Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-50194
HMS HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
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New York
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11-3656261 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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401 Park Avenue South, New York, NY
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10016 |
(Address of principal executive offices)
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(Zip Code) |
(Registrants Telephone Number, Including Area Code)
(212) 725-7965
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of November 4, 2010 there were approximately 27,561,327 shares of the registrants common stock
(par value $0.01 per share) outstanding.
HMS HOLDINGS CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2010
INDEX
2
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the
U.S. Private Securities Litigation Reform Act of 1995. From time to time, we also provide
forward-looking statements in other materials we release to the public, as well as oral
forward-looking statements. Such statements give our expectations or forecasts of future events;
they do not relate strictly to historical or current facts.
We have tried, wherever possible, to identify such statements by using words such as anticipate,
estimate, expect, project, intend, plan, believe, will, target, seek, forecast
and similar expressions. In particular, these include statements relating to future actions,
business plans, objects and prospects, future operating or financial performance or results of
current and anticipated services, acquisitions and the performance of companies we have acquired,
sales efforts, expenses, interest rates, and the outcome of contingencies, such as financial
results.
We cannot guarantee that any forward-looking statement will be realized. Forward-looking
statements are based on our current expectations and assumptions regarding our business, the
economy and other future conditions. Should known or unknown risks or uncertainties materialize,
or should underlying assumptions prove inaccurate, actual results could differ materially from past
results and those anticipated, estimated or projected. We caution you, therefore, against relying
on any of these forward-looking statements. They are neither statements of historical fact nor
guarantees or assurances of future performance. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in our Annual Report, and in
particular, the risks discussed under the heading Risk Factors in Part I, Item 1A of our Annual
Report, Part II of this 10-Q and those discussed in other documents we file with the Securities and
Exchange Commission.
Any forward-looking statements made by us in this Report on Form 10-Q speak only as of the date on
which they are made. Factors or events that could cause actual results to differ may emerge from
time to time and it is not possible for us to predict all of them. We undertake no obligation to
publicly update forward-looking statements, whether as a result of new information, future events
or otherwise, except as may be required by law. You are advised, however, to consult any further
disclosures we make on related subjects in our 10-K and 8-K reports to the Securities and Exchange
Commission.
3
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
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September 30, |
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December 31, |
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2010 |
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2009 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
66,035 |
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$ |
64,863 |
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Accounts receivable, net of allowance of $1,078 at September 30, 2010 and $614 at December 31, 2009 |
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75,267 |
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64,750 |
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Prepaid expenses, including prepaid income taxes of $5,846 at September 30, 2010 and $4,234 at December 31, 2009 |
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11,325 |
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9,956 |
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Other current assets |
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138 |
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68 |
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Deferred tax asset |
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101 |
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804 |
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Total current assets |
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152,866 |
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140,441 |
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Property and equipment, net |
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39,007 |
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20,902 |
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Goodwill |
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117,997 |
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91,520 |
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Intangible assets, net |
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22,376 |
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16,798 |
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Other assets |
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309 |
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983 |
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Total assets |
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$ |
332,555 |
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$ |
270,644 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Accounts payable, accrued expenses and other liabilities |
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$ |
26,888 |
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$ |
26,474 |
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Contingent payment due to AMG-SIU |
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4,169 |
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Total current liabilities |
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31,057 |
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26,474 |
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Long-term liabilities: |
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Contingent payment due to AMG-SIU |
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8,808 |
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Accrued deferred rent |
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1,714 |
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3,675 |
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Other liabilities |
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2,113 |
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|
1,876 |
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Deferred tax liability |
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3,710 |
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326 |
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Total long-term liabilities |
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16,345 |
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5,877 |
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Total liabilities |
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47,402 |
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32,351 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock $.01 par value; 5,000,000 shares authorized; none issued |
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Common stock $.01 par value; 45,000,000 shares authorized;
29,148,709 shares issued and 27,485,863 shares
outstanding at September 30, 2010
28,533,406 shares issued and 26,870,560 shares outstanding at December 31,
2009 |
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292 |
|
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285 |
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Capital in excess of par value |
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194,911 |
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175,795 |
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Retained earnings |
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99,347 |
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71,610 |
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Treasury stock, at cost: 1,662,846 shares at September 30, 2010 and December 31, 2009 |
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(9,397 |
) |
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(9,397 |
) |
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Total shareholders equity |
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285,153 |
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238,293 |
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|
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|
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Total liabilities and shareholders equity |
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$ |
332,555 |
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$ |
270,644 |
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See accompanying notes to unaudited consolidated financial statements.
4
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
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Three months ended September 30, |
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Nine months ended September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenue |
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$ |
80,022 |
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$ |
59,164 |
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$ |
215,700 |
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$ |
162,920 |
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Cost of services: |
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Compensation |
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28,013 |
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19,191 |
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78,723 |
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54,537 |
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Data processing |
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4,600 |
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3,476 |
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12,749 |
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|
10,113 |
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Occupancy |
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3,560 |
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|
|
2,540 |
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|
9,882 |
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|
7,769 |
|
Direct project costs |
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9,818 |
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|
7,446 |
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|
25,596 |
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|
21,170 |
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Other operating costs |
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|
4,664 |
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|
3,617 |
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|
12,085 |
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|
9,829 |
|
Amortization of software and intangibles |
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1,665 |
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|
1,211 |
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4,566 |
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|
3,643 |
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|
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Total cost of services |
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|
52,320 |
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|
|
37,481 |
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|
|
143,601 |
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|
|
107,061 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Selling, general & administrative expenses |
|
|
9,424 |
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|
|
7,322 |
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|
|
25,920 |
|
|
|
20,196 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
|
61,744 |
|
|
|
44,803 |
|
|
|
169,521 |
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|
|
127,257 |
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|
|
|
|
|
|
|
|
|
|
|
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Operating income |
|
|
18,278 |
|
|
|
14,361 |
|
|
|
46,179 |
|
|
|
35,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest expense |
|
|
(24 |
) |
|
|
(254 |
) |
|
|
(70 |
) |
|
|
(820 |
) |
Other expense, net |
|
|
(31 |
) |
|
|
|
|
|
|
(31 |
) |
|
|
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|
Interest income |
|
|
32 |
|
|
|
46 |
|
|
|
73 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
18,255 |
|
|
|
14,153 |
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|
|
46,151 |
|
|
|
35,042 |
|
Income taxes |
|
|
7,209 |
|
|
|
5,774 |
|
|
|
18,414 |
|
|
|
14,319 |
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|
|
|
|
|
|
|
|
|
|
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Net income |
|
$ |
11,046 |
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|
$ |
8,379 |
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|
$ |
27,737 |
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|
$ |
20,723 |
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Basic income per common share data: |
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Net income per basic share |
|
$ |
0.40 |
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|
$ |
0.32 |
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|
$ |
1.02 |
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|
$ |
0.80 |
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
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|
Weighted average common shares outstanding, basic |
|
|
27,336 |
|
|
|
26,228 |
|
|
|
27,122 |
|
|
|
25,953 |
|
|
|
|
|
|
|
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Diluted income per share data: |
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Net income per diluted share |
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$ |
0.39 |
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$ |
0.30 |
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|
$ |
0.98 |
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|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average common shares outstanding,
diluted |
|
|
28,483 |
|
|
|
27,697 |
|
|
|
28,347 |
|
|
|
27,476 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to unaudited consolidated financial statements.
