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HMS Holdings Corp. Reports Third Quarter 2018 Results

  • Record Quarterly Revenue of $154.3 Million
  • Record Quarterly Commercial Revenue of $86.7 Million / YTD Commercial Revenue Up 24%
  • Quarterly COB Revenue of $105.7 million / YTD COB Revenue Up 8%
  • Full-Year 2018 Revenue Outlook Raised to $595-$600 million
  • GAAP EPS of $0.22 Per Diluted Share / Adjusted EPS of $0.31 Per Diluted Share

IRVING, Texas, Nov. 02, 2018 (GLOBE NEWSWIRE) -- HMS Holdings Corp. (Nasdaq: HMSY) today announced financial results for the third quarter of 2018. Net income for the quarter ended September 30, 2018 was $18.6 million or $0.22 per diluted share, compared to a net loss of ($3.4) million or ($0.04) per diluted share in the second quarter of 2018 and net income of $6.4 million or $0.07 per diluted share in the prior year third quarter. Net income in the third quarter of 2018 included a cumulative tax benefit of $2.9 million or $0.03 per diluted share relating to prior open tax years and the current tax year in connection with a realignment of certain state tax apportionments recognized in the quarter. The net loss for the second quarter of 2018 included an expense of $20.0 million related to the settlement on June 27, 2018 of litigation in connection with the earn-out portion of the purchase price for an acquisition the Company completed in 2010 (the “Settlement”). Net income YTD was $21.6 million, compared to $14.3 million in the first three quarters of 2017.  

Adjusted EPS in the third quarter of 2018 was $0.31 per diluted share, compared to adjusted EPS of $0.25 per diluted share in the second quarter of 2018 and adjusted EPS of $0.19 per diluted share in the prior year third quarter. Adjusted EPS in the second quarter of 2018 included an adjustment for the non-recurring Settlement expense.

Total revenue in the third quarter of 2018 was a record $154.3 million, compared to total revenue of $146.8 million in the second quarter of 2018 (+5.1%) and $125.7 million in the prior year third quarter (+22.8%). Total revenue YTD, which includes a Medicare RAC reserve release in the first quarter of 2018 of $8.4 million, was $442.5 million compared to $372.7 million in the first three quarters of 2017 (+18.7%). Excluding the Medicare RAC reserve release, total revenue YTD was $434.1 million (+16.5%).

Adjusted EBITDA in the third quarter of 2018 was $41.4 million, compared to $40.0 million in the second quarter of 2018 (+3.5%) and $34.1 million in the prior year third quarter (+21.4%). Adjusted EBITDA in the second quarter of 2018 included an adjustment for the non-recurring Settlement expense. Adjusted EBITDA in the first quarter of 2018 included a net benefit of $6.3 million related to the Medicare RAC reserve release. Adjusted EBITDA YTD was $116.3 million, compared to $84.5 million in the first three quarters of 2017 (+37.6%).

”We are extremely pleased with our overall financial performance through the first three quarters of 2018. The record third quarter revenue reflects progress we have made throughout the year on a number of growth initiatives related to our coordination of benefits and payment integrity offerings, as well as the important contribution of our new care management and consumer engagement products. We intend to push hard through year end to meet our full year objectives, including the increased revenue target we have announced today,” said Bill Lucia, Chairman and CEO. “Our key year-to-date metrics show the broad-based strength of our overall performance. Total Company revenue is up 17% YTD, excluding the first quarter Medicare RAC reserve release - including commercial, payment integrity and member engagement revenues each up double digits. YTD adjusted EBITDA is 38% higher than the comparable period last year, which reflects the leverage in our business model.”

