R1 RCM INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with our consolidated
financial statements and the related notes and other financial information
included elsewhere in this Annual Report on Form 10-K. Some of the information
contained in this discussion and analysis or set forth elsewhere in this Annual
Report on Form 10-K, including information with respect to our plans and
strategy for our business and related financing, includes forward-looking
statements that involve risks and uncertainties. Please review "Risk Factors" of
this Annual Report on Form 10-K for a discussion of important factors that could
cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis.
Overview
We are a leading provider of technology-driven solutions that transform the
patient experience and financial performance of healthcare providers. We help
healthcare providers generate sustainable improvements in their operating
margins and cash flows while also enhancing patient, physician, and staff
satisfaction for our customers.
While we cannot control the changes in the regulatory environment imposed on our
customers, we believe that our role becomes increasingly more important to our
customers as macroeconomic, regulatory, and healthcare industry conditions
continue to impose financial pressure on healthcare providers to manage their
operations effectively and efficiently.
Our primary service offering consists of end-to-end RCM, which we deploy through
an operating partner relationship or a co-managed relationship. Under an
operating partner relationship, we provide comprehensive revenue cycle
infrastructure to providers, including all revenue cycle personnel, technology,
and process workflow. Under a co-managed relationship, we leverage our
customers' existing RCM staff and processes, and supplement them with our
infused management, subject matter specialists, proprietary technology, and
other resources. For the year ended December 31, 2020 , substantially all of our
net operating and incentive fees from end-to-end RCM were generated under the
operating partner model.
We also offer modular services, allowing customers to engage us for only
specific components of our end-to-end RCM service offering, such as PAS, PM, and
RIS. Our PAS offering assists healthcare organizations in complying with payer
requirements regarding whether to classify a hospital visit as an in-patient or
an out-patient observation case for billing purposes. Our PM services offer
administrative and operational support to allow healthcare providers to focus on
delivering high quality patient care and outsource non-core functions to us. Our
RIS offering includes charge capture, CDM maintenance, and pricing services that
help providers ensure they are capturing the maximum net compliant revenue for
services delivered.
We operate our business as a single segment configured with our significant
operations and offerings organized around the business of providing end-to-end
RCM services to healthcare providers.
Summary of Operations
In 2020, we achieved notable progress against our strategic initiatives, and
delivered significant improvements on our key performance metrics. Our key
accomplishments in 2020 include:
•We navigated the complex environment presented by the COVID-19 pandemic by
prioritizing the safety of our workforce and providing uninterrupted service to
our customers, while balancing near-term dynamics with our long-term growth
needs. Our financial results were below the goals we established at the start of
2020, but strong operational execution by the entire team mitigated the impact
of the pandemic on our results and we delivered revenue growth of 7.1% and
adjusted EBITDA growth of 42.9% compared to 2019.
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•We added $5.0 billion in net patient revenue under management on an end-to-end
basis, exceeding our $3 billion target. Penn State Health and LifePoint Health
were two notable new customers, extending our presence in the academic and
for-profit health system markets.
•We acquired SCI, a leading provider of digital patient engagement solutions. By
integrating SCI's capabilities into R1's PX platform, we can deliver enhanced
value for our customers by enabling them to create digital front door strategies
for their patients, improve operating efficiency, and increase capacity
utilization.
•We acquired RevWorks and announced a partnership with Cerner Corporation. The acquisition of RevWorks expands our customer footprint in the physician and hospital space. The ongoing partnership improves technology integration and presents a commercial channel as we grow the business.
•We divested the EMS business, which was non-core to our portfolio. The divestiture allows us to maximize investments to drive innovation and growth of our core revenue cycle management platform.
