|
|
Total accounts
payable, accrued expenses and other liabilities
|
|
$
|
45,445
|
|
|
$
|
61,900
|
|
The Company’s effective
tax rate increased to 32.0% for the three months ended March 31, 2018 from 20.4% for the three months ended March 31, 2017.
The effective tax rate for the three months ended March 31, 2018 includes discrete tax expense for interest on uncertain tax
benefits and net stock compensation shortfalls as well as a net federal tax reform benefit comprised of a federal tax rate
decrease, net of state impact, offset by tax increases for officer compensation deduction limits and loss of the Section 199
Deduction. For the three months ended March 31, 2018, the differences between the federal statutory
rate and our effective tax rate are state taxes, equity compensation impacts, unrecognized tax benefits, including interest,
officer compensation deduction limits, R&D Credits, and other permanent differences.
The effective tax rate for the three
months ended March 31, 2018 represents the Company’s best estimate using information available to the Company as of May 7,
2018. The Company anticipates U.S. regulatory agencies will issue further regulations over the next nine months which may alter
this estimate. The Company is still evaluating, among other things, the application of limitations for executive compensation related
to contracts existing prior to November 2, 2017. The Company will refine its estimates to incorporate new or better information
as it becomes available through the filing date of its 2017 U.S. income tax returns in the fourth quarter of 2018.
Included in Other Liabilities on
the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits of approximately $8.5 million and $8.2 million,
as of March 31, 2018 and December 31, 2017, 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 $0.8 million and $0.6
million as of March 31, 2018 and December 31, 2017, 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, 2018 and 2017
was $0.2 million and $0.1 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 2012. The Company is currently under audit by the Internal Revenue Service for years 2013 and 2014, and no assessments
have been received. 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. Previously recognized Texas refund claims are
currently being examined by the state.
8.
|
Estimated Liability For Appeals
|
Under the Company’s contracts
with certain commercial health plan customers and its Medicare RAC contracts with CMS (included within the Company’s analytical
services product 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 contract with CMS includes
five levels of appeals, and resolution of appeals can take substantial time to resolve. HMS records a) a return obligation liability
for findings which have been 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. Any future changes to any of the Company’s customer contracts, including modifications
to the Medicare RAC contract, 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.
The Company’s original Medicare RAC contract with CMS expired on
January 31, 2018. As a result of the 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
liability and increased revenue by $8.4 million during the first quarter of 2018. The Company continues to assess the remaining
Medicare RAC liability to determine management’s best estimate of liability for any findings which have been previously
adjudicated prior to the expiration of the contract.
The total estimated liability for
appeals balance of $22.6 million and $30.8 million as of March 31, 2018 and December 31, 2017, respectively, includes $19.4 million
and $19.3 million, respectively, of Medicare RAC claim findings which have been adjudicated in favor of providers, and $0.0 million
and $8.5 million, respectively, of the Company’s estimate of the potential amount of Medicare RAC repayments that are probable
of being adjudicated in favor of providers following a successful appeal. Additionally, the total estimated liability for appeals
balance includes $3.2 million and $3.0 million related to commercial customers claim appeals. The provision included in the estimated
liability for appeals is an offset to revenue in the Company’s Consolidated Statements of Income.
A summary of the activity in the estimated liability
for appeals related to the Company’s original Medicare RAC contract was as follows
(in thousands)
:
|
|
March
31,
2018
|
|
December
31,
2017
|
Balance--beginning of period
|
|
$
|
8,544
|
|
|
$
|
11,126
|
|
Provision
|
|
|
-
|
|
|
|
83
|
|
Appeals found in providers favor
|
|
|
(108
|
)
|
|
|
(2,665
|
)
|
Release of liability
|
|
|
(8,436
|
)
|
|
|
-
|
|
Balance--end of period
|
|
$
|
-
|
|
|
$
|
8,544
|
|
In December 2017, the Company entered
into an amendment to its Credit Agreement, which, among other things, extended the maturity of its then existing 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, 2018 and December
31, 2017, the outstanding principal balance due on the Amended Revolving Facility was $240.0 million. No principal payments were
made against the Company’s Amended Revolving Facility during the three months ended March 31, 2018.
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 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.
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, 2018, 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,
|
|
|
|
2018
|
|
|
|
2017
|
|
Interest expense
|
|
$
|
2,070
|
|
|
$
|
1,374
|
|
Commitment fees
|
|
|
239
|
|
|
|
378
|
|
As of March 31, 2018 and December
31, 2017, the unamortized balance of deferred origination fees and debt issuance costs were $2.7 million and $2.8 million, respectively.
For the three month periods ended March 31, 2018 and 2017, HMS amortized $0.1 million and $0.5 million, respectively, of interest
expense related to the Company’s deferred origination fees and debt issue costs.
Although HMS expects that operating
cash flows will continue to be a primary source of liquidity for the Company’s operating needs, the Amended Revolving Facility
may be used for general corporate purposes, including, but not limited to acquisitions, if necessary.
As part of the Company’s contractual
agreement with a customer, HMS has an outstanding irrevocable letter of credit for $5.4 million, which is issued against the Amended
Revolving Facility and expires June 22, 2018.