Commercial revenue increased sequentially to a second straight quarterly record of $86.7 million in the third quarter of 2018, compared to $80.5 million in the second quarter of 2018 (+7.7%) and $67.6 million in the prior year third quarter (+28.3%). Commercial revenue YTD was $239.0 million compared to $192.1 million in the first three quarters of 2017 (+24.4%), though comparable 2017 commercial revenue only included roughly two quarters of Eliza revenue following the April 2017 acquisition of Eliza. Excluding Eliza revenue in both periods, Commercial revenue YTD was $201.6 million compared to $174.6 million in the first three quarters of 2017 (+15.5%). Commercial revenue in the third quarter of 2018 included $14.0 million from Eliza, compared to $13.7 million in the second quarter of 2018 (+2.2%) and $9.9 million in the prior year third quarter (+41.4%).

State government revenue increased sequentially to $59.3 million in the third quarter of 2018, compared to $58.8 million in the second quarter of 2018 (+0.9%) and $51.6 million in the prior year third quarter (+14.9%).  State government revenue YTD was $172.7 million, compared to $162.8 million in the first three quarters of 2017 (+6.1%). Federal (including Medicare RAC) and other revenue was $8.3 million in the third quarter of 2018, compared to $7.5 million in the second quarter of 2018 (+10.7%) and $6.5 million in the prior year third quarter (+27.7%).

Coordination of benefits (COB) revenue increased sequentially to $105.7 million in the third quarter of 2018, compared to $100.8 million in the second quarter of 2018 (+4.9%) and $90.1 million in the prior year third quarter (+17.3%). COB revenue YTD was $298.2 million, compared to $277.1 million in the first three quarters of 2017 (+7.6%).  COB accounted for 68.5% of total revenue in the third quarter of 2018, compared to 68.7% in the second quarter of 2018 and 71.7% in the prior year third quarter. COB revenue as a percentage of total revenue has declined in recent quarters as Analytical Services (described below) has grown more rapidly, and that trend is currently expected to continue.

Revenue from Analytical Services, which includes Payment Integrity (PI), care management (Essette) and consumer engagement (Eliza) solutions and Medicare RAC, was $48.6 million in the third quarter of 2018, compared to $46.0 million in the second quarter of 2018 (+5.7%) and $35.6 million in the prior year third quarter (+36.5%). Analytical Services revenue YTD was $144.3 million compared to $95.6 million in the first three quarters of 2017 (+50.9%), though 2017 revenue only included approximately two quarters of Eliza revenue following the April 2017 acquisition of Eliza.

PI revenue was $30.2 million in the third quarter of 2018, compared to $29.5 million in the second quarter of 2018 (+2.4%) and $23.9 million in the prior year third quarter (+26.4%). PI revenue YTD was $88.4 million, compared to $75.2 million in the first three quarters of 2017 (+17.6%). Care management and consumer engagement revenue was $15.3 million in the third quarter of 2018, including Eliza revenue of $14.0 million and Essette revenue of $1.3 million, compared to $14.8 million in the second quarter of 2018 (+3.4%) and $10.9 million in the prior year third quarter (+40.4%). Medicare RAC revenue was $3.1 million in the third quarter of 2018, compared to $1.7 million in the second quarter of 2018 and $0.8 million in the prior year third quarter.

Capital Expenditures were $6.8 million in the third quarter of 2018, which was unchanged from the second quarter of 2018 and the prior year third quarter.

“Based on our strong financial performance through the first three quarters of 2018, we are raising our full year revenue projection to a range of $595 - $600 million. Achieving this revenue target should result in exceeding the top end of the revised guidance we provided in our second quarter 2018 earnings release on other key performance metrics, including operating margin, GAAP Net Income and Adjusted EBITDA. Given the leverage in our business model and the momentum we have going into the fourth quarter, we believe we are well positioned to achieve our full year financial goals,” said Jeff Sherman, CFO. “Cash flow from operations of $31.8 million was particularly strong in the third quarter and we ended the quarter with a cash balance of $124.3 million. We are also very pleased with the impact of our ongoing expense management initiatives, which continue to enhance profitability as we grow top line revenue.”