•We made significant progress with our digitization effort. We deployed the automation routines we started developing in 2019 and are on track to automate approximately 30 million manual tasks annually, Our PX platform is now deployed at over 200 locations, from approximately 100 locations at the start of 2020. Despite lower volumes resulting from the pandemic, our digitization effort delivered results at the high end of the$15-20 million expectation entering 2020. Net Services Revenue Our primary source of revenue is our end-to-end RCM services fees. We also generate revenue through modular RCM services, where customers will engage us for only specific components of our end-to-end RCM service offering on a fixed-fee or transactional basis. Cost of Services Our cost of services includes: •Personnel costs and technology expenses. We incur costs related to our management and staff employees who are devoted to customer operations. These expenses consist primarily of the wages, bonuses, benefits, share-based compensation, travel and other costs associated with our employees who are assigned to specific customer sites related to our customers' revenue cycle operations. The employees assigned to customer sites typically have significant experience in revenue cycle operations, care coordination, technology, quality control, or other management disciplines. Included in these expenses is an allocation of the costs associated with maintaining, improving, and deploying our integrated proprietary technology suite. •Global business services center costs. We incur expenses related to salaries and benefits of employees in our global business services centers, as well as non-payroll costs associated with operating our global business services centers. •Other expenses. We incur expenses related to our employees who manage PAS and other services. These expenses consist primarily of wages, bonuses, benefits, share-based compensation, and other costs. 43 -------------------------------------------------------------------------------- Estimates of Cost of Customers' Revenue Cycle Operations Cost of customers' revenue cycle operations consist of invoiced costs from customers and estimated costs not yet invoiced. These costs consist of payroll and third-party non-payroll costs. Customers' payroll costs are reasonably estimable; however, we are at times dependent upon information generated from our customers' records to determine the amount of third-party non-payroll costs. We estimate the amount of non-payroll costs incurred but not invoiced in order to properly calculate net operating fees at the end of each reporting period. Such estimated costs are based on contractually allowable expenses, historical reimbursed costs, and estimated lag in the timing of receipt of information for third-party non-payroll costs. The timing difference includes the lag between the services rendered by third-party vendors and their billings to our customers. The liabilities for such costs are included in accrued service costs and are part of the customer liabilities balance in the consolidated balance sheet. These estimates are based on the best available information and are subject to future adjustments based on additional information received from our customers. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of expenses for executives, sales, corporate IT, legal, regulatory compliance, finance, and human resources personnel, professional service fees related to external legal, tax, audit and advisory services, insurance premiums, facility charges, and other corporate expenses. Other Expenses Other expenses include expenses related to evaluating and pursuing acquisition opportunities and integrating completed acquisitions as part of our inorganic growth strategy, reorganization-related expenses, and expenses incurred related to the COVID-19 pandemic. Reorganization expenses consist primarily of severance payments and employee benefits. As part of the transition of certain customers' personnel to us, we have agreed to reimburse those customers for severance and retention expenses related to certain employees who will not be transitioned to us. Additionally, in 2020 as a part of our evaluation of our footprint, we've transitioned certain employees to a work from home environment and continue to evaluate our future state workplace environment. In conjunction with this evaluation, we exited numerous leased facilities which generated facility exit costs including costs of writing off assets related to those leases. Interest Expense Interest expense reflects interest on debt arrangements, and the amortization of certain debt discounts and costs. Income Taxes Income tax provision (benefit) consists of federal and state income taxes inthe United States and other foreign jurisdictions. Application of Critical Accounting Policies and Use of Estimates Our consolidated financial statements reflect the assets, liabilities and results of operations ofR1 RCM Inc. and our wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. Our consolidated financial statements have been prepared in accordance with GAAP. 44 -------------------------------------------------------------------------------- The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base estimates on historical experience and on assumptions that we believe to be reasonable given our operating environment. Estimates are based on our best knowledge of current events and the actions we may undertake in the future. Although we believe all adjustments considered necessary for fair presentation have been included, our actual results may differ materially from our estimates. We believe that the accounting policies described below involve our more significant judgments, assumptions, and estimates, and therefore, could have the greatest potential impact on our consolidated financial statements. In addition, we believe that a discussion of these policies is necessary to understand and evaluate the consolidated financial statements contained in this Annual Report on Form 10-K. For further information on our critical and other significant accounting policies, see Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in this Annual Report on Form 10-K. Revenue Recognition The Company's primary source of revenue is its end-to-end RCM services fees. The Company also generates revenue through modular RCM services, where customers will engage the Company for only specific components of its end-to-end RCM service offering on a fixed-fee or transactional basis.
Revenue Cycle Management
RCM services fees are primarily variable and performance related, and are generally viewed as the consideration earned in satisfaction of a single performance obligation which is considered a series. Variable consideration for end-to-end RCM services are allocated to and recognized over the related time period as the amounts reflect the consideration the Company is entitled to and relate specifically to the Company's efforts to satisfy its performance obligation. Fees for physician group RCM services include variable consideration contingent on customer collections, and inputs to the Company's revenue estimates typically include historical service fees and historical customer collection amounts. RCM services fees consist of net operating fees, incentive fees, and other fees. Net Operating Fees
The Company's net operating fees consist of:
i) gross base fees invoiced to customers; less
ii) corresponding costs of customers' revenue cycle operations which the Company pays pursuant to its RCM agreements, including salaries and benefits for the customers' RCM personnel, and related third-party vendor costs; plus
iii) fees accrued for physician group RCM services.
The Company recognizes revenue related to net operating fees ratably as the
performance obligation for the RCM services is satisfied. Base fees are
typically billed in advance of the quarter and paid in three monthly payments as
the entity performs and the customer simultaneously receives and consumes the
benefits of the services provided. The costs of customers' revenue cycle
operations, which the Company pays pursuant to its RCM agreements, are accrued
based on the service period. Net operating fees for physician groups are
invoiced on a monthly basis and payment terms are typically 30 days.
