CHANGE HEALTHCARE INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
results of operations and financial condition. The MD&A is provided as a
supplement to, and should be read in conjunction with, the Company's audited
financial statements and the accompanying notes.
In addition to historical data, the discussion contains forward-looking
statements about the business, operations and financial performance based on
current expectations that involve risks, uncertainties and assumptions. Actual
results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including but not limited to those
discussed in Cautionary Notice Regarding Forward-Looking Statements and Risk
Factors above.
For a discussion of the comparison of the fiscal years ended March 31, 2021 and
2020, refer to part II, Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations in our 2021 Form 10-K, which was filed with
the SEC on May 27 2021 .
Overview
We are a leading healthcare technology company, focused on accelerating the
transformation of the healthcare system through the power of our healthcare
platform. We provide data and analytics-driven solutions to improve clinical,
financial, administrative, and patient engagement outcomes in the
Our platform and comprehensive suite of software, analytics, technology enabled services and network solutions drive improved results in the complex workflows of healthcare system payers and providers by enhancing clinical decision making, simplifying billing, collection and payment processes, and enabling a better patient experience.
Our healthcare platform supports one of the largest clinical and financial
healthcare networks in the
We were originally formed to hold an equity investment inChange Healthcare LLC (the "Joint Venture"), a joint venture between the Company and McKesson Corporation ("McKesson"). OnMarch 10, 2020 , McKesson completed a split-off of its interest in the Joint Venture ("the Merger"). As a result, we own 100% and consolidate the financial statements ofChange Healthcare LLC .
Recent Developments
Sale Transaction - UnitedHealth Group Incorporated
OnJanuary 5, 2021 , we entered into an Agreement and Plan of Merger (the "UHG Agreement") with UnitedHealth Group Incorporated ("UnitedHealth Group "), and UnitedHealth Group's wholly owned subsidiaryCambridge Merger Sub Inc. Pursuant to 52 -------------------------------------------------------------------------------- the UHG Agreement, UnitedHealth Group has agreed to acquire all of the outstanding shares of the Company's common stock for$25.75 per share in cash (the "UHG Transaction"). The consummation of the transaction remains subject to the satisfaction or, to the extent permitted by law, waiver of other customary closing conditions. The UHG Agreement contains representations, warranties, covenants, closing conditions and termination rights customary for transactions of this type. Until the earlier of the termination of the UHG Agreement and the consummation of the transaction, we have agreed to operate our business in the ordinary course and have agreed to certain other operating covenants, as set forth in the UHG Agreement. If UnitedHealth Group terminates the UHG Agreement after we materially breach the agreement, and we fail to cure such breach, and then within 12 months of such termination we enter into an alternative transaction to sell the Company, or if the Board recommends to stockholders that they approve an alternative transaction to sell the Company, and such alternative transaction is subsequently consummated, then we may be required to pay UnitedHealth Group a termination fee of$300 million at the time such alternative transaction is consummated. OnFebruary 24, 2022 , the DOJ and certain other parties commenced litigation to block the UHG Transaction, and the Company continues to support UnitedHealth Group in working toward closing the merger. OnApril 4, 2022 , the parties to the UHG Agreement entered into a waiver (the "Waiver") pursuant to which, among other things, the Company and UnitedHealth Group each waived its right to terminate the UHG Agreement due to a failure of the UHG Transaction to have been consummated by the Outside Date (as defined in the UHG Agreement) until the earlier of (i)5:00 p.m. (New York time) on the tenth business day following a final order (whether or not appealable) issued by theU.S. District Court for the District of Columbia (the "Trial Court") with respect to the complaint filed by theU.S. Department of Justice and certain other parties regarding the UHG Transaction that permanently prohibits the consummation of the UHG Transaction and (ii)11:59 p.m. (New York time) onDecember 31, 2022 (the "Waiver Period"); provided, that if (A) the Trial Court issues a final order that permits the consummation of the UHG Transaction (whether or not subject to conditions), (B) any plaintiff appeals such order and (C) the ability to consummate the UHG Transaction is enjoined or otherwise prohibited by a governmental entity pending such appeal, then the Waiver Period may be extended by either