For additional information about the Company’s third quarter 2018 financial results, see the Q3 2018 Investor Presentation available on the HMS Investor Relations Website at http://investor.hms.com/events-and-presentations.

Webcast and Conference Call Information

HMS will report its preliminary third quarter 2018 financial and operating results via webcast at 7:30 AM CT / 8:30 AM ET on November 2, 2018. The webcast may also include discussion of HMS developments, forward-looking statements and other material information about business and financial matters. The webcast can be accessed via phone at (877) 303–7208 or (224) 357–2389 for international participants, or on the HMS Investor Relations website at http://investor.hms.com/events-and-presentations.The webcast will also be archived and available for replay beginning at approximately 11:00 AM CT / 12:00 PM ET on November 2, 2018 at http://investor.hms.com/events-and-presentations This press release and the financial statements contained herein are also available on the HMS Investor Relations website at http://investor.hms.com/releases.cfm.

About HMS

HMS advances the healthcare system by helping payers reduce costs and improve health outcomes. Through our industry-leading  technology, analytics and engagement solutions, we save billions of dollars annually for health care payers, government programs and at-risk organizations, while helping people live healthier lives. HMS provides a broad range of coordination of benefits, payment integrity, risk analytics, care management and member engagement solutions that move the healthcare system forward. Learn more at hms.com.

Trademarks

HMS, Eliza, Essette and the HMS logo are registered trademarks of HMS Holdings Corp. and/or its affiliates.  Other names may be trademarks of their respective owners.

Non-GAAP Financial Measures

The Company reports and discusses its operating results using financial measures consistent with accounting principles generally accepted in the United States ("GAAP"). From time to time, in press releases, financial presentations, earnings conference calls or otherwise, the Company may disclose certain non-GAAP financial measures. The non-GAAP financial measures presented in this press release should not be viewed as alternatives or substitutes for the Company's reported GAAP results. A reconciliation to the most directly comparable GAAP financial measure is set forth in the tables that accompany this press release.

The Company believes that the non-GAAP financial measures presented in this press release provide useful information to the Company's management, investors, and other interested parties about the Company's operating performance because they allow them to understand and compare the Company's operating results during the current periods to the prior periods in a more consistent manner. The non-GAAP measures presented in this press release may not be comparable to similarly titled measures used by other companies. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and reflect an additional way of viewing aspects of the Company's operations that, when viewed with GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provides a more complete understanding of the results of operations and trends affecting the Company's business. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to financial measures calculated in accordance with GAAP.

Safe Harbor Statement

The financial results in this press release reflect preliminary results, which are not final until the Company’s Form 10-Q for the quarter ended September 30, 2018 is filed with the Securities and Exchange Commission. This press release contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such statements relate to our current expectations, projections and assumptions about our business, the economy and future events or conditions. They do not relate strictly to historical or current facts. Forward‐looking statements can be identified by words such as “aims,” “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “likely,” “may,” “plans,” “projects,” “seeks,” “targets,” “will,” “would,” “could,” “should,” and similar expressions and references to guidance, although some forward-looking statements may be expressed differently. In particular, these include statements relating to future actions, business plans, objectives and prospects, and future operating or financial performance, including our updated revenue guidance for full year 2018. Factors or events that could cause actual results to differ may emerge from time to time and are difficult to predict. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results may differ materially from past results and those anticipated, estimated or projected. We caution you not to place undue reliance upon any of these forward-looking statements. 