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--------------------------------------------------------------------------------Incentive Fees
Incentive fees are structured to reflect quarterly or annual performance and are evaluated on a contract-by-contract basis. The Company estimates incentive fee revenue based on contractually agreed-upon financial or operating metrics. The Company recognizes revenue related to incentive fees ratably as the performance obligation for RCM services is satisfied, to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved. Incentive fees are typically billed and paid on a quarterly basis. Other The Company recognizes revenue related to other fees as RCM services are provided. These services consist of an obligation to provide a specific component of its end-to-end RCM service offering. Fees are typically variable in nature with the entire amount being included in revenue in the month of service. The customer simultaneously receives and consumes the benefits provided by the services and the fees are typically billed on a monthly basis and payment terms are typically 30 days. To the extent that certain service fees are fixed and not subject to refund, adjustment, or concession, these fees are generally recognized into revenue ratably as the performance obligation is satisfied. The Company recognizes revenue from PAS in the period in which the service is performed. The Company's PAS arrangements typically consist of an obligation to provide specific services to customers on an if and when needed basis. These services are provided under a fixed price per unit arrangement. Fees for the Company's PAS arrangements are typically billed on a monthly basis with 30 to 60 day payment terms. PM services arrangements include a single performance obligation, constituting a series, to manage and administer various non-clinical aspects of a customer's physician practice, which may be comprised of numerous physical office locations. Consideration for PM services is typically variable in nature and allocated to and recognized over the related time period as the amounts reflect the consideration the Company is entitled to and relate specifically to the Company's effort to satisfy its performance obligation. PM services fees are invoiced on a monthly basis and payment terms are typically 30 days.
Bundled Services
Modular RCM services may be sold separately or bundled in a contract. End-to-end
RCM services are typically sold separately but may be bundled with PAS. PAS are
commonly sold separately. The typical length of an end-to-end RCM contract
is two to ten years (subject to the parties' respective termination rights) but
varies from customer to customer. Modular RCM agreements generally vary in
length between one and three years.
For bundled arrangements, the Company accounts for individual services as a
separate performance obligation if a service is separately identifiable from
other items in the bundled arrangement and if a customer can benefit from it on
its own or with other resources that are readily available to the customer. The
transaction price is allocated between separate services in a bundle based on
their relative standalone selling prices. The standalone selling prices are
determined based on the prices at which the Company separately sells its modular
services. PAS are provided at a customer's election but do not represent
material rights as the services are priced at standalone selling price
throughout the life of the agreement.
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Cost of Services
Costs associated with generating the Company's net services revenue, including
the cost of operating its global business services centers, are expensed as
incurred. Cost of services consist of (i) on-site personnel and technology
costs, (ii) global business services costs, and (iii) other costs. On-site
personnel and technology costs consist primarily of wages, bonuses, benefits,
share-based compensation, travel, and other costs associated with our employees
who are assigned to specific customer sites related to our customers' revenue
cycle operations. The other significant portion of such expenses is an
allocation of the costs associated with maintaining, improving, and deploying
our integrated proprietary technology suite. Global business services costs
relate to the Company's global services centers in the U.S. and internationally
that perform patient scheduling and pre-registration, medical transcription,
cash posting, reconciliation of payments to billing records, patient follow-up,
and Medicaid eligibility determination for our customers. The Company incurs
expenses related to salaries and benefits for employees in its global business
services centers and non-payroll costs associated with operating its global
business services centers. Other expenses consist of costs related to managing
other services. These expenses consist primarily of wages, bonuses, benefits,
share-based compensation, and facilities costs.
Income Taxes
We account for income taxes under the asset and liability method. We record
deferred tax assets and liabilities for future income tax consequences that are
attributable to differences between the carrying amount of assets and
liabilities for financial statement purposes and the income tax bases of such
assets and liabilities. We base the measurement of deferred tax assets and
liabilities on enacted tax rates that we expect will apply to taxable income in
the year we expect to settle or recover those temporary differences. We
recognize the effect on deferred income tax assets and liabilities of any change
in income tax rates in the period that includes the enactment date.
The carrying values of deferred income tax assets and liabilities reflect the
application of our income tax accounting policies, and are based on management's
assumptions and estimates about future operating results and levels of taxable
income, and judgments regarding the interpretation of the provisions of current
accounting principles. We provide a valuation allowance for deferred tax assets
if, based upon the weight of all available evidence, both positive and negative,
it is more likely than not that some or all of the deferred tax assets will not
be realized. We have established a valuation allowance with respect to certain
state income net operating loss carryforwards and on certain tax credits
acquired from the SCI Acquisition.