5
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2010
(in thousands, except share amounts)
(unaudited)
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|
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|
|
|
|
|
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|
Common Stock |
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Capital In |
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|
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|
Treasury Stock |
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Total |
|
|
|
Number of |
|
|
Par |
|
|
Excess Of |
|
|
Retained |
|
|
Number of |
|
|
|
|
|
|
Shareholders |
|
|
|
Shares Issued |
|
|
Value |
|
|
Par Value |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
28,533 |
|
|
$ |
285 |
|
|
$ |
175,795 |
|
|
$ |
71,610 |
|
|
|
1,663 |
|
|
$ |
(9,397 |
) |
|
$ |
238,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,737 |
|
|
|
|
|
|
|
|
|
|
|
27,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation cost |
|
|
|
|
|
|
|
|
|
|
5,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,334 |
|
Exercise of stock options |
|
|
616 |
|
|
|
7 |
|
|
|
5,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,486 |
|
Excess tax benefit from
exercise of stock options |
|
|
|
|
|
|
|
|
|
|
8,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
|
29,149 |
|
|
$ |
292 |
|
|
$ |
194,911 |
|
|
$ |
99,347 |
|
|
|
1,663 |
|
|
$ |
(9,397 |
) |
|
$ |
285,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
6
HMS HOLDINGS CORP. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2010 and 2009
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,737 |
|
|
$ |
20,723 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Loss on disposal of fixed assets |
|
|
22 |
|
|
|
6 |
|
Depreciation and amortization |
|
|
11,478 |
|
|
|
10,014 |
|
Share-based compensation expense |
|
|
5,334 |
|
|
|
4,482 |
|
Decrease in deferred tax asset |
|
|
546 |
|
|
|
1,649 |
|
Increase in allowance for doubtful accounts |
|
|
464 |
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) in accounts receivable |
|
|
(10,020 |
) |
|
|
(10,195 |
) |
(Increase) in prepaid expenses and other current assets |
|
|
(1,138 |
) |
|
|
(2,653 |
) |
(Increase)/Decrease in other assets |
|
|
685 |
|
|
|
(6 |
) |
(Increase)/Decrease in accounts payable, accrued expenses and other
liabilities |
|
|
(43 |
) |
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
35,065 |
|
|
|
24,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(10,488 |
) |
|
|
(6,544 |
) |
Purchase of building and land |
|
|
(9,886 |
) |
|
|
|
|
Acquisition of AMG-SIU, net of cash |
|
|
(12,795 |
) |
|
|
|
|
Acquisition of Chapman Kelly |
|
|
(13,001 |
) |
|
|
|
|
Acquisition of IntegriGuard |
|
|
|
|
|
|
(5,217 |
) |
Investment in capitalized software |
|
|
(1,512 |
) |
|
|
(1,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(47,682 |
) |
|
|
(12,954 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
5,486 |
|
|
|
5,733 |
|
Repayment of long-term debt |
|
|
|
|
|
|
(4,725 |
) |
Excess tax benefit from exercised stock options |
|
|
8,303 |
|
|
|
7,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
13,789 |
|
|
|
8,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
1,172 |
|
|
|
20,316 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
64,863 |
|
|
|
49,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
66,035 |
|
|
$ |
69,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
11,269 |
|
|
$ |
7,165 |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
46 |
|
|
$ |
674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
|
|
AMG-SIU acquisition-related contingent payments |
|
$ |
12,977 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Accrued property and equipment purchases |
|
$ |
674 |
|
|
$ |
774 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
7
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
1. Basis of Presentation
The financial information in this report has not been audited, but in the opinion of
management all adjustments (consisting only of normal recurring adjustments) considered necessary
to present fairly such information have been included. The operating results for the nine months
ended September 30, 2010 and 2009 are not necessarily indicative of results to be expected for the
full year. The financial statements included herein should be read in conjunction with the
financial statements and notes included in our Annual Report on Form 10-K for the year ended
December 31, 2009, which we refer to as our Annual Report.
We provide a variety of cost containment, coordination of benefits and program integrity
services for government-sponsored health and human services programs. These services are designed
to help our clients recover amounts due from liable third parties, reduce costs, ensure regulatory
compliance, and increase operational efficiencies. In December 2009, with the acquisition of Verify
Solutions, we moved into the employer-based market with valuable new services that ensure that
dependents covered by employees are eligible to receive healthcare benefits. In June 2010, we
acquired Allied Management Group Special Investigation Unit, or AMG-SIU, which provides fraud,
waste, and abuse prevention and detection solutions for healthcare payors. In August 2010, we
acquired Chapman Kelly, Inc., which provides claims audit and beneficiary eligibility audit
services to employers and managed care organizations.