Factors that could cause or contribute to such differences, include, but are not limited to: our ability to execute our business plans or growth strategy; our ability to innovate, develop or implement new or enhanced solutions or services; the nature of investment and acquisition opportunities we are pursuing, and the successful execution of such investments and acquisitions; our ability to successfully integrate acquired businesses and realize synergies; variations in our results of operations; our ability to accurately forecast the revenue under our contracts and solutions; our ability to protect our systems from damage, interruption or breach, and to maintain effective information and technology systems and networks; our ability to protect our intellectual property rights, proprietary technology, information processes, and know-how; significant competition relating to solutions and services; our failure to maintain a high level of customer retention or the unexpected reduction in scope or termination of key contracts with major customers; customer dissatisfaction or our non-compliance with contractual provisions or regulatory requirements; our failure to meet performance standards triggering significant costs or liabilities under our contracts; our inability to manage our relationships with information and data sources and suppliers; our reliance on subcontractors and other third party providers and parties to perform services; our ability to continue to secure contracts and favorable contract terms through the competitive bidding process; pending or threatened litigation; unfavorable outcomes in legal proceedings; our success in attracting and retaining qualified employees and members of our management team; our ability to generate sufficient cash to cover our interest and principal payments under our credit facility, or to borrow, obtain financing, maintain liquidity or use credit; unexpected changes in tax laws, regulations or guidance and unexpected changes in our effective tax rates; unanticipated increases in the number or amount of claims for which we are self-insured; our ability to develop, implement and maintain effective internal control over financial reporting; changes in the U.S. healthcare environment or healthcare financing system, including regulatory, budgetary or political actions that affect healthcare spending or the practices and operations of healthcare organizations; our failure to comply with applicable laws and regulations governing individual privacy and information security or to protect such information from theft and misuse; our ability to comply with current and future legal and regulatory requirements; negative results of government or customer reviews, audits or investigations; state or federal limitations related to outsourcing of certain government programs or functions; restrictions on bidding or performing certain work due to perceived conflicts of interests; the market price of our common stock and lack of dividend payments; and anti-takeover provisions in our corporate governance documents; and other factors, risks and uncertainties described in our most recent Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. Any forward-looking statements are made as of the date of this press release. Except as may be required by law, we disclaim any obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

   
Investor Contact:

Dennis Oakes
SVP, Investor Relations
dennis.oakes@hms.com
212-857-5786
 Media Contact:

Lacey Hautzinger
Sr. Director, External Communications
lacey.hautzinger@hms.com
469-284-7240


      
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
        
 Three Months Ended
September 30, 
 Nine Months Ended
September 30,
 
  2018   2017   2018   2017 
Revenue$154,246  $125,673  $442,462  $372,719 
Cost of services:       
Compensation 58,188   49,012   169,455   149,784 
Information technology 12,979   12,067   39,482   33,131 
Occupancy 3,500   4,332   11,897   12,109 
Direct project expenses 10,661   9,548   31,652   30,092 
Other operating expenses 8,567   7,446   22,183   21,212 
Amortization of acquisition related software and intangible assets 7,942   8,167   25,695   21,825 
Total cost of services 101,837   90,572   300,364   268,153 
Selling, general and administrative expenses 28,178   22,240   86,708   73,400 
Settlement expense -   -   20,000   - 
Total operating expenses 130,015   112,812   407,072   341,553 
Operating income 24,231   12,861   35,390   31,166 
Interest expense (2,880)  (3,109)  (8,562)  (7,734)
Interest income 292   14   600   201 
Income before income taxes 21,643   9,766   27,428   23,633 
Income taxes 3,069   3,394   5,830   9,302 
Net Income$18,574  $6,372  $21,598  $14,331 
        
Basic income per common share:       
Net income per common share -- basic$0.22  $0.08  $0.26  $0.17 
Diluted income per common share:       
Net income per common share -- diluted$0.22  $0.07  $0.25  $0.17 
Weighted average shares:        
Basic 83,509   83,923   83,373   83,778 
Diluted 85,144   85,730   85,241   85,586 
        