The estimated effective tax rate for the year is applied to our quarterly
operating results. In the event that there is a significant unusual or discrete
item recognized, or expected to be recognized, in our quarterly operating
results, the tax attributable to that item is calculated separately and recorded
at the same time as the unusual or discrete item, such as the resolution of
prior-year tax matters.
We recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the position will be sustained on examination by taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the consolidated financial statements from such a position are
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement.
Interest and penalties related to income taxes are recognized in our tax
provision in the consolidated statement of operations and comprehensive income
(loss).
See Note 17, Income Taxes, to our consolidated financial statements included in
this Annual Report on Form 10-K for additional information on income taxes.
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Share-Based Compensation Expense
We determine the expense for all employee share-based compensation awards by
estimating their fair value and recognizing that value as an expense, on a
ratable basis, in our consolidated financial statements over the requisite
service period in which our employees earn the awards. Significant judgment is
required in estimating the probability of achievement of performance conditions
for our performance-based restricted stock unit awards. Changes in estimates to
the completion of performance factors are applied utilizing the cumulative
catch-up methodology. These awards typically have both cumulative adjusted
EBITDA and end-to-end RCM agreement growth metrics. To assess current
performance, we review our historical performance to date, along with any
adjustments which have been approved to the reported performance, and add on our
current future projections to determine the probable outcome of the award. The
current estimates are then compared to the scoring metrics and any necessary
adjustments are reflected in the current period to update share-based
compensation expense to the current performance expectations.
We recognize compensation expense using a straight-line method over the
applicable vesting period. During each quarter, the share-based compensation
expense is adjusted to reflect forfeitures during the period; however,
compensation expense already recognized is not adjusted if market conditions are
not met.
Business Combinations
We account for business combinations using the acquisition method of accounting,
which requires that assets acquired and liabilities assumed be recorded at fair
value, with limited exceptions. Any excess of the purchase price over the fair
value of specifically identified assets is recorded as goodwill.
Significant judgment is required in estimating the fair value of intangible
assets and in assigning their respective useful lives. Our typical intangible
assets acquired include developed technology and customer relationships. There
are several methods that can be used to determine the fair value of intangible
assets. We typically use an income approach to value the specifically
identifiable intangible assets which is based on forecasts of expected future
cash flows. Under the income approach, we utilize a multi-period excess earnings
methodology to value the primary intangible asset of a business combination.
Fair value estimates are based on available historical information and on future
expectations and assumptions deemed reasonable by management but are inherently
uncertain. We typically consult with an independent advisor to assist in the
valuation of intangible assets. Significant estimates and assumptions inherent
in valuations include discount rates, revenue and cost growth rates, and
technology obsolescence curves. We consider marketplace participant assumptions
in determining the amount and timing of future cash flows along with technology
life cycles, barriers to entry, and risks associated with cash flows in
concluding upon our discount rates. While we use our best estimates and
assumptions to accurately value assets acquired and liabilities assumed at the
acquisition dates, our estimates are inherently uncertain and subject to
refinement. As a result, during the measurement period, we may record
adjustments to the purchase accounting. In addition, unanticipated market or
macroeconomic events and circumstances may occur that could affect the accuracy
or validity of the estimates and assumptions.
Determining the useful life of an intangible asset also requires judgment, as
different types of intangible assets will have different useful lives and
certain assets may even be considered to have indefinite useful lives. Our
assessment of useful lives acquired is based on numerous factors including
underlying product life cycles, operating plans, brand history, and the
competitive environment. Definite-lived intangible assets are amortized to
expense over their estimated useful life.
New Accounting Standards
For additional information regarding new accounting guidance, see Note 3, Recent
Accounting Pronouncements, to our consolidated financial statements included in
this Annual Report on Form 10-K, which provides a summary of recently adopted
accounting standards and disclosures.