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,
|
|
|
|
2018
|
|
|
|
2017
|
|
Net
income
|
|
$
|
6,391
|
|
|
$
|
1,442
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
|
|
83,933
|
|
|
|
83,617
|
|
Plus: net effect
of dilutive stock options and restricted stock units
|
|
|
1,749
|
|
|
|
1,963
|
|
Weighted average common shares outstanding-diluted
|
|
|
85,682
|
|
|
|
85,580
|
|
Net income per
common share-basic
|
|
$
|
0.08
|
|
|
$
|
0.02
|
|
Net income per
common share-diluted
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
For the three months ended March
31, 2018 and 2017, 3,118,939 and 2,106,397 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, 2018 and 2017, restricted stock units representing
58,743 and 42,056 shares of common stock, respectively, were not included in the diluted earnings per share calculation because
the effect would have been anti-dilutive.
11.
|
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,
|
|
|
|
2018
|
|
|
|
2017
|
|
Cost of services-compensation
|
|
$
|
2,563
|
|
|
$
|
2,040
|
|
Selling, general
and administrative
|
|
|
6,931
|
|
|
|
3,346
|
|
Total
|
|
$
|
9,494
|
|
|
$
|
5,386
|
|
(b)
Stock Options
Stock-based compensation expense
related to stock options was approximately $4.0 million and $2.1 million for the three months ended March 31, 2018 and 2017, respectively.
Presented below is a summary of stock option activity
for the three months ended March 31, 2018 (
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, 2017
|
|
|
5,554
|
|
|
$
|
17.35
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
923
|
|
|
|
19.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(9
|
)
|
|
|
15.97
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(21
|
)
|
|
|
15.74
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(21
|
)
|
|
|
20.36
|
|
|
|
|
|
|
|
|
|
Outstanding balance at March 31,
2018
|
|
|
6,426
|
|
|
|
17.70
|
|
|
|
5.53
|
|
|
$
|
7,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at March 31, 2018
|
|
|
1,657
|
|
|
|
17.48
|
|
|
|
8.12
|
|
|
|
1,691
|
|
Exercisable at March 31, 2018
|
|
|
3,908
|
|
|
$
|
17.84
|
|
|
|
3.90
|
|
|
$
|
5,331
|
|
During the three months ended March
31, 2018 and 2017, the Company issued 9,043 and 677 shares, respectively, of the Company’s common stock upon the exercise
of outstanding stock options and received proceeds of $144,408 and $1,836, respectively. The total intrinsic value of stock options
exercised during the three months ended March 31, 2018 and 2017 was $13,849 and $10,903, respectively.
As of March 31, 2018, there was approximately
$10.5 million of total unrecognized compensation cost related to stock options outstanding, which is expected to be recognized
over a weighted average period of 2.47 years.
The weighted-average grant date fair
value per share of the stock options granted during the three months ended March 31, 2018 was $6.83. There were no stock
options granted during the three months ended March 31, 2017. 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,
|
|
|
2018
|
|
2017
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
2.66
|
%
|
|
|
-
|
|
Expected volatility
|
|
|
42.49
|
%
|
|
|
-
|
|
Expected life
(years)
|
|
|
6.00
|
|
|
|
-
|
|
The total tax benefits recognized
on stock-based compensation for the three months ended March 31, 2018 and 2017 is $2.1 million and $3.1 million, respectively.
|
(c)
|
Restricted Stock
Units
|
Stock-based compensation expense
related to restricted stock units was $5.5 million and $3.3 million for the three months ended March 31, 2018 and 2017, respectively.
Presented below is a summary of restricted stock units
activity for the three months ended March 31, 2018
(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, 2017
|
|
|
1,346
|
|
|
$
|
17.65
|
|
Granted
|
|
|
699
|
|
|
|
16.93
|
|
Vesting of restricted stock units, net of units
withheld for taxes
|
|
|
(331
|
)
|
|
|
16.85
|
|
Units withheld for taxes
|
|
|
(154
|
)
|
|
|
16.85
|
|
Forfeitures
|
|
|
(11
|
)
|
|
|
16.60
|
|
Outstanding balance at March 31,
2018
|
|
|
1,549
|
|
|
$
|
17.56
|
|
As of March 31, 2018, 1,363,295 restricted
stock units remained unvested and there was approximately $16.0 million of unrecognized compensation cost related to restricted
stock units, which is expected to be recognized over a weighted average vesting period of 1.54 years.
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 (“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. A decision on the motion has not yet been issued
by the Court. The Company continues to believe that strong grounds exist to overturn or greatly reduce the damages awarded by the
jury. In light of the Company’s belief that the jury award was unsupportable as a matter of law, the Company has not recorded
a reserve for this pending litigation. HMS will continue to monitor developments in assessing the probability and measurability
of any related loss contingency.
In February 2018, the Company received
a Civil Investigative Demand from the Texas Attorney General, purporting to investigate possible unspecified violations of the
Texas Medicaid Fraud Prevention Act. The Company has been cooperating with the government and providing documents and information
in response to the Civil Investigative Demand.
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 disclosure.