These consolidated financial statements include our accounts and transactions of our wholly
owned subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
We are managed and operated as one business, with a single management team that reports to the
Chief Executive Officer. We do not operate separate lines of business with respect to any of our
product lines. Accordingly, we do not prepare discrete financial information with respect to
separate product lines or location and do not have separately reportable segments.
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting
Principles, or GAAP, requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
We consider all highly liquid instruments with an original maturity of 90 days or less to be
cash equivalents. Cash equivalents consist of deposits that are readily convertible into cash.
The Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC)
Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for
measuring fair value and expands the related disclosure requirements. The guidance applies under
other accounting pronouncements that require or permit fair value measurements and indicates, among
other things, that a fair value measurement assumes that the transaction to sell an asset or
transfer a liability occurs in the principal market for the asset or liability or, in the absence
of a principal market, the most advantageous market for the asset or liability. ASC Topic 820
defines fair value based upon an exit price model.
8
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
Our financial instruments are categorized into a three-level fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
The fair value hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
If the inputs used to measure fair value fall within different levels of the hierarchy, the
category level is based on the lowest priority level input that is significant to the fair value
measurement of the instrument. Financial assets recorded at fair value on our consolidated balance
sheets are categorized as follows:
|
|
|
Level 1: Observable inputs such as quoted prices in active markets; |
|
|
|
|
Level 2: Inputs, other than the quoted prices in active markets, that
are observable either directly or indirectly; and |
|
|
|
|
Level 3: Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own assumptions. |
Our policy is to limit the amount of credit exposure to any one financial institution and
place investments with financial institutions evaluated as being creditworthy, or in short-term
money market funds which are exposed to minimal interest rate and credit risk. We maintain our cash
primarily in investment accounts within large financial institutions. Currently, the Federal
Deposit Insurance Corporation insures these balances up to $250,000 per bank account. We have not
experienced any losses on our bank deposits and we believe these deposits do not expose us to any
significant credit risk.
We grant credit, generally without collateral, to our clients, which are primarily in the
health care market. Consequently, we are subject to potential credit risk related to changes in
economic conditions within that market. However, we believe that our billing and collection
policies are adequate to minimize the potential credit risk.
We
evaluate the recoverability of goodwill and long-lived assets either
annually or whenever events or changes in
circumstances indicate that an assets carrying amount may not be recoverable. Such circumstances
could include, but are not limited to (i) a significant decrease in the market value of an asset,
(ii) a significant adverse change in the extent or manner in which an asset is used, or (iii) an
accumulation of costs significantly in excess of the amount originally expected for the acquisition
of an asset. We measure the carrying amount of the asset against the estimated undiscounted future
cash flows associated with it. If the sum of the expected future net cash flows is less than the
carrying value of the asset being evaluated, an impairment charge would be recognized. The
impairment charge would be calculated as the amount by which the carrying value of the asset
exceeds its fair value. The determination of fair value is based on quoted market prices, if
available. If quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including the discounted value of estimated future cash flows. We did
not recognize any impairment charges related to our long-lived assets, property and equipment,
goodwill or intangible assets, during either the three or nine months ended September 30, 2010, or
the three or nine months ended September 30, 2009 as management believes that carrying amounts
were not impaired.
The carrying amounts for our cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value due to their short-term nature.
We evaluated all subsequent events through the date and time our financial statements were
issued. See Note 9, for stock based compensation awards approved on September 15, 2010 and granted
on October 1, 2010.
In January 2010, the FASB issued guidance that amends ASC Topic 820, Fair Value Measurements
and Disclosures and that requires reporting entities to make new disclosures about recurring or
nonrecurring fair-value measurements including significant transfers into and out of Level 1
and Level 2 fair-value measurements and information about purchases, sales, issuances, and
settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. This
guidance also clarifies existing fair-value measurement disclosure guidance about the level of
disaggregation, inputs, and valuation techniques. Except for the detailed Level 3 roll forward
disclosures, the guidance is effective for reporting periods beginning after December 15, 2009 and
did not have an impact on our consolidated interim financial statement.
9
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
In October 2009, the FASB issued guidance which amends Topic 605, Revenue Recognition, for
separating consideration in multiple-deliverable revenue arrangements. The guidance establishes a
selling price hierarchy for determining the selling price of each specific deliverable, which
includes vendor-specific objective evidence, or VSOE, if available, third party evidence if VSOE is
not available or estimated selling price if neither VSOE nor third party evidence is available. The
guidance also eliminates the residual method for allocating revenue between the elements of an
arrangement and requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method, which allocates any
discount in the arrangement proportionally to each deliverable on the basis of each deliverables
selling price. This guidance expands the disclosure requirements regarding a vendors
multiple-deliverable revenue arrangements and is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early
adoption permitted. We are currently evaluating the impact of this guidance on our consolidated
financial statements.
2. Acquisitions
Chapman Kelly, Inc.
In August 2010, we acquired the net assets of Chapman Kelly, Inc., or Chapman Kelly for $13.0
million in cash. This acquisition was accounted for under the acquisition method of accounting.
Chapman Kelly, which is based in Jeffersonville, Indiana, provides dependent eligibility audits to
large, self-insured employers, as well as plan and claims audits to both employers and managed care
organizations.
As a result of the acquisition occurring late in the current quarter, we have not yet
completed a valuation of the assets and liabilities acquired, from Chapman Kelly. Accordingly, we
have not completed the purchase price allocation, and therefore, the aggregate purchase price
allocation of this acquisition presented below is subject to adjustments:
The preliminary allocation of the aggregate purchase price of the Chapman Kelly acquisition is
estimated to be as follows (in thousands):
|
|
|
|
|
Goodwill |
|
$ |
9,983 |
|
Net assets acquired |
|
|
1,018 |
|
Identifiable intangible assets |
|
|
2,000 |
|
|
|
|
|
Total purchase price |
|
$ |
13,001 |
|
|
|
|
|
Identifiable intangible assets principally include covenants not to compete and Chapman
Kellys trade name.