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Results of Operations
The following table provides consolidated operating results and other operating
data for the periods indicated:
Year Ended December 31, 2020 vs. 2019 Change 2019 vs. 2018 Change
2020 2019 2018 Amount % Amount %
(In millions)
Consolidated statement of operations
Data:
Net operating fees $ 1,093.8 $ 1,037.4 $ 760.2 $ 56.4 5.4 % $ 277.2 36.5 %
Incentive fees 70.6 56.2 38.3 14.4 25.6 % 17.9 46.7 %
Other 106.4 92.5 70.0 13.9 15.0 % 22.5 32.1 %
Total net services revenue 1,270.8 1,186.1 868.5 84.7 7.1 % 317.6 36.6 %
Operating expenses:
Cost of services 1,021.1 987.8 770.6 33.3 3.4 % 217.2 28.2 %
Selling, general and administrative 102.4 104.4 97.9 (2.0) (1.9) % 6.5 6.6 %
Other 67.3 36.2 30.4 31.1 85.9 % 5.8 19.1 %
Total operating expenses 1,190.8 1,128.4 898.9 62.4 5.5 % 229.5 25.5 %
Income (loss) from operations 80.0 57.7 (30.4) 22.3 38.6 % 88.1 289.8 %
Gain on business disposition 55.7 - - 55.7 100.0 % - - %
Loss on debt extinguishment - (18.8) - 18.8 (100.0) % (18.8) 100.0 %
Net interest expense (17.3) (29.1) (26.3) 11.8 (40.5) % (2.8) 10.6 %
Net income (loss) before income tax
provision (benefit) 118.4 9.8 (56.7) 108.6 1,108.2 % 66.5 117.3 %
Income tax provision (benefit) 1.3 (2.2) (11.4) 3.5 159.1 % 9.2 80.7 %
Net income (loss) $ 117.1 $ 12.0 $ (45.3) $ 105.1 875.8 % $ 57.3 126.5 %
Adjusted EBITDA (1) $ 240.0 $ 168.0 $ 57.0 $ 72.0 42.9 % $ 111.0 194.7 %
(1) Refer to the Non-GAAP Financial Measures section below for a reconciliation
of our financial results reported in accordance with GAAP to non-GAAP financial
results.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Net Services Revenue
Net services revenue increased by $84.7 million , or 7.1%, from $1,186.1 million
for the year ended December 31, 2019 to $1,270.8 million for the year ended
December 31, 2020 . The increase was primarily driven by a $56.6 million increase
in net operating fees largely as a result of new customers onboarded since the
beginning of 2019, a $14.4 million increase in incentive fees driven by better
operational execution, and an $11.1 million increase driven by the acquisitions
of SCI and RevWorks, partially offset by the EMS Disposition in the third
quarter of 2020.
Cost of Services
Cost of services increased by $33.3 million , or 3.4%, from $987.8 million for
the year ended December 31, 2019 , to $1,021.1 million for the year ended
December 31, 2020 . The increase was primarily driven by an increase in costs
associated with new customers onboarded in the last twelve months and the
acquisitions of SCI and RevWorks, partially offset by cost management, lower
compensation costs, and healthcare claims experience.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $2.0 million , or 1.9%,
from $104.4 million for the year ended December 31, 2019 to $102.4 million for
the year ended December 31, 2020 . The decrease was primarily driven by lower
travel and marketing expenses due to COVID-19, and corporate cost control
actions.
Other Expenses
Other expenses increased by $31.1 million , or 85.9%, from $36.2 million for the
year ended December 31, 2019 , to $67.3 million for the year ended December 31,
2020 . The increase was primarily driven by expenses related to COVID-19, the SCI
and RevWorks acquisitions, facility-exit charges, and legal and professional
fees related to the simplification of our capital structure via the conversion
of preferred shares to common shares.
Income Tax Provision (Benefit)
Income tax provision increased by $3.5 million to a $1.3 million provision for
the year ended December 31, 2020 from a $2.2 million benefit for the year ended
December 31, 2019 . This was primarily due to higher pre-tax income for the year
ended December 31, 2020 , offset by higher tax benefit for share-based
compensation and non-recognition of the gain from the sale of the EMS business.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net Services Revenue
Net services revenue increased by $317.6 million , or 36.6%, from $868.5
million for the year ended December 31, 2018 to $1,186.1 million for the year
ended December 31, 2019 . The increase was primarily driven by a $185.6 million
increase in net operating fees as a result of new customers onboarded to an
operating partner model contract since the beginning of 2018. In addition, we
realized year-over-year growth of $63.9 million as a result of the Intermedix
Holdings, Inc. acquisition.
Cost of Services
Cost of services increased by $217.2 million , or 28.2%, from $770.6 million for
the year ended December 31, 2018 , to $987.8 million for the year
ended December 31, 2019 . The increase was primarily driven by a $151.4 million
increase in costs associated with new customers onboarded since the beginning of
2018. The Intermedix Holdings, Inc. acquisition resulted in an increase in costs
of services of $52.3 million . In addition, we increased investments in
information technology infrastructure, automation technology, and central
operations support and incurred additional employee benefits costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $6.5 million , or 6.6%,
from $97.9 million for the year ended December 31, 2018 to $104.4 million for
the year ended December 31, 2019 . The increase was primarily due to increased
investments in sales and marketing expenses, as we have increased our efforts to
pursue new business opportunities, and also increased investments in human
resources spend to support scaling business operations.
Other Expenses
Other expenses increased by $5.8 million , or 19.1%, from $30.4 million for the
year ended December 31, 2018 , to $36.2 million for the year ended December 31,
2019 . The increase was primarily attributable to an additional $5.0 million of
costs associated with the DTO initiative.