UnitedHealth Group or the Company (in each case, acting in its sole discretion) to5:00 p.m. (New York time) onMarch 31, 2023 , by providing written notice to the other party prior to11:59 p.m. (New York time) onDecember 31, 2022 . The Waiver provides that, if the Company or UnitedHealth Group terminates the UHG Agreement pursuant to Section 9.2(a) or Section 9.2(c) of the UHG Agreement at a time when any of the conditions to the closing set forth in Sections 8.1(b), 8.1(c) (in connection with a legal restraint of a governmental antitrust entity) or 8.2(c) of the UHG Agreement has not been satisfied or, to the extent permitted by applicable law, waived, UnitedHealth Group will pay to the Company an amount equal to$650.0 million . The Waiver also provides that the Company may declare and pay a one-time special dividend of up to$2.00 in cash per each issued and outstanding share of common stock of the Company, with a record date and payment date to be determined in the sole discretion of the Board of Directors of the Company (or a committee thereof). We expect to pay the dividend at or about the time of closing of the UHG Transaction. OnApril 22, 2022 , UnitedHealth Group, as seller, entered into an equity purchase agreement and related agreements relating to the sale of the Company's claims editing business ("ClaimsXten") to an affiliate of investment funds ofTPG Capital for a base purchase price in cash equal to$2.2 billion (subject to customary adjustments). Consummation of the transaction is contingent on a number of conditions, including the consummation of the UHG Transaction.
Term Loan Repayment
During fiscal year 2022, we repaid$180.0 million on our$5,100.0 million term loan facility (the "Term Loan Facility") and recognized a loss on extinguishment of$3.9 million . See Note 13, Long-Term Debt, for additional information.
Key Components of Our Results of Operations
Qualified McKesson Exit
Prior to the Merger, we accounted for our investment in the Joint Venture using
the equity method of accounting. Subsequent to the Merger, we own 100% of the
Joint Venture and consolidate its results of operations. We accounted for the
Merger as a business combination achieved in stages in accordance with
Accounting Standards Codification 805, Business Combinations ("ASC 805"). As a
result of the accounting for this transaction and the change in basis of
accounting, our consolidated results reflect fair value adjustments to various
assets and liabilities, including deferred revenue, goodwill, and intangible
assets.
Segments
We report our financial results in three reportable segments: Software and Analytics, Network Solutions and Technology-Enabled Services. •The Software and Analytics segment provides solutions for revenue cycle management, provider network management, payment accuracy, value-based payments, clinical decision support, consumer engagement, risk adjustment and quality performance, and imaging and clinical workflow.
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•The Network Solutions segment provides solutions for financial, administrative,
clinical and pharmacy transactions, electronic payments and aggregation and
analytics of clinical and financial data.
•The Technology-Enabled Services segment provides solutions for financial and
administrative management, value-based care, communication and payment, pharmacy
benefits administration and healthcare consulting.
Factors Affecting Results of Operations
The following are certain key factors that affect, will affect, or have recently affected, our results of operations:
Macroeconomic and Industry Trends
While conditions have improved since the onset of the COVID-19 pandemic, the spread of COVID-19 has driven a reduction in, or in some cases temporary elimination of, elective medical procedures and healthcare visits. A portion of our business is tied to overall volume of activity in the healthcare system, and therefore, we have been adversely impacted by this industry trend. However, this negative impact from lower healthcare utilization is now being more than offset by revenue associated with vaccines and testing. In response to COVID-19, we initiated a number of actions with our employees' health being our first priority. We also focused on serving our customers and introducing new products and services to address their previously unexpected needs related to COVID-19. While the availability of approved COVID-19 vaccines and their impact on the economy has been encouraging, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted by COVID-19. However, we continue to assess its impact on our business and are actively managing our response as the pandemic evolves. We believe the solutions we provide our customers will be as important, if not more, post-COVID-19. Additionally, the current labor market combined with heightened inflation across the globe has increased our cost of labor, primarily impacting our Technology-Enabled Services segment. We are optimizing our cost structure and investing in technology to help us offset these costs.