Allied Management Group Special Investigation Unit
On June 30, 2010, we purchased all of the issued and outstanding common stock of AMG-SIU, a
Santa Ana, California-based company specializing in fraud, waste, and abuse prevention and
detection solutions for healthcare payors, which further strengthens our ability to service this
segment of the market.
The purchase price for AMG-SIU was valued at $26.0 million, and consisted of a $13.0 million
upfront payment and future contingent payments estimated and recognized as of the acquisition date
at $13.0 million. These payments are contingent upon AMG-SIUs financial performance for each of
the twelve month periods ending June 30, 2011 and June 30, 2012 as measured by AMG-SIUs EBITDA,
(earnings before income taxes, depreciation and amortization) for those periods. The contingent
payments are not subject to any cap. Any contingent payments owed for the periods ended June 30,
2011 and 2012 shall be payable by September 30, 2011 and 2012. The undiscounted contingent
payments are estimated to be $14.5 million.
The fair value of the contingent consideration recognized on the acquisition date of June 30,
2010 was estimated by applying the income approach. That measure is based on significant inputs not
observable in the market, which ASC 820 refers to as Level 3 inputs.
The acquisition of AMG-SIU was accounted for under the acquisition method of accounting.
10
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
We are currently in the process of completing a valuation of the assets and liabilities
acquired from AMG-SIU, including the fair value of the contingent payments discussed above.
Accordingly, we have not completed the purchase price allocation, and therefore, the aggregate
purchase price allocation of this acquisition presented below is subject to adjustments.
The preliminary allocation of the aggregate purchase price of the AMG-SIU acquisition is
estimated as follows (in thousands):
|
|
|
|
|
Goodwill |
|
$ |
19,792 |
|
Net assets acquired |
|
|
750 |
|
Intangible software |
|
|
4,670 |
|
Identifiable intangible assets |
|
|
4,509 |
|
Deferred tax asset |
|
|
(3,744 |
) |
|
|
|
|
Total purchase price |
|
$ |
25,977 |
|
|
|
|
|
Identifiable intangible assets principally include covenants not to compete, customer relationships
and AMG-SIUs trade name.
Verify Solutions, LLC
In December 2009, we acquired the assets of Verify Solutions, LLC, or Verify Solutions, an
Alpharetta, Georgia-based company specializing in dependent eligibility audit services for
employer-sponsored healthcare plans. With this acquisition, we moved into the employer-based
market, providing services which include Dependent Eligibility Reviews for large and mid-market
employers. The acquisition of Verify Solutions was accounted for under the acquisition method of
accounting.
The purchase price for Verify Solutions was $8.1 million, with additional future payments
contingent upon Verify Solutions achievement of financial performance milestones. The additional
future payments of up to $5.5 million ($2.7 million and $2.8 million for the years ended December
31, 2010 and 2011, respectively) will be recorded as compensation expense in the year in which the
milestones are expected to be achieved. As of September 30, 2010, no compensation expense was
recorded as the 2010 performance milestones are not expected to be reached.
The allocation of the purchase price for Verify Solutions was based upon the fair value
estimate of its assets and liabilities. The acquisition of Verify Solutions was based on
managements consideration of past and expected future performance as well as the potential
strategic fit with our long-term goals. The expected long-term growth, market position and
expected synergies to be generated by Verify Solutions were the primary factors that gave rise to
an acquisition price that resulted in the recognition of identifiable intangible assets.
11
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
The allocation of the aggregate purchase price of the Verify Solutions acquisition is as
follows (in thousands):
|
|
|
|
|
Goodwill |
|
$ |
4,101 |
|
Net assets acquired |
|
|
446 |
|
Identifiable intangible assets |
|
|
3,000 |
|
Capitalized software |
|
|
601 |
|
|
|
|
|
Total purchase price |
|
$ |
8,148 |
|
|
|
|
|
Identifiable intangible assets principally include covenants not to compete and Verify Solutions
trade name.
IntegriGuard LLC
In September 2009, we acquired the net assets of IntegriGuard LLC, or IntegriGuard, for $5.1
million in cash. This acquisition was accounted for under the acquisition method of accounting.
IntegriGuard, which is based in Omaha, Nebraska, provides services for the prevention and detection
of fraud, waste and abuse in the healthcare system, and operates as our wholly owned subsidiary.
With this acquisition, we further expanded our portfolio of program integrity service offerings for
government healthcare programs, particularly in the Medicare and Medicaid programs.
The allocation of the purchase price for IntegriGuard was based upon the fair value estimate
of its assets and liabilities. The acquisition of IntegriGuard was based on managements
consideration of past and expected future performance as well as the potential strategic fit with
our long-term goals. The expected long-term growth, market position and expected synergies to be
generated by IntegriGuard were the primary factors that gave rise to an acquisition price that
resulted in the recognition of identifiable intangible assets.
The allocation of the aggregate purchase price of the IntegriGuard acquisition is as follows
(in thousands):
|
|
|
|
|
Goodwill |
|
$ |
1,777 |
|
Net assets acquired |
|
|
1,712 |
|
Identifiable intangible assets |
|
|
1,405 |
|
Capitalized software |
|
|
240 |
|
|
|
|
|
Total purchase price |
|
$ |
5,134 |
|
|
|
|
|
Identifiable intangible assets principally include client relationships and IntegriGuards
trade name.
12
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
As part of the IntegriGuard acquisition, we entered into a 12 month Intercompany Services
Agreement (ISA) with the seller, Lumetra, to allow each party to perform contractual transition
services. Services performed under the ISA were billed at pre-determined rates that are specified
in the ISA. The ISA with Lumetra expired in September 2010. We did not incur any expense for the
ISA during the three month period ended September 30, 2010. For the nine month period ending
September 30, 2010 we incurred expenses of $0.2 million for services rendered by Lumetra under the
ISA.
Operating results subsequent to the dates of the acquisitions of IntegriGuard, Verify Solutions
AMG-SIU and Chapman Kelly were included in the unaudited consolidated financial statements included
herein. Had the results of the acquisitions been included in the unaudited consolidated financial
statements for the same periods in 2010 and 2009, the effect would not have been material.