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Income Tax Provision (Benefit)
Income tax benefit decreased by $9.2 million to $2.2 million for the year
ended December 31, 2019 from $11.4 million for the year ended December 31, 2018 .
This was primarily due to higher pre-tax income, offset by higher tax benefit
from share-based compensation.
Non-GAAP Financial Measures
In order to provide a more comprehensive understanding of the information used
by our management team in financial and operational decision-making, we
supplement our consolidated financial statements that have been prepared in
accordance with GAAP with the non-GAAP financial measure of adjusted EBITDA.
Adjusted EBITDA is utilized by our Board and management team as (i) one of the
primary methods for planning and forecasting overall expectations and for
evaluating actual results against such expectations; and (ii) as a performance
evaluation metric in determining achievement of certain executive incentive
compensation programs, as well as for incentive compensation plans for
employees.
Selected Non-GAAP Measure
Adjusted EBITDA
We define adjusted EBITDA as net income before net interest income/expense,
income tax provision/benefit, depreciation and amortization expense, share-based
compensation expense, expense arising from debt extinguishment, strategic
initiatives costs, transitioned employee restructuring expense, and other items
which are detailed in the table below.
We understand that, although non-GAAP measures are frequently used by investors,
securities analysts, and others in their evaluation of companies, these measures
have limitations as analytical tools, and you should not consider them in
isolation or as a substitute for analysis of our results of operations as
reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect:
•Changes in, or cash requirements for, our working capital needs;
•Share-based compensation expense;
•Income tax expenses or cash requirements to pay taxes;
•Interest expenses or cash required to pay interest;
•Certain other expenses which may require cash payments;
•Although depreciation and amortization charges are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the future,
and adjusted EBITDA does not reflect cash requirements for such replacements or
other purchase commitments, including lease commitments; and
•Other companies in our industry may calculate adjusted EBITDA differently than
we do, limiting its usefulness as a comparative measure.
Reconciliation of GAAP and Non-GAAP Measures
The following table presents a reconciliation of adjusted EBITDA to net income
(loss) for each of the periods indicated:
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Year End December 31,
2020 2019 2018
(In millions)
Net income (loss) (GAAP) $ 117.1 $ 12.0 $ (45.3)
Net interest expense 17.3 29.1 26.3
Income tax provision (benefit) 1.3 (2.2) (11.4)
Depreciation and amortization expense 68.7 55.7 38.8
Share-based compensation expense (1) 24.0 18.4 18.2
Gain on business disposition (2) (55.7) - -
Loss on debt extinguishment (3) - 18.8 -
Other (4) 67.3 36.2 30.4
Adjusted EBITDA (Non-GAAP) $ 240.0 $ 168.0 $ 57.0
(1)Share-based compensation expense represents the expense associated with stock
options, restricted stock units, performance-based restricted stock units, and
restricted stock awards granted, as reflected in our Consolidated Statements of
Operations and Comprehensive Income (Loss). See Note 15, Share-Based
Compensation, to the Consolidated Financial Statements included in this Annual
Report on Form 10-K for the detail of the amounts of share-based compensation
expense.
(2)Gain on business disposition represents the gain associated with the EMS
Disposition. See Note 1, Description of Business, to the Consolidated Financial
Statements included in this Annual Report on form 10-K for further details on
the disposal.
(3)Loss on debt extinguishment represents the loss associated with the repayment
of the credit agreement and subordinated notes in June 2019 , as reflected in our
Consolidated Statements of Operations and Comprehensive Income (Loss). See Note
13, Debt, to the Consolidated Financial Statements included in this Annual
Report on Form 10-K for further details on the extinguishment.