Acquisitions and Divestitures
Prior to entering into the UHG Agreement, we actively evaluated opportunities to
improve and expand our business through targeted acquisitions that are
consistent with our strategy. While the UHG Agreement does not prohibit us from
engaging in all types of acquisitions, we anticipate such activity to be more
limited prior to the expected closing of the transaction. On occasion, and
consistent with the UHG Agreement, we may also dispose of certain components of
our business that no longer fit within our overall strategy. Because of the
acquisition and divestiture activity as well as the shifting revenue mix of our
business due to this activity, our results of operations may not be directly
comparable among periods. See Note 4, Business Combinations, and Note 5,
Dispositions, for details of recent activity.
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Results of Operations
Years Ended
Year Ended March 31, $ %
(amounts in millions) (1) 2022 2021 Change Change
Revenue
Solutions revenue $ 3,261.2 $ 2,893.9 $ 367.3 12.7 %
Postage revenue 219.6 196.5 23.1 11.8 %
Total revenue 3,480.8 3,090.4 390.4 12.6 %
Operating expenses
Cost of operations (exclusive of
depreciation and amortization
below) $ 1,415.3 $ 1,335.1 $ 80.2 6.0 %
Research and development 277.9 227.0 50.9 22.4 %
Sales, marketing, general and
administrative 734.6 686.6 48.0 7.0 %
Customer postage 219.6 196.5 23.1 11.8 %
Depreciation and amortization 681.8 591.0 90.8 15.4 %
Accretion and changes in estimate
with related parties, net 14.8 13.2 1.6 12.4 %
Gain on sale of businesses - (59.1) 59.1 (100.0) %
Total operating expenses $ 3,344.0 $ 2,990.4 $ 353.6 11.8 %
Operating income (loss) $ 136.8 $ 100.1 $ 36.7 36.7 %
Non-operating (income) expense
Interest expense, net 234.2 245.2 (11.0) (4.5) %
Loss on extinguishment of debt 3.9 8.9 (5.0) (56.3) %
Other, net 4.7 (6.7) 11.4 NMF
Total non-operating (income) $ $ $
expense 242.8 247.5 (4.7) (1.9) %
Income (loss) before income tax
provision (benefit) (106.0) (147.4) 41.4 (28.1) %
Income tax provision (benefit) (48.6) (35.2) (13.4) 38.1 %
Net income (loss) $ (57.4) $ (112.2) $ 54.8 (48.9) %
(1)As a result of displaying amounts in millions, rounding differences may exist in the table above.
Revenue Solutions revenue Solutions revenue increased$367.3 million for the year endedMarch 31, 2022 , compared with the same period in the prior year. Factors affecting solutions revenue are described in the various segment discussions below.
Postage revenue
Postage revenue increased
Operating Expenses
Cost of operations (exclusive of depreciation and amortization)
Cost of operations increased
Research and development
Research and development expense increased
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Sales, marketing, general and administrative
Sales, marketing, general and administrative expense increased$48.0 million for the year endedMarch 31, 2022 , compared with the same period in the prior year, which is primarily attributable to legal fees related to the pending UHG Transaction and equity-based compensation.
Customer postage
Customer postage increased$23.1 million for the year endedMarch 31, 2022 , compared with the same period in the prior year. Customer postage is affected by increases in postage rates within communication and payment solutions. Because customer postage is a pass-through cost to our customers, changes in volume of customer postage generally have no effect on operating income.
Depreciation and amortization
Depreciation and amortization expense increased$90.8 million for the year endedMarch 31, 2022 , compared with the same period in the prior year. Depreciation and amortization were generally affected by routine amortization of tangible and intangible assets existing atMarch 31, 2021 , as well as the routine amortization and depreciation of additions to property, equipment, software and intangible assets since that date.
Accretion and changes in estimate with related parties, net
Accretion and changes in estimate with related parties, net increased$1.6 million for the year endedMarch 31, 2022 , compared with the same period in the prior year. Accretion is affected by changes in the expected timing or amount of cash flows associated with our tax receivable agreements, which may result from various factors, including changes in tax rates.