3. Property and Equipment
Property and equipment at September 30, 2010 and December 31, 2009 consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Equipment |
|
$ |
36,124 |
|
|
$ |
29,005 |
|
Leasehold improvements |
|
|
6,678 |
|
|
|
7,514 |
|
Building |
|
|
8,639 |
|
|
|
|
|
Land |
|
|
1,113 |
|
|
|
|
|
Furniture and fixtures |
|
|
9,118 |
|
|
|
7,858 |
|
Capitalized software |
|
|
15,398 |
|
|
|
8,916 |
|
|
|
|
|
|
|
|
|
|
|
77,070 |
|
|
|
53,293 |
|
Less accumulated depreciation and amortization |
|
|
(38,063 |
) |
|
|
(32,391 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
39,007 |
|
|
$ |
20,902 |
|
|
|
|
|
|
|
|
On June 30, 2010, we acquired, through our subsidiary Health Management Systems, Inc., the
office building in Irving, Texas that we occupied under an operating lease. The purchase price of
the building was $9.9 million. Concurrent with this acquisition, our operating lease with the
seller was terminated. We allocated $1.1 million of the purchase price to land, $8.6 million to the
building, and $0.2 million to prepaid expenses.
13
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
For the three months ended September 30, 2010 and September 30, 2009, depreciation and
amortization expense related to property and equipment was $2.7 million and $2.2 million
respectively.
For the nine months ended September 30, 2010 and September 30, 2009, depreciation and
amortization expense related to property and equipment was $7.5 million and $6.8 million
respectively.
4. Intangible Assets
Intangible assets at September 30, 2010 and December 31, 2009 consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September |
|
|
December 31, |
|
|
Useful |
|
|
|
2010 |
|
|
2009 |
|
|
Life |
|
Customer Relations |
|
$ |
31,623 |
|
|
$ |
29,547 |
|
|
5-10 Years |
Trade Name |
|
|
6,432 |
|
|
|
732 |
|
|
5-10 Years |
Restrictive Covenant |
|
|
1,858 |
|
|
|
126 |
|
|
3-5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,913 |
|
|
|
30,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization |
|
|
(17,537 |
) |
|
|
(13,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
22,376 |
|
|
$ |
16,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles is as follows (in thousands):
|
|
|
|
|
12 Months Ending September 30, |
|
|
|
|
|
|
|
|
|
2011 |
|
$ |
5,812 |
|
2012 |
|
|
5,775 |
|
2013 |
|
|
5,334 |
|
2014 |
|
|
1,592 |
|
2015 and thereafter |
|
|
3,863 |
|
|
|
|
|
Total |
|
$ |
22,376 |
|
|
|
|
|
The changes in the carrying amount of goodwill for the nine months ended September 30, 2010
are as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
82,342 |
|
IntegriGuard acquisition |
|
|
1,777 |
|
Initial allocation for Verify Solutions, LLC acquisition |
|
|
7,401 |
|
|
|
|
|
Balance at December 31, 2009 |
|
|
91,520 |
|
Allied Management Group-Special Investigations Unit acquisition |
|
|
19,792 |
|
Chapman Kelly, Inc. |
|
|
9,983 |
|
Adjustments to Verify Solutions, LLC for identified intangibles |
|
|
(3,298 |
) |
|
|
|
|
Balance at September, 30, 2010 |
|
$ |
117,997 |
|
|
|
|
|
14
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
For the three months ended September 30, 2010 and September 30, 2009, amortization expense
related to intangible assets amounted to $1.5 million and $1.2 million respectively.
For the nine months ended September 30, 2010 and September 30, 2009, amortization expense
related to intangible assets amounted to $4.0 million and $3.2 million respectively.
5. Income Taxes
Our effective tax rate decreased to 39.5% for the three months ended September 30, 2010 from
40.8% for the three months ended September 30, 2009, primarily due to a change in state
apportionments. The principal difference between the statutory rate and our effective rate is state
taxes.
Our effective tax rate decreased to 39.9% for the nine months ended September 30, 2010 from
40.9% for the nine months ended September 30, 2009, primarily due to a change in state
apportionments. The principal difference between the statutory rate and our effective rate is state
taxes.
We file income tax returns with the U.S. federal government and various state jurisdictions.
We are no longer subject to U.S. federal income tax examinations for years before 2006. Our 2008
federal tax return is currently being examined by the Internal Revenue Service. We operate in a
number of state and local jurisdictions, most of which have never audited our records. Accordingly,
we are subject to state and local income tax examinations based upon the various statutes of
limitations in each jurisdiction.
During the nine months ended September 30, 2010 and 2009, we recorded a tax benefit of $8.3
million and $7.6 million, respectively, related to the utilization of the income tax benefit from
stock transactions by reducing income tax payable and crediting capital.
At September 30, 2010 and 2009, we had approximately $1.3 million and $0.5 million of net
unrecognized tax benefits, respectively, for which there is uncertainty about the allocation and
apportionment impacting state taxable income. We have recognized interest accrued related to
unrecognized tax benefits in interest expense and penalties in tax expense. The accrued liabilities
related to uncertain tax positions were $0.5 million and $0.2 million at September 30, 2010 and
2009, respectively.
15
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
6. Debt
We have a credit agreement with several banks and other financial institutions, with JPMorgan
Chase Bank, N.A. (JPMCB) as administrative agent, which we refer to as the Credit Agreement. The
Credit Agreement, which expires in September 2011, provided for a term loan of $40 million, which
we refer to as the Term Loan, and revolving credit loans of up to $25 million, which we refer to as
the Revolving Loan. During the year ended December 31, 2009, we repaid in full the $17.3 million
of debt outstanding under the Term Loan. During 2010, there have been no borrowings under the
Revolving Loan; however, as a result of the Letter of Credit for $4.6 million the amount available
under the Revolving Loan as of September 30, 2010 is $20.4 million.