(4)Other expenses consist of the following (in millions):
Year Ended
2020 2019 2018
Severance and related employee benefits$ 6.4 $
3.6
Strategic initiatives (1) 29.3
19.8 19.7
Transitioned employees restructuring expense (2) (0.2)
3.0 4.3
Digital Transformation Office (3) - 8.6 3.6 Facility-exit charges (4) 17.5 (0.2) 0.1 Other (5) 14.3 1.4 0.4 Total other expenses$ 67.3 $ 36.2 $ 30.4 (1) Costs related to evaluating, pursuing, and integrating acquisitions, performing portfolio and capital structure analyses, and other inorganic business projects as part of the Company's growth strategy. Costs include vendor spend, employee time and expenses spent on activities, severance and retention amounts associated with integration activities, and changes to contingent consideration related to acquisitions. For the year endedDecember 31, 2020 ,$4.7 million of contingent consideration changes were included. (2) As part of the transition of personnel to the Company under certain operating partner model contracts, the Company has agreed to reimburse, or directly pay the affected employees, for certain severance and retention costs related to certain employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company. (3) Project costs related to the Company's initial efforts to automate its transactional environment. (4) As part of evaluating our footprint, we have exited certain leased facilities during the year endedDecember 31, 2020 . Costs include asset impairment charges and other costs related to exited leased facilities. (5) For the year endedDecember 31, 2020 , includes$10.9 million of expenses related to the COVID-19 pandemic, inclusive of appreciation bonuses for the Company's front-line employees, pandemic response mobilization efforts, telemedicine and testing costs for employees, and other costs. 52 -------------------------------------------------------------------------------- Liquidity and Capital Resources Our primary sources of liquidity include our cash and cash equivalents, cash flows from operations, and borrowings under our Credit Agreement. See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in this Annual Report on Form 10-K for additional information. As ofDecember 31, 2020 and 2019, we had cash and cash equivalents of$173.8 million and$92.0 million , respectively. The primary driver for the increased cash position atDecember 31, 2020 was the proceeds from the EMS Disposition. Our Credit Agreement includes a senior secured revolving credit facility (the "Senior Revolver") with a total capacity of$100.0 million . As ofDecember 31, 2020 and 2019, we had drawn$70.0 million and had$30.0 million remaining, and drawn$40.0 million and had$60.0 million remaining, respectively. See Note 13, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K for additional information on our Credit Agreement. As ofDecember 31, 2020 we had total available liquidity of$203.8 million reflecting our cash and cash equivalents as well as remaining availability under our revolver. OnJanuary 15, 2021 , we paid$105.0 million in cash to the Investor in connection with the conversion of the preferred stock held by the investor. Our liquidity is influenced by many factors, including timing of revenue and corresponding cash collections, the amount and timing of investments in strategic initiatives, our investments in property, equipment and software, and the use of cash to pay tax withholding obligations upon surrender of shares upon vesting of equity awards. We continue to invest capital in order to achieve our strategic initiatives. In addition, we plan to enhance customer service by continuing our investment in technology to enable our systems to more effectively integrate with our customers' existing technologies in connection with our strategic initiatives. We plan to continue to deploy resources to strengthen our information technology infrastructure, including automation, in order to drive additional value for our customers. We also expect to continue to invest in our global business services infrastructure and capabilities, and selectively pursue acquisitions and/or strategic relationships that will enable us to broaden or further enhance our offerings. New business development remains a priority as we plan to continue to boost our sales and marketing efforts. Additionally, we expect to incur costs associated with implementation and transition costs to onboard new customers. We expect cash and cash equivalents, cash flows from operations, and our availability under the Senior Revolver to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, including debt maturities and material capital expenditures, for at least the next 12 months. The extent to which COVID-19 will ultimately impact our results will depend on future developments, but could materially adversely impact our business, results of operations, and liquidity in future periods. Cash flows from operating, investing and financing activities, as reflected in our Consolidated Statements of Cash Flows, are summarized in the following table: Year Ended December 31, 2020 2019 2018 (In millions) Net cash provided by operating activities$ 61.8 $ 113.9 $ 18.3 Net cash used in investing activities (117.0) (61.0) (496.3) Net cash provided by (used in) financing activities 137.9 (25.3) 377.4 Effect of exchange rate changes in cash (0.4) (0.2) (0.7) Net increase (decrease) in cash, cash equivalents, and 82.3 restricted cash 27.4 (101.3) 53