Gain on sale of businesses
Gain on sale of businesses decreased$59.1 million for the year endedMarch 31, 2022 , compared with the same period in the prior year, which primarily represents the gain recorded as a result of the sales of Connected Analytics inMay 2020 and Capacity Management inDecember 2020 .
Non-Operating Income and Expense
Interest expense, net
Interest expense, net decreased$11.0 million for the year endedMarch 31, 2022 , compared with the same period in the prior year. This decrease is primarily attributable to reductions in our average long-term debt outstanding and lower interest rates. While we have interest rate cap agreements in place to limit our exposure to rising interest rates, such agreements, together with our fixed rate notes, effectively fixed interest rates for approximately 50% of our total indebtedness atMarch 31, 2022 .
Loss on extinguishment of debt
Loss on extinguishment of debt decreased$5.0 million for the year endedMarch 31, 2022 , compared with the same period in the prior year. This decrease is primarily attributable to fewer term loan payments during the year endedMarch 31, 2022 . Other, net
Other, net primarily reflects mark to market adjustments on our investments.
Income Taxes
Our effective tax rate for the year endedMarch 31, 2022 was 45.9% compared to 23.8% for the year endedMarch 31, 2021 . Fluctuations in our reported income tax rates from the statutory rate are primarily due to the impacts of equity compensation, transaction costs, and benefits recognized for certain incentive tax credits resulting from research and experimental expenditures in the year endedMarch 31, 2022 , and the impacts of acquisition and divestiture activity, equity compensation, and benefits recognized for certain incentive tax credits resulting from research and experimental expenditures in the year endedMarch 31, 2021 . 56
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Solutions Revenue and Adjusted EBITDA
Year Ended March 31, $ %
(amounts in millions) (1) 2022 2021 Change Change
Solutions revenue (2)
Software and Analytics $ 1,612.9 $ 1,534.9 $ 78.0 5.1 %
Network Solutions $ 868.4 $ 717.8 $ 150.6 21.0 %
Technology-Enabled Services
$ 446.4 $ 377.0 $ 69.4 18.4 %
Technology-Enabled Services
(1)As a result of displaying amounts in millions, rounding differences may exist in the table above. (2)Includes inter-segment revenue and excludes deferred revenue purchase accounting adjustments.
Software and Analytics
Software and Analytics revenue increased$78.0 million for the year endedMarch 31, 2022 , compared with the same period in the prior year. Software and Analytics revenue was positively impacted by volume recovery from COVID-19 related volume declines in the prior period as well as organic revenue growth, which was partially offset by the Connected Analytics and Capacity Management divestitures which had a combined negative revenue impact of$26.1 million .
Software and Analytics adjusted EBITDA increased
Network Solutions
Network Solutions revenue increased$150.6 million for the year endedMarch 31, 2022 , compared with the same period in the prior year. Network Solutions revenue was positively impacted by volume recovery from COVID-19 related volume declines in the prior period, COVID-19 vaccine volume as well as new sales. Revenue was also positively impacted by the eRx and PDX acquisitions which had a combined impact of$21.6 million , reflecting a full quarter in the first quarter versus a partial first quarter in the prior year. Network Solutions adjusted EBITDA increased$69.4 million for the year endedMarch 31, 2022 , compared with the same period in the prior year. Network Solutions adjusted EBITDA was impacted by the same factors that impacted revenue, partially offset by investments to support new product launches and market expansion opportunities primarily in the core network platform and business to business payments offerings.
Technology-Enabled Services
Technology-Enabled Services revenue increased$55.2 million for the year endedMarch 31, 2022 as compared with the same period in the prior year. Technology-Enabled Services revenue was impacted by volume recovery and incremental revenue from COVID-19 testing as well as new sales, partially offset by customer attrition. Technology-Enabled Services adjusted EBITDA increased$31.7 million for the year endedMarch 31, 2022 as compared with the same period in the prior year. Technology-Enabled Services adjusted EBITDA was impacted by the same factors that impacted revenue as well as the continued favorable impact from cost structure optimization, partially offset by negative mix and increased wage inflation.