We secured the Term and Revolving Loans with the grant of a security interest, covering our
assets and subsidiaries, in favor of the lenders. Interest on borrowings under the Credit
Agreement is calculated, at our option, at either (i) LIBOR, including statutory reserves, plus a
variable margin based on our leverage ratio, or (ii) the higher of (a) the prime lended rate of
JPMCB, and (b) the Federal Funds Effective Rate plus 0.50%, in each case plus a variable margin
based on our leverage ratio. In connection with the Revolving Loan, we agreed to pay a commitment
fee on the unused portion of the Revolving Loan, payable quarterly in arrears, at a variable rate
based on our leverage ratio.
Commitments under the Credit Agreement will be reduced and borrowings are required to be
repaid with the net proceeds of, among other things, sales or issuances of equity (excluding equity
issued under employee benefit plans and equity issued to sellers as consideration in acquisitions),
sales of assets and any incurrence of indebtedness by us, subject, in each case, to limited
exceptions. Our obligations under the Credit Agreement may be accelerated upon the occurrence of
an event of default under the Credit Agreement, which encompasses customary events of default
including, without limitation, payment defaults, defaults in the performance of affirmative and
negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency
related defaults, defaults relating to such matters as ERISA, uninsured judgments and the failure
to pay certain indebtedness and a change of control default.
In addition, the Credit Agreement contains affirmative, negative and financial covenants
customary for financings of this type. The negative covenants include restrictions on indebtedness,
liens, fundamental changes, dispositions of property, investments, dividends and other restricted
payments. The financial covenants include a consolidated fixed charge coverage ratio, as defined,
of not less than 1.75 to 1.0 and a consolidated leverage ratio, as defined, not to exceed 3.0 to
1.0. We are currently in full compliance with these covenants.
On March 30, 2010, we entered into an amendment to the Credit Agreement, which we refer to as
the First Amendment, to increase the total amount we could spend on acquisitions in any one year
from $10.0 million to $30.0 million. In connection with entering into the First Amendment, the
lenders agreed to waive any default that may have occurred and be continuing as a result of the
Verify Solutions acquisition, which closed on December 31, 2009, as a result of which we exceeded
the aggregate acquisition amount in 2009. This default did not have a material impact on our 2009
financial statements since we had no outstanding debt and only a Letter of Credit outstanding.
7. Earnings Per Share
Basic income per share is calculated by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted income per share is calculated by dividing
net income by the weighted average number of common shares and dilutive common share equivalents
outstanding during the period. Our common share equivalents consist of stock options and
restricted stock awards and units.
16
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
The following table reconciles the basic to diluted weighted average shares outstanding using
the treasury stock method (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Weighted average shares outstanding basic |
|
|
27,336 |
|
|
|
26,228 |
|
|
|
27,122 |
|
|
|
25,953 |
|
Dilutive effect of stock options |
|
|
1,108 |
|
|
|
1,454 |
|
|
|
1,188 |
|
|
|
1,516 |
|
Dilutive effect of restricted stock |
|
|
39 |
|
|
|
15 |
|
|
|
36 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
diluted |
|
|
28,483 |
|
|
|
27,697 |
|
|
|
28,346 |
|
|
|
27,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase approximately 12,379 and 10,000 shares of common stock during the three
months ended September 30, 2010 and 2009, respectively, were not included in the Companys earnings
per share calculations because they are anti-dilutive.
Options to purchase approximately 11,327 and 4,579 shares of common stock during the nine
months ended September 30, 2010 and 2009, respectively, were not included in the Companys earnings
per share calculations because they are anti-dilutive. Restricted stock units representing 502
shares of common stock during the nine months ended September 30, 2010, were not included because
they are anti-dilutive.
8. Stock-Based Compensation
Presented below is a summary of our stock option activity for the nine months ended September
30, 2010, (shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Terms |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
3,036 |
|
|
$ |
17.39 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
2 |
|
|
|
55.09 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(616 |
) |
|
|
8.91 |
|
|
|
|
|
|
|
|
|
Forfeitures |
|
|
(23 |
) |
|
|
31.83 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
2,399 |
|
|
$ |
19.47 |
|
|
|
4.40 |
|
|
$ |
95,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
September 30, 2010 |
|
|
2,346 |
|
|
$ |
19.20 |
|
|
|
0.44 |
|
|
$ |
93,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010 |
|
|
1,297 |
|
|
$ |
11.91 |
|
|
|
4.23 |
|
|
$ |
61,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
The fair value of each option grant was estimated using the Black-Scholes option pricing
model. Expected volatilities are calculated based on the historical volatility of the stock.
Management monitors share option exercise and employee termination patterns to estimate forfeiture
rates within the valuation model. Separate groups of employees that have similar historical
exercise behavior are considered separately for valuation purposes. The expected holding period of
options represents the period of time that options granted are expected to be outstanding. The
risk-free interest rate for periods within the contractual life of the option is based on the
interest rate of a 5-year U.S. Treasury Note in effect on the date of the grant.
As of September 30, 2010, there was approximately $3.7 million of total unrecognized
compensation expense related to stock options outstanding. That expense is expected to be
recognized over a weighted-average period of 1.1 years. No compensation expense related to stock
options was capitalized for the nine months ended September 30, 2010 and 2009, respectively.
The total intrinsic value of options exercised during the three months ended September 30,
2010 and 2009 was $10.2 million and $4.5 million, respectively. The total intrinsic value of
options exercised during the nine month period ended September 30, 2010 and 2009 was $24.4 million
and $21.2 million, respectively.
Total compensation expense charged against income relating to stock options was $1.6 million
and $1.4 million for the three month periods ended September 30, 2010 and 2009, respectively. These
expenses were categorized as selling, general and administration costs for each of those periods.
The total income tax benefit recognized in the income statement for share-based arrangements was
$0.6 million for each of the three months ended September 30, 2010 and 2009.
Total compensation expense related to stock options charged against income was $4.5 million
and $4.0 million for the nine months ended September 30, 2010 and 2009, respectively. These
expenses were categorized as selling, general and administration costs for each of those periods.
The total income tax benefit recognized in the income statement for share-based arrangements was
$1.8 million and $1.6 million for the nine months ended September 30, 2010 and 2009, respectively.