-------------------------------------------------------------------------------- Cash Flows from Operating Activities Cash provided by operating activities fell by$52.1 million , from$113.9 million for the year endedDecember 31, 2019 , to$61.8 million for the year endedDecember 31, 2020 . Cash provided by operating activities fell due to timing of working capital changes, including increased accounts receivable balances and decreased accrued compensation and benefits balances in 2020. Accounts receivable increases from our acquisitions totaled approximately$28 million . Additionally, incentive fee and physicians accounts receivables increased approximately$14 million and$13 million , respectively. Accrued compensation and benefits liabilities fell in 2020 due to timing of payroll payments and bonus accruals. The decrease due to timing effects of working capital balances was partially offset by increased net income from operations of$22.3 million and deferred payments related to our payroll tax obligations as permitted under the CARES act. Cash provided by operating activities improved by$95.6 million , from cash provided of$18.3 million for the year endedDecember 31, 2018 , to cash provided of$113.9 million for the year endedDecember 31, 2019 . Cash provided by operating activities improved primarily due to improved operating results after adjusting for non-cash items, including adjustments for depreciation expense and loss on debt extinguishment, offset by changes in operating assets and liabilities. Cash Used in Investing Activities Cash used in investing activities primarily includes our investments in property, equipment and software and our inorganic growth initiatives. Outflows for significant acquisitions are typically offset by cash inflows from financing activities related to obtaining new debt. In 2020, cash used in investing activities included the acquisitions of SCI and RevWorks, which was partially offset by cash inflows related to the EMS Disposition. These inorganic activities are the primary drivers of the changes in cash flows from investing activities when comparing year-over-year. Cash used in investing activities increased by$56.0 million from$61.0 million for the year endedDecember 31, 2019 , to$117.0 million for the year endedDecember 31, 2020 . Cash outflows of$196.0 million related to acquisitions was offset by inflows of$128.3 million related to the EMS Disposition. Cash used in investing activities decreased by$435.3 million from$496.3 million for the year endedDecember 31, 2018 , to$61.0 million for the year endedDecember 31, 2019 . Cash used in investing activities included the acquisition ofIntermedix Holdings, Inc. in 2018. The decrease was slightly offset by an increase in purchases of property, equipment and software in 2019. Cash Flows from Financing Activities Cash flows from financing activities primarily relate to borrowings and repayments of debt. In 2018, we obtained financing to fund the acquisition of Intermedix. In 2019, we refinanced from a term loan, revolver and subordinated notes with our current senior secured credit facility, including a term loan and a revolver. In conjunction with the acquisition of SCI in 2020, we amended our Credit Agreement to draw additional funds to finance the acquisition. We utilize our revolver to ensure we have sufficient cash on hand to support the needs of the business at any given point in time. Cash flows from financing activities also include cash received from exercises of stock options and the use of cash to pay tax withholding obligations upon surrender of shares upon vesting of equity awards. Cash provided by financing activities increased by$163.2 million , from cash used of$25.3 million for the year endedDecember 31, 2019 , to cash provided of$137.9 million for the year endedDecember 31, 2020 . This change was primarily due to the term loan drawn of$191.1 million in conjunction with the acquisition of SCI and additional borrowings made under our revolver, offset by the use of cash to pay tax withholding obligations upon surrender of shares upon vesting of equity awards. 54 -------------------------------------------------------------------------------- Cash provided by financing activities fell by$402.7 million from$377.4 million for the year endedDecember 31, 2018 to cash used of$25.3 million for the year endedDecember 31, 2019 . This change was primarily due to obtaining new debt in 2018, whereas the new debt in 2019 was offset by the extinguishment of old debt. Debt and Financing Arrangements OnJune 26, 2019 , we entered into a new senior credit agreement (the "Credit Agreement") withBank of America, N.A ., as administrative agent, and the lenders named therein, for the senior secured credit facilities (the "Senior Secured Credit Facilities"), consisting of a$325.0 million senior secured term loan facility (the "Senior Term Loan") issued at 99.66% of par and a$100.0 million senior secured revolving credit facility (the "Senior Revolver"). OnApril 1, 2020 , we drew an additional$191.1 million in conjunction with Amendment No. 1 to the Credit Agreement (the "Amendment") on the same terms as its existing Senior Term Loan provided under the Credit Agreement. As ofDecember 31, 2020 , we had$484.6 million outstanding on our term loan facilities and had drawn$70.0 million on our Senior Revolver, with$30.0 million remaining. The term loans require quarterly payments, and we bear interest at a floating rate, which was 2.40% atDecember 31, 2020 . The Credit Agreement contains a number of financial and non-financial covenants. We are required to maintain minimum consolidated total net leverage and consolidated interest coverage ratios. The Company was in compliance with all of the covenants in the Credit Agreement as ofDecember 31, 2020 . See Note 13, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K for additional information. Contractual Obligations The following table presents a summary of our contractual obligations as ofDecember 31, 2020 (in millions): 2021 2022 2023 2024 2025 Thereafter Total Operating leases (1)$ 18.7 $ 16.1 $ 15.3 $ 15.0 $ 14.8 $ 34.0 $ 113.9 Purchase and finance lease obligations (2)$ 12.2 $ 10.1 $ 9.0 $ 5.0 $ 1.8 $ -$ 38.1 Debt obligations$ 32.3 $ 38.7 $ 45.2 $ 438.4 $ - $ -$ 554.6 Interest on debt$ 14.6 $ 13.2 $ 11.4 $ 5.1 $ - $ -$ 44.3 Total$ 77.8 $ 78.1 $ 80.9 $ 463.5 $ 16.6 $ 34.0 $ 750.9 (1) Obligations and commitments to make future minimum rental payments under non-cancelable operating leases having remaining terms in excess of one year. (2) Includes obligations associated with IT software and service costs.
Off-Balance Sheet Arrangements
Other than the contractual obligations noted above, there were no off-balance
sheet transactions, arrangements or other relationships with other persons in
2020, 2019 or 2018 that would have affected or are likely to affect our
liquidity or the availability of, or requirements for, capital resources.
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