Significant Changes in Assets and Liabilities
In addition to the$180.0 million repayment on our Term Loan Facility made during fiscal year 2022, we regularly receive funds within our Network Solutions segment from certain pharmaceutical industry participants in advance of our obligation to remit these funds to participating retail pharmacies. Such funds are not restricted; however, these funds are generally paid out in satisfaction of the processing obligations within three business days of their receipt. At the time of receipt, we record a corresponding liability within accrued expenses on our consolidated balance sheets. AtMarch 31, 2022 , we reported$29.1 million of such pass-through payment obligations which were subsequently paid in the first week ofApril 2022 . AtMarch 31, 2021 , we reported$16.2 million of such pass-through payment obligations. 57
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Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash flows provided by operating activities, cash and cash equivalents on hand, and our Revolving Facility. Our principal uses of liquidity are working capital, capital expenditures, debt service, business acquisitions and other general corporate purposes. Pursuant to the UHG Agreement with UnitedHealth Group, however, there are limitations on how we conduct our business during the period from the signing of the UHG Agreement through the close of the transaction, including limitations on our ability to, among other things, engage in certain acquisitions, incur indebtedness or issue or sell new debt securities. We anticipate our cash on hand, cash generated from operations, and funds available under the Revolving Facility will be sufficient to fund our planned capital expenditures, debt service obligations, permitted business acquisitions and operating needs. Further, we may be required to make additional principal payments on the Term Loan Facility based on excess cash flows of the prior year, as defined in the credit agreement governing the Term Loan Facility. Cash and cash equivalents totaled$252.3 million and$113.1 million atMarch 31, 2022 and 2021, respectively, of which$27.7 million and$27.7 million was held outside theU.S. , respectively. As ofMarch 31, 2022 , no amounts had been drawn under the Revolving Facility and$5.5 million had been issued in letters of credit against the Revolving Facility, leaving$779.5 million available for borrowing. We also have the ability to borrow up to an additional$2,177.3 million , or such amount that the senior secured net leverage ratio does not exceed 4.9 to 1.0, whichever is greater, under the Term Loan Facility, subject to certain additional conditions including the UHG Agreement and commitments by existing or new lenders to fund any additional borrowings.
Cash Flows
Years Ended
The following table summarizes the net cash flow from operating, investing and
financing activities:
Year Ended Year Ended $ %
(amounts in millions) (1)
$ $
operating activities 696.9 586.2 110.7 18.9 %
Cash provided by (used in)
investing activities (276.9) (568.0) 291.1 (51.3) %
Cash provided by (used in)
financing activities (280.9) (318.8) 37.9 (11.9) %
Effects of exchange rate
changes on cash and cash
equivalents 0.2 3.3 (3.1) (93.9) %
Net change in cash and cash
equivalents $ 139.3 $ (297.3) $ 436.6 (146.9) %
(1)As a result of displaying amounts in millions, rounding differences may exist in the table above.
Operating Activities Cash provided by operating activities is primarily affected by operating income, including the impact of debt service payments, integration-related costs and the timing of collections and disbursements. Cash provided by operating activities includes$12.9 million related to pass-through funds for the year endedMarch 31, 2022 , and includes a$12.8 million use of cash related to pass-through funds for the year endedMarch 31, 2021 .
Investing Activities
Cash used in investing activities reflects routine capital expenditures related to purchases of property and equipment and the development of software. For the year endedMarch 31, 2021 , cash used in investing activities also reflects the eRx, PDX and Nucleus.io acquisitions partially offset by the sales of the Connected Analytics and Capacity Management businesses.
Financing Activities
Cash used in financing activities reflects payments under the Term Loan Facility, tax receivable agreements, interest rate cap agreements, deferred financing obligations, employee tax withholdings on vesting of equity awards, and tangible equity unit agreements partially offset by proceeds from the exercise of equity awards. During the year endedMarch 31, 2021 , cash used in financing activities also reflects repayment of the Revolving Facility, partially offset by the issuance of additional Senior Notes.