 
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
    
 September 30,
2018
 December 31,
2017
Assets(unaudited)  
Current assets:   
Cash and cash equivalents$124,297  $83,313 
Accounts receivable, net of allowance of $16,239 and $14,799,   
at September 30, 2018 and December 31, 2017, respectively 202,498   189,460 
Prepaid expenses 16,826   16,589 
Income tax receivable 4,597   1,892 
Deferred financing costs, net 564   564 
Other current assets 314   836 
Total current assets 349,096   292,654 
Property and equipment, net 93,145   98,581 
Goodwill 487,617   487,617 
Intangible assets, net 72,593   91,482 
Deferred financing costs, net 1,814   2,237 
Other assets 2,655   2,589 
Total assets$1,006,920  $975,160 
    
Liabilities and Shareholders' Equity   
Current liabilities:   
Accounts payable, accrued expenses and other liabilities$64,295  $61,900 
Estimated liability for appeals 22,184   30,787 
Total current liabilities 86,479   92,687 
Long-term liabilities:   
Revolving credit facility 240,000   240,000 
Net deferred tax liabilities 14,407   21,989 
Deferred rent 4,329   4,852 
Other liabilities 9,925   9,403 
Total long-term liabilities 268,661   276,244 
Total liabilities 355,140   368,931 
Commitments and contingencies   
Shareholders' equity:   
Preferred stock -- $0.01 par value; 5,000,000 shares authorized; none issued     
Common stock -- $0.01 par value; 175,000,000 shares authorized;   
97,588,656 shares issued and 83,925,462 shares outstanding at September 30, 2018;   
96,536,251 shares issued and 83,256,858 shares outstanding at December 31, 2017 975   965 
Capital in excess of par value 397,192   368,721 
Retained earnings 389,189   366,164 
Treasury stock, at cost: 13,663,194 shares at September 30, 2018   
and 13,279,393 shares at December 31, 2017 (135,576)  (129,621)
    
Total shareholders' equity 651,780   606,229 
    
Total liabilities and shareholders' equity$1,006,920  $975,160 
    


 
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
    
 Nine Months Ended
September 30, 
  2018   2017 
Operating activities:   
Net income $21,598  $14,331 
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization of property, equipment and software 24,331   20,599 
Amortization of intangible assets 18,889   15,947 
Amortization of deferred financing costs 423   1,563 
Stock-based compensation expense 17,645   16,761 
Deferred income taxes (7,582)  (726)
Change in fair value of contingent consideration (35)  (2,450)
Release of estimated liability for appeals (8,436)  - 
Changes in operating assets and liabilities:   
Accounts receivable (13,038)  5,630 
Prepaid expenses (237)  757 
Other current assets 522   712 
Other assets (66)  163 
Income taxes receivable / (payable) (2,705)  (2,731)
Accounts payable, accrued expenses and other liabilities 4,394   (15,457)
Estimated liability for appeals (167)  (1)
Net cash provided by operating activities 55,536   55,098 
Investing activities:    
Acquisition of a business, net of cash acquired -   (171,174)
Purchases of property and equipment (4,333)  (11,656)
Investment in capitalized software (15,100)  (10,664)
Net cash used in investing activities (19,433)  (193,494)
Financing activities:    
Proceeds from exercise of stock options 13,633   2,580 
Payments of tax withholdings on behalf of employees for net-share settlement for stock-based compensation (2,797)  (2,898)
Payments on capital lease obligations -   (5)
Proceeds from credit facility -   42,204 
Purchases of treasury stock (5,955)  - 
Net cash provided by financing activities 4,881   41,881 
Net increase (decrease) in cash and cash equivalents 40,984   (96,515)
Cash and Cash Equivalents   
Cash and cash equivalents at beginning of year 83,313   175,999 
Cash and cash equivalents at end of period$124,297  $79,484 
    
Supplemental disclosure of cash flow information:   
Cash paid for income taxes, net of refunds$15,501  $12,317 
Cash paid for interest$7,769  $5,819 
    
Supplemental disclosure of non-cash activities:    
Change in balance of accrued property and equipment purchases$538  $(414)
        

 HMS HOLDINGS CORP. AND SUBSIDIARIES
 (in thousands)
(unaudited)

Reconciliation of Net (Loss)/Income to EBITDA and Adjusted EBITDA

As summarized in the following table, earnings before interest, taxes, depreciation and amortization, stock-based compensation expense and settlement expense (adjusted EBITDA) was $41.4 million for the third quarter of 2018.

