HMS HOLDINGS CORP.
The following Management's Discussion and Analysis is intended to help the
reader understand the results of operations and financial condition of HMS. You
should read this discussion and analysis in conjunction with the other sections
of this Form 10-Q, including the Cautionary Note Regarding Forward-Looking
Statements appearing prior to Part I, the information in Part II, Item 1A and
the unaudited Consolidated Financial Statements and Notes thereto included in
Part I, Item 1. The historical results set forth in Part I of this Form 10-Q
should not be taken as necessarily indicative of our future operations or
financial results.
Business Overview
At HMS, our mission is to make healthcare work better for everyone. We deliver
healthcare technology, analytics and engagement solutions that advance the
healthcare system by helping healthcare organizations reduce costs, improve
health outcomes and enhance consumer experiences. Our comprehensive solutions
include a broad range of payment accuracy and population health management
services that offer value throughout the healthcare continuum. Through our
solutions, we save billions of dollars annually for our customers while helping
consumers lead healthier lives. HMS is managed and operates as one business
segment with a single management team that reports to the Chief Executive
Officer.
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We serve state Medicaid programs, commercial health plans, federal government
health agencies, government and private employers, CHIPs and other healthcare
payers. We also serve as a subcontractor for certain business outsourcing and
technology firms. As of March 31, 2020 , our customer base included the
following:
?over 40 state Medicaid programs;
?approximately 325 health plans, including 22 of the top 25 health plans
nationally (based on membership) in support of their multiple lines of business,
including Medicaid managed care, Medicare Advantage and group and individual
health;
?over 150 private employers;
?CMS, VA and the Centers for Disease Control and Prevention ; and
?PBMs, third-party administrators and other risk-bearing entities, including
independent practice associations, hospital systems, ACOs and specialty care
organizations.
COVID-19 Impact
On March 11, 2020 , the World Health Organization declared the outbreak of
COVID-19 as a pandemic, which has spread globally and throughout the United
States . We have taken a number of precautionary and preemptive steps to protect
the safety and well-being of our
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employees while ensuring continuity of service to our clients, including,
transitioning all of our employees to working remotely, suspending non-essential
employee travel, canceling participation in industry events and in-person group
meetings, promoting social distancing and enhanced cleaning and sanitization
efforts across office locations, and implementing protocols to quarantine
employees who may have been exposed to COVID-19, or show relevant symptoms. We
also commenced preparedness plans at our facilities to maintain continuity of
operations, which provide for flexible work arrangements, and we have moved to a
remote working environment without any significant disruptions to our business
or control processes. Our management team is actively monitoring the situation
and in constant communication with our workforce as well as with our customers
and vendors. While COVID-19 has not had a material adverse effect on our
operations to date, the extent of the impact in the future, if any, will depend
on future developments, which are highly uncertain and cannot be predicted. We
are closely monitoring the impact of COVID-19 on all aspects of our business,
and may take further actions as may be required by federal, state or local
authorities, or that we determine are in the best interests of our employees,
customers and partners. As the conditions surrounding COVID-19 continue to
evolve rapidly, we will continue to actively manage our response in
collaboration with customers, government officials and stakeholders, and assess
any potential impacts to our financial position and operating results, as well
as adverse developments in our business. For further information regarding the
effect of COVID-19 on the Company, please see Part II, Item 1A. Risk Factors to
this Form 10-Q, which is incorporated herein by reference.
Critical Accounting Policies and Estimates
Since the date of our 2019 Form 10-K, there have been no material changes to our
critical accounting policies. Information regarding our critical accounting
policies can be found in our 2019 Form 10-K under "Critical Accounting Policies
and Estimates" in Part II, Item 7 and "Business and Summary of Significant
Accounting Policies" in Note 1 to the Consolidated Financial Statements under
Part II, Item 8.
As of the date of the unaudited Consolidated Financial Statements presented in
this Form 10-Q, there have been no material financial impacts on our operations
resulting from the COVID-19 pandemic. However, the future effects of this
pandemic on economic and market conditions is uncertain and increases the
subjectivity that will be involved in evaluating our estimates and assumptions
underlying our critical accounting policies. Any events and changes in
circumstances arising after March 31, 2020 , including those resulting from the
impacts of COVID-19, will be reflected in management's estimates for future
periods.