Capital Expenditures
We incur capital expenditures to grow our business by developing new and enhanced capabilities, to increase the effectiveness and efficiency of the organization and to reduce risks. Additionally, we incur capital expenditures for product development, disaster recovery, security enhancements and the replacement and upgrade of existing equipment at the end of its useful life.
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Debt
Senior Credit Facilities and Senior Notes
InMarch 2017 , the Joint Venture entered into a$5,100.0 Term Loan Facility and a$500.0 million Revolving Facility. Additionally, the Joint Venture issued Senior Notes totaling$1,000.0 million . InJuly 2019 , the Joint Venture amended the Revolving Facility, the primary effects of which were to increase the maximum amount that can be borrowed from$500.0 million to$785.0 million and to extend the maturity date untilJuly 2024 . OnApril 21, 2020 , we issued$325.0 million aggregate principal amount of 5.75% Senior Notes due 2025 (the "Notes"). The Senior Notes were issued as part of the same series as the Senior Notes issued inFebruary 2017 . Additionally, during fiscal year 2022, we repaid$180.0 million on our Term Loan Facility, recognizing a loss on extinguishment of$3.9 million .
Tangible Equity Units
In connection with our initial public offering inJuly 2019 , we completed an offering of 5,750,000 TEUs. Each TEU, which has a stated amount of$50.00 , is comprised of a stock purchase contract and a senior amortizing note dueJune 30, 2022 . Each senior amortizing note has an initial principal amount of$8.2378 and bears interest at 5.5% per year. Each year onMarch 30 ,June 30 ,September 30 andDecember 30 , we pay equal quarterly cash installments of$0.7500 per amortizing note with an aggregate principal amount of$47.4 million . Each installment constitutes a payment of interest and partial payment of principal. Unless settled earlier, each purchase contract will automatically settle onJune 30, 2022 . Holders of TEUs may elect to early settle prior toJune 30, 2022 , in which case each purchase contract converts to 3.2051 shares of common stock. During the years endedMarch 31, 2022 and 2021, 779,325 and 303,700 TEUs were converted, respectively. Hedges
From time to time, we execute interest rate cap agreements with various
counterparties that effectively cap our LIBOR exposure on a portion of our
existing Term Loan Facility or similar replacement debt. The following table
summarizes the terms of our interest rate cap agreements at
Receive LIBOR Pay
Effective Date Expiration Date Notional Amount Exceeding(1) Fixed Rate
1.00 % 0.18 %
March 31, 2020 March 31, 2024 $ 250,000,000 1.00 % 0.18 %
March 31, 2020 March 31, 2024 $ 250,000,000 1.00 % 0.18 %
March 31, 2020 March 31, 2024 $ 250,000,000 1.00 % 0.19 %
(1)All based on 1-month LIBOR.
The interest rate cap agreements are recorded on the balance sheet at fair value and changes in the fair value are recorded in other comprehensive income (loss). Amounts are reclassified from other comprehensive income (loss) to interest expense in the same period the interest expense on the underlying hedged debt impacts earnings. Any payments we receive to the extent LIBOR exceeds the specified cap rate are also reclassified from other comprehensive income (loss) to interest expense in the period received.
LIBOR Transition
OnMarch 5, 2021 , theFCA , which regulates LIBOR, announced that all LIBOR tenors will cease to be published or will no longer be representative afterJune 30, 2023 . The FCA Announcement coincides with theMarch 5, 2021 announcement of the IBA, indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors on a representative basis afterJune 30, 2023 , the IBA would have to cease publication of such LIBOR tenors immediately after the last publication onJune 30, 2023 . The United States Federal Reserve has also advised banks to cease entering into new contracts that use USD LIBOR as a reference rate. TheFederal Reserve , in conjunction with the Alternative Reference Rate Committee, a committee convened by theFederal Reserve that includes major market participants, has identified SOFR, a new index calculated by short-term repurchase agreements, backed byTreasury securities, as its preferred alternative rate for LIBOR. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities. Although SOFR is the ARRC's recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us. We have material contracts that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks.