We estimated the fair value of options granted using a Black-Scholes option pricing model with
the following assumptions:
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
2010 |
|
2009 |
|
|
|
|
|
Expected dividend yield |
|
0% |
|
0% |
Risk-free interest rate |
|
2.47% |
|
2.34% |
Expected volatility |
|
43.80% |
|
44.90% |
Expected life |
|
4.0 years |
|
4.0 years |
18
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
Restricted Stock Units
In October 2009, certain employees received restricted stock units under the Third Amended and
Restated 2006 Stock Plan, which we refer to as our 2006 Plan. The fair value of restricted stock
units is estimated based on the closing sale price of our common stock on the NASDAQ Global Select
Market on the date of issuance. The total number of restricted stock units expected to vest is
adjusted by estimated forfeiture rates. As of September 30, 2010, there was approximately $0.7
million of unamortized compensation expense related to restricted stock units which is expected to
be recognized over the remaining weighted-average vesting period of 2.25 years. For the three and
nine months ended September 30, 2010, share-based compensation expense related to restricted stock
units was $0.1 million and $0.2 million, respectively. The total intrinsic value of restricted
stock units outstanding at September 30, 2010 was $0.5 million based on our closing sale price on
that date.
A summary of the status of our restricted stock units as of September 30, 2010 and of changes
in restricted stock units outstanding under the 2006 Plan for the nine months ended September 30,
2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
Grant Date Fair |
|
|
|
Units |
|
|
Value per Unit |
|
Restricted stock units outstanding at December
31, 2009 |
|
|
25,272 |
|
|
$ |
37.82 |
|
Restricted stock units granted |
|
|
907 |
|
|
|
55.09 |
|
Restricted stock units forfeited |
|
|
(595 |
) |
|
|
37.82 |
|
Restricted stock units converted into common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units outstanding at September
30, 2010 |
|
|
25,584 |
|
|
$ |
38.43 |
|
|
|
|
|
|
|
|
Restricted Stock Awards
In February 2009, our executive officers were granted restricted stock awards under the 2006
Plan. The vesting of restricted stock awards is subject to the executive officers continued
employment with us. Recipients of these restricted stock awards are not required to provide us with
any consideration other than rendering service. Holders of restricted stock awards are permitted
to vote and to receive dividends on shares of restricted stock.
The stock-based compensation expense for restricted stock awards is determined based on the
closing market price of our common stock on the grant date of the awards applied to the total
number of awards that are anticipated to fully vest. At September 30, 2010, there was unrecognized
stock-based compensation expense of $2.7 million related to restricted stock awards, which is
expected to be recognized over the weighted-average period of 3.4 years for these restricted stock
awards. For the three and nine months ended September 30, 2010 and 2009, share-based compensation
expense related to restricted stock awards was $0.2 million and $0.6 million, respectively. The
total intrinsic value of restricted stock awards outstanding at September 30, 2010 was $3.6 million
based on our closing sale price on that date.
19
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
A summary of the status of our restricted stock awards as of September 30, 2010 and of changes
in restricted stock awards outstanding under the 2006 Plan for the nine months ended September 30,
2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value per Share |
|
|
|
|
|
|
|
|
|
|
Unvested shares under restricted stock
awards at December 31, 2009 |
|
|
127,918 |
|
|
$ |
31.27 |
|
Restricted stock awards granted |
|
|
|
|
|
|
|
|
Restricted stock awards vested |
|
|
|
|
|
|
|
|
Restricted stock awards forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares under restricted stock
awards at September 30, 2010 |
|
|
127,918 |
|
|
$ |
31.27 |
|
|
|
|
|
|
|
|
9. Commitments and Contingencies
Lease commitments
We lease office space, data processing equipment and software licenses under operating leases
that expire at various dates through 2016.
Minimum annual lease payments to be made each of the next five years ending December 31 and
thereafter are as follows (in thousands):
|
|
|
|
|
Year |
|
Payments |
|
2010 |
|
$ |
12,547 |
|
2011 |
|
|
11,180 |
|
2012 |
|
|
7,813 |
|
2013 |
|
|
3,202 |
|
2014 and thereafter |
|
|
2,134 |
|
|
|
|
|
Total |
|
$ |
36,876 |
|
|
|
|
|
10. Subsequent Events
The Compensation Committee of the Board of Directors approved the grant of 214,944 stock
option awards and 30,433 restricted stock units to employees and directors at $59.32 per share,
the closing price for the Companys common stock on the date of grant, October 1, 2010.
The fair value calculated for stock options and restricted stock units which vest over a range of
1 to 3.25 years was $4.6 million and $1.8 million respectively.
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Revenue Recognition. A majority of our contracts are contingency fee based. We recognize
revenue on contingency fee based contracts when third party payors remit payment to our clients
and, consequently, the contingency is deemed to have been satisfied. For certain contracts, this
may result in revenue being recognized in irregular increments. We recognize revenue on our general
service agreements as work is performed and amounts are earned. We consider amounts to be earned
once evidence of an arrangement has been obtained, services are delivered, fees are fixed or
determinable and collectability is reasonably assured. Our contracts with the federal government
generally are cost-plus or time and material based. Revenue on cost-plus contracts is recognized
based on costs incurred plus an estimate of the negotiated fee earned. Revenue on time and
materials contracts is recognized based on hours worked and expenses incurred.
Where contracts have multiple deliverables, we evaluate these deliverables at the inception of
each contract and as each item is delivered. As part of this evaluation, we consider whether (i) a
delivered item has value to a client on a stand-alone basis; (ii) there is objective and reliable
evidence of the fair market value of the undelivered items; and (iii) the delivery of the
undelivered items is considered probable and substantially within our control, if a general right
of return exists. Where deliverables, or groups of deliverables, have all three of these
characteristics, we treat each deliverable item as a separate unit of accounting and apply the
relevant revenue recognition guidance to each deliverable. Arrangements, including implementation
and transaction related revenue, are accounted for as a single unit of accounting. Since
implementation services do not carry a standalone value, the revenue relating to these services is
recognized over the term of the client contract to which it relates.
Expense Classifications: Cost of services in the statement of income is presented in the seven
categories set forth below. Each category of cost excludes costs relating to selling, general and
administrative functions which are presented separately as a component of total operating expenses.
All revenue and expenses are reported under one operating segment. A description of the primary
costs included in each category is provided below:
|
|
|
Compensation: Salary, benefit, bonus and stock based compensation costs. |
|
|
|
Data processing: Hardware, software and data communication costs. |
|
|
|
Occupancy: Rent, utilities, depreciation, office equipment, repair and maintenance
costs. |
|
|
|
Direct project costs: Variable costs incurred that are directly associated with specific
revenue generating projects. |
|
|
|
Other operating costs: Professional fees, temporary staffing, travel and entertainment,
insurance, and local and property tax costs. |
|
|
|
Amortization of intangibles: Amortization cost of acquisition-related software and
intangible assets. |
|
|
|
Selling, general and administrative: Costs related to general management, marketing and
administrative activities. |
Since the date of the Annual Report for the year ended December 31, 2009, there have been no
material changes to our critical accounting policies.
21
Overview
We provide a variety of cost containment, coordination of benefits and program integrity
services for government-sponsored health and human services programs. These services are designed
to help our clients recover amounts due from liable third parties, reduce costs, ensure regulatory
compliance and increase operational efficiencies.
Our clients are state Medicaid agencies, government-sponsored managed care
organizations, Pharmacy Benefit Managers, child support agencies, Veterans Health Administration,
Medicare and Medicaid Services, commercial plans, employer-sponsored health care plans and other
healthcare payors. We help these payors contain healthcare costs by identifying third party
insurance coverage and recovering expenditures that were the responsibility of the third party, or
that were paid in error. In December 2009, with the acquisition of Verify Solutions, we moved into
the employer-based market with valuable new services that ensure that dependents covered by
employees are eligible to receive healthcare benefits.
Our principal source of funds has been operations and we believe that we have sufficient cash
and cash equivalents to support our operating needs through at least the next twelve months. At
September 30, 2010, we had cash and cash equivalents of $66.0 million, and net working capital of
$121.8 million. We have a credit agreement with several banks and other financial institutions with
JPMorgan Chase Bank, N.A. (JPMCB), as administrative agent, which we refer to as the Credit
Agreement. The Credit Agreement provided for a term loan of $40 million, which we refer to as the
Term Loan, and revolving credit loans of up to $25 million, which we refer to as the Revolving
Loan. During the year ended December 31, 2009, we repaid in full the $17.3 million of debt
outstanding under the Term Loan; however, we continue to have an irrevocable standby Letter of
Credit for $4.6 million against the Revolving Loan, which we refer to as the Letter of Credit, as
required by a contractual arrangement with a client. As a result of the letter of credit of $4.6
million, the amount available under the Revolving Loan as of September 30, 2010 is $20.4 million.
Although we expect that operating cash flows will continue to be a primary source of liquidity for
our operating needs, we also have the remaining balance of the Revolving Loan available for future
cash flow needs, if necessary.
Our revenue, most of which is derived from contingency fees, has increased at an average
compounded rate of approximately 35.4% per year for the last five years. Our growth has been
attributable to our expansion of existing product offerings and acquisitions, as well as an overall
increase in Medicaid costs, which has historically averaged approximately 8% annually. In
addition, state governments have increased their use of vendors for the coordination of benefits
and other cost containment functions, and we have been able to increase our revenue through these
initiatives. Leveraging our work on behalf of state Medicaid fee-for-service programs, we have
penetrated the Medicaid managed care market, into which more Medicaid lives are being shifted. As
of September 30, 2010, we served the District of Columbia and 40 state Medicaid programs, and 123
Medicaid health plans under an aggregate of 56 contracts.
To date, we have grown our business through the internal development of new services and
through acquisitions of businesses whose core services strengthen our overall mission to help our
clients control healthcare costs. Most recently, we acquired Chapman Kelly, Inc., a leading
provider of claims audit and beneficiary eligibility audit services to employers and managed care
organizations. We are continuously evaluating opportunities that will enable us to expand the
breadth of the services we provide and will consider acquisition opportunities that enable us to
continue to grow our business to address the increasing needs of the healthcare industry in the
post-healthcare reform era.
22
In March 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into law.
According to Centers for Medicare & Medicaid Services (CMS), under the PPACA, approximately an
additional 18 million lives will be added to Medicaid, which will more than double Medicaid
enrollment. In addition, the PPACA includes a number of provisions for combating fraud and abuse
throughout the healthcare system, allows for significant increases in funding for program integrity
initiatives and provides for the creation of insurance exchanges. The PPACA largely preserves and
builds upon the employer-sponsored health coverage model. However, under the PPACA, employers are
faced with new compliance guidelines, coverage requirements and mandates that will challenge their
systems and processes and will likely raise their healthcare costs. We plan to build on our
existing partnerships with states, the federal government, and health plans to provide services
that address the program integrity, fraud and abuse initiatives created by the PPACA and to assist
these clients in meeting the requirements of the PPACA. In addition, we believe that we are
well-positioned to work with employers to address the new requirements of the PPACA and plan to
work with our clients to develop collaborations that support the overarching goal of controlling
healthcare costs.
In addition to the information provided below, you should refer to the items disclosed as our
Critical Accounting Policies in Part II, Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations of our Annual Report.
23
SUMMARY OF OPERATING RESULTS
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
The following table sets forth, for the periods indicated, certain items in our consolidated
statements of income expressed as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
Revenue |
|
$ |
80,022 |
|
|
|
100.0 |
% |
|
$ |
59,164 |
|
|
|
100.0 |
% |
Cost of service: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
28,013 |
|
|
|
35.0 |
% |
|
|
19,191 |
|
|
|
32.4 |
% |
Data processing |
|
|
4,600 |
|
|
|
5.7 |
% |
|
|
3,476 |
|
|
|
5.9 |
% |
Occupancy |