RESULTS
As of and for the three months ended March 31, 2020 and March 31, 2019
? Revenue of $171.4 million increased $23.4 million , or 15.9% over the same
quarter in 2019; and
? Operating income of $18.5 million decreased by $1.2 million as compared to
operating income of $19.7 million in the same quarter of the prior year.
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Comparison of Three Months Ended
Three Months Ended
dollars in millions March 31, $ Change % Change
2020 2019 2020 vs 2019
Revenue $ 171.4 $ 148.0 $ 23.4 15.9 %
Cost of services:
Compensation 67.5 57.5 10.0 17.4
Direct project and other operating
expenses 24.9 20.2 4.7 23.3
Information technology 14.9 13.1 1.8 13.7
Occupancy 4.3 4.1 0.2 4.9
Amortization of acquisition related
software and intangible assets 5.5 4.1 1.4 34.1
Total cost of services 117.1 99.0 18.1 18.3
Selling, general and administrative
expenses 35.8 29.3 6.5 22.2
Total operating expenses 152.9 128.3 24.6 19.2
Operating income 18.5 19.7 (1.2) (6.1)
Interest expense (2.3) (2.8) 0.5 (17.9)
Interest income 0.2 1.0 (0.8) (80.0)
Other income 0.7 - 0.7 100.0
Income before income taxes 17.1 17.9 (0.8) 4.5
Income taxes 4.4 (1.7) 6.1 (358.8)
Net income $ 12.7 $ 19.6 $ (6.9) (35.2) %
Revenue (in millions)
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Three Months Ended March 31 - 2020 vs. 2019
During the three months ended March 31, 2020 , revenue was $171.4 million , an
increase of $23.4 million or 15.9% compared to revenue of $148.0 million for the
prior year quarter.
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?By solution:
•Coordination of benefits revenue increased $12.2 million or 11.5%, largely
driven by Accent related revenue of $10.9 million .
•Payment integrity revenue increased $11.6 million or 41.8% primarily due to an
increased volume of claims activity.
?By market:
•Commercial health plan market revenue increased $12.5 million or 16.4%, which
was primarily attributable to Accent related revenue of $10.9 million .
•Federal government market revenue increased $4.0 million or 40.6% compared to
the prior year quarter primarily due to increased federal related claims
processed.
•State government market revenue increased by $6.9 million or 11.2%, which was
attributable to expanded scopes and yield improvements.
Total Cost of Services (in millions)
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Three Months Ended March 31 - 2020 vs. 2019
During the three months ended March 31, 2020 , total cost of services was $117.1
million , an increase of $18.1 million or 18.3% compared to $99.0 million for the
prior year quarter.
?Compensation expense increased by $10.0 million primarily due to payroll
related costs as a result of the VitreosHealth and Accent acquisitions in the
third and fourth quarters of 2019.
?Direct project and other operating costs increased by $4.7 million due to
increased labor and professional fees utilized to support acquisition related
activities and other initiatives.
?Information technology expense increased by $1.8 million due to an increase in
the amortization of capitalized software, and other computer and equipment
related costs.
?Amortization of acquisition related software and intangible assets increased by
$1.4 million due to an increase in intangible assets following the acquisition
of VitreosHealth and Accent in the third and fourth quarters of 2019.
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--------------------------------------------------------------------------------Selling, General and Administrative expenses (in millions)
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Three Months Ended March 31 - 2020 vs. 2019
During the three months ended March 31, 2020 , SG&A expense was $35.8 million , an
increase of $6.5 million or 22.2% compared to $29.3 million for the prior year
quarter.
?Compensation costs increased $4.1 million compared to the prior year quarter
due to an increase in payroll related costs and stock compensation.
?Professional and consulting fees increased $1.3 million compared to the prior
year quarter, primarily related to the acquisition of Accent which occurred in
the fourth quarter of 2019.