Effect of Certain Debt Covenants
A breach of any of the covenants under the agreements governing existing debt
could limit our ability to borrow funds under the Term Loan Facility and could
result in a default under the Term Loan Facility. Upon the occurrence of an
event of default under
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the Term Loan Facility, the lenders could elect to declare all amounts then
outstanding to be immediately due and payable, and the lenders could terminate
all commitments to extend further credit. If we were unable to repay the amounts
declared due, the lenders could proceed against any collateral granted to them
to secure that indebtedness.
With certain exceptions, the Term Loan Facility obligations are secured by a
first-priority security interest in substantially all of our assets. The Term
Loan Facility contains various restrictions and nonfinancial covenants, along
with a senior secured net leverage ratio test. The nonfinancial covenants
include restrictions on dividends, investments, dispositions, future borrowings
and other specified payments, as well as additional reporting and disclosure
requirements. The senior secured net leverage test must be met as a condition to
incur additional indebtedness, but otherwise is applicable only to the extent
that amounts drawn exceed 35% of the Revolving Facility at the end of any fiscal
quarter. As of March 31, 2022 , we were in compliance with all debt covenants.
Our ability to meet liquidity needs depends on our subsidiaries' earnings and cash flows, the terms of our indebtedness along with our subsidiaries' indebtedness, and other contractual restrictions.
Off-Balance Sheet Arrangements
As of
Contractual Obligations
The following table presents a summary of contractual obligations for future
fiscal years as of
Payments by Period
(amounts in millions)(1) Total 2023 2024 - 2025 2026 - 2027 Thereafter
Senior Credit Facilities
and other long-term
obligations(2) $ 3,324.5 $ 9.5 $ 3,315.0 $ - $ -
Senior Notes(2) 1,325.3 - 1,325.3 - -
Expected interest(3) 509.9 218.2 291.7 - -
Related Party Tax
Receivable Agreements(4) 169.9 13.1 58.6 57.2 41.0
McKesson Tax Receivable
Agreement(4) 161.5 25.0 53.3 48.2 35.0
Other Tax Receivable
Agreements(4) 107.7 11.7 29.6 29.2 37.2
Operating lease
obligations(5) 87.2 26.0 32.8 16.8 11.6
Finance lease
obligations(5) 1.4 0.5 0.9 - -
Purchase obligations(6) 1,047.5 220.2 418.4 278.8 130.1
Total contractual
obligations(7) $ 6,734.9 $ 524.2 $ 5,525.6 $ 430.2 $ 254.9 (1)As a result of displaying amounts in millions, rounding differences may exist in the table above.
(2)Represents the principal amounts of indebtedness, which are shown without reduction for any original issue discount. See Note 13, Long-Term Debt.
(3)Consists of interest payable under the Senior Credit Facilities and Senior Notes. Interest related to the Senior Credit Facilities is based on interest rates in effect as ofMarch 31, 2022 and assumes that payments are made in quarterly installments of 1% of the original principal amount until their maturity. Because the interest rates under the Senior Credit Facilities are variable, actual payments may differ.
(4)Represents expected amounts due; however, the timing and/or amount of aggregate payments may vary based on a number of factors. See Note 20, Tax Receivable Agreements.
(5)See Note 7, Leases. (6)See Note 23, Commitments.
(7)We have excluded net deferred tax liabilities of
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if: •it requires assumptions to be made that were uncertain at the time the estimate was made; and •changes in the estimate or different estimates that could have been made could have a material impact on our results of operations and financial condition.
See Note 2, Significant Accounting Policies, for additional information about other critical accounting estimates.
Business Combinations
In a business combination, we recognize the consideration transferred (i.e.,
purchase price) and the acquired business' identifiable assets, liabilities and
noncontrolling interests at their acquisition date fair value. The excess of the
consideration
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transferred over the fair value of the identifiable assets, liabilities and noncontrolling interest, if any, is recorded as goodwill.