       
  Three Months Ended 
  September 30, 2018 June 30, 2018 September 30, 2017
Net (Loss)/ income $18,574  $(3,367) $6,372 
       
Net interest expense  2,588   2,846   3,095 
Income taxes  3,069   (242)  3,394 
Depreciation and amortization of property and equipment and intangible assets  13,688   16,066   13,879 
       
Earnings before interest, taxes, depreciation and amortization  (EBITDA)  37,919   15,303   26,740 
Stock based compensation expense  3,437   4,714   7,381 
Settlement expense  -   20,000   - 
Adjusted EBITDA $41,356  $40,017  $34,121 
       

As summarized in the following table, earnings before interest, taxes, depreciation and amortization, stock-based compensation expense and settlement expense (adjusted EBITDA) was $116.3 million for the nine months ended September 30, 2018, including the first quarter net benefit of $6.3 million related to the Reserve Release.

     
  Nine Months Ended 
  September 30, 2018 September 30, 2017
Net Income $21,598  $14,331 
     
Net interest expense  7,962   7,533 
Income taxes  5,830   9,302 
Depreciation and amortization of property and equipment and intangible assets  43,220   36,546 
     
Earnings before interest, taxes, depreciation and amortization  (EBITDA)  78,610   67,712 
Stock based compensation expense  17,645   16,761 
Settlement expense  20,000   - 
Adjusted EBITDA $116,255  $84,473 
     

HMS HOLDINGS CORP. AND SUBSIDIARIES
 (in thousands, except per share amounts)
(unaudited)

Reconciliation of Net (Loss)/income to GAAP EPS (Diluted) and Adjusted EPS (Diluted)

As summarized in the following table, diluted earnings per share adjusted for stock-based compensation expense, settlement expense, amortization of acquisition related software and intangible assets and for the related taxes (adjusted EPS) was $0.31 for the third quarter of 2018.

       
  Three Months Ended 
  September 30, 2018 June 30, 2018 September 30, 2017
Net (Loss)/ income $18,574  $(3,367) $6,372 
       
Stock-based compensation expense  3,437   4,714   7,381 
Settlement expense  -   20,000   - 
Amortization of acquisition related software and intangible assets  7,942   9,621   8,167 
Income tax related to adjustments (1)   (3,186)  (10,404)  (5,815)
       
Adjusted net income $26,767  $20,564  $16,105 
       
Weighted average common shares, diluted  85,144   83,231   85,730 
       
Diluted GAAP EPS $0.22  $(0.04) $0.07 
Diluted adjusted EPS $0.31  $0.25  $0.19 
       

As summarized in the following table, diluted earnings per share adjusted for stock-based compensation expense, settlement expense, amortization of acquisition related software and intangible assets and for the related taxes (adjusted EPS) was $0.79 for the first nine months ended September 30, 2018, including the first quarter net benefit of $0.05 per diluted share related to the Reserve Release.

     
  Nine Months Ended 
  September 30, 2018 September 30, 2017
Net Income $21,598  $14,331 
     
Stock-based compensation expense  17,645   16,761 
Settlement expense  20,000   - 
Amortization of acquisition related software and intangible assets  25,695   21,825 
Income tax related to adjustments (1)  (17,735)  (14,431)
     
Adjusted net income $67,203  $38,486 
     
Weighted average common shares, diluted  85,241   85,586 
     
Diluted GAAP EPS $0.25  $0.17 
Diluted adjusted EPS $0.79  $0.45 
     

(1)  Tax effect of adjustments is computed as the pre-tax effect of the adjustments multiplied by the forecasted adjusted annual effective tax rate at period end.

Friday, November 2, 2018 - 06:00