Income Taxes
Three Months Ended March 31 - 2020 vs. 2019
The Company's effective tax rate increased to 25.7% for the three months ended
March 31, 2020 compared to (9.3)% for the three months ended March 31, 2019 . The
effective tax rate for the three months ended March 31, 2020 included an
immaterial amount of discrete tax benefits related to net equity compensation
deductions. Excluding the above mentioned immaterial discrete tax items, our
normalized effective tax rate would approximate 25.7% for the three months ended
March 31, 2020 . For the three months ended March 31, 2020 , the differences
between the federal statutory rate and our effective tax rate are tax 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.
On March 27, 2020 , the CARES Act was enacted in response to the COVID-19
pandemic, which provides numerous tax provisions and other stimulus measures.
Due to the recent enactment of this legislation, the Company continues to assess
the potential impacts the CARES Act may have on its financial position and
results of operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Liquidity and Capital Resources
The following tables should be read in conjunction with the unaudited
Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this
Form 10-Q.
Our cash and cash equivalents, working capital and available borrowings under
our revolving credit facility (based upon the borrowing base and financial
covenants in our Credit Agreement) were as follows (in thousands):
March 31, 2020 December 31, 2019
Cash and cash equivalents $ 148,033 $ 139,268
Working capital $ 321,105 $ 296,093
Available borrowings under credit facility
The following is a summary of our cash flows (in thousands):
Three Months Ended
March 31,
2020 2019
Net cash provided by operating activities $ 17,094 $ 28,522
Net cash used in investing activities (5,017)
(3,990)
Net cash (used in)/provided by financing activities (3,312)
16,379
Net increase in cash and cash equivalents$ 8,765 $
40,911
Our principal sources of cash have been our cash flow from operations and our$500 million five-year revolving credit facility. Other sources of cash include proceeds from the exercise of stock options and tax benefits associated with stock option exercises. The primary uses of cash include, but are not limited to, acquisitions, strategic investments, capital investments, compensation expenses, data processing, direct project and other operating costs, SG&A expenses and other expenses. We believe that expected cash flows from operations, available cash and cash equivalents, and funds available under our revolving credit facility will be sufficient to meet our liquidity requirements for the following year, which include: ? the working capital requirements of our operations; ? investments in our business; and ? business development activities. Any projections of future earnings and cash flows are subject to substantial uncertainty, particularly in light of the rapidly changing market and economic conditions created by the COVID-19 pandemic. We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to meet working capital requirements, fund acquisitions or investments or repay our indebtedness under the Credit Agreement. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions as well as our financial condition and results of operations at the time we seek additional financing. While we did not incur significant disruptions during the three months endedMarch 31, 2020 from COVID-19, we will continue to assess our liquidity needs and anticipated capital requirements as we move forward. 32
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Cash Flows from Operating Activities Net cash provided by operating activities for the three months endedMarch 31, 2020 was$17.1 million , a$11.4 million decrease compared to net cash provided by operating activities of$28.5 million for the three months endedMarch 31, 2019 . The decrease was primarily related to a$6.9 million decrease in net income and a$7.9 million decrease resulting from changes in operating assets and liabilities reconciling items. Cash Flows from Investing Activities Net cash used in investing activities for the three months endedMarch 31, 2020 was$5.0 million , a$1.0 million increase compared to net cash used in investing activities of$4.0 million for the three months endedMarch 31, 2019 . The increase was primarily attributable to purchases of property and equipment and investment in capitalized software. Cash Flows from Financing Activities Net cash used in financing activities for the three months endedMarch 31, 2020 was$3.3 million , a$19.7 million decrease compared to net cash provided by financing activities of$16.4 million for the three months endedMarch 31, 2019 . The decrease was primarily related to a$19.6 million decrease in proceeds from the exercise of stock options, net of payments of tax withholdings. Contractual Obligations There have been no material changes outside the ordinary course of business in our contractual obligations as presented in our 2019 Form 10-K. Recently Issued Accounting Pronouncements The information set forth under the caption "Summary of Significant Accounting Policies" in Note 1 to the unaudited Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.
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