The income, cost and/or market approach is used in determining the estimated fair value of the consideration transferred, assets, liabilities and noncontrolling interests. The method used is determined based on the nature of the asset or liability and the level of inputs available to the Company (i.e., quoted prices in an active market, other observable inputs or unobservable inputs). With respect to assets, liabilities and noncontrolling interest, the determination of fair value requires us to make subjective judgments regarding the projections of future operating performance, the appropriate discount rate, long-term growth rates, etc. These judgments then impact the amount of the goodwill that is recorded and the amount of depreciation and amortization expense to be recognized in future periods related to assets acquired. With respect to the consideration transferred, certain acquisitions may include contingent consideration, the fair value of which is generally required to be measured each quarter until resolution of the contingency. Determining the fair value of specified financial performance measures requires us to make subjective judgments as to the probability and timing of the attainment of these measures.
Goodwill and intangible assets from acquisitions are accounted for using the acquisition method of accounting. Intangible assets with definite lives are amortized over their useful lives either on a straight-line basis or using an accelerated method, depending on the pattern we expect the economic benefits of the assets to be consumed. We assess goodwill for impairment annually (as ofJanuary 1 of each year) or whenever significant indicators of impairment are present. Using a qualitative analysis, we first assess whether it is more likely than not that goodwill is impaired. To the extent we cannot reach a conclusion using only a qualitative analysis, we compare the fair value of each reporting unit to its associated carrying value. We will recognize an impairment charge for the amount, if any, by which the carrying amount of the reporting unit exceeds its fair value. When necessary, we estimate the fair value of our reporting units using a methodology that considers both the income and market approaches. Each approach requires the use of certain assumptions. The income approach requires us to exercise judgment in making assumptions regarding the reporting unit's future income stream, a discount rate and a constant growth rate after the initial forecast period utilized. These assumptions are subject to change based on business and economic conditions and could materially affect the indicated values of our reporting units. The market approach requires us to exercise judgment in our selection of guideline companies, as well in selecting the most relevant transaction multiple. Guideline companies selected are comparable to us in terms of product or service offerings, markets and/or customers, among other characteristics. With respect to intangible assets (excluding goodwill), we review the assets for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. We recognize an impairment loss only if the carrying amount is not recoverable through undiscounted cash flows and we measure the impairment loss based on the difference between the carrying amount and fair value. Revenue Recognition
ASC 606 requires a significant amount of judgement in determining the amount and timing of revenue recognition. Refer to Note 3, Revenue Recognition, for additional information on significant estimates.
Income Taxes
We record deferred income taxes for the tax effect of differences between book
and tax bases of our assets and liabilities and for differences related to the
timing of recognition of income and expenses.
Deferred income taxes reflect the available net operating losses and the net tax
effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Realization of the future tax benefits related to deferred tax assets
is dependent on many factors, including our past earnings history, expected
future earnings, the character and jurisdiction of such earnings, reversing
taxable temporary differences, unsettled circumstances that, if unfavorably
resolved would adversely affect utilization of deferred tax assets, carryback
and carryforward periods and tax strategies that could potentially enhance the
likelihood of realization of a deferred tax asset.
We recognize tax benefits for uncertain tax positions when we conclude the tax
position, based solely on its technical merits, is more likely than not to be
sustained upon examination. The benefit, if any, is measured as the largest
amount of benefit, determined on a cumulative probability basis that is more
likely than not to be realized upon ultimate settlement. Tax positions failing
to qualify for initial recognition are recognized in the first subsequent period
that they meet the more likely than not standard, are resolved through
negotiation or litigation with the taxing authority or on expiration of the
statute of limitations.
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Tax Receivable Agreement Obligations
Through the Merger, we assumed obligations related to certain tax receivable agreements entered into by the Joint Venture. Depending on whether the respective tax receivable agreements were assumed as part of the Merger or became effective as a result of the Merger, the liabilities related to the tax receivable agreements are subject to differing accounting models and may vary based on a number of factors including, but not limited to, the forecast of future operating performance, actual utilization of attributes, and income tax rates.
Related Party Balances and Transactions
See Note 25, Related Party Transactions, for information regarding our related party balances and transactions.
Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, for information about recent accounting pronouncements and the potential impact to our consolidated financial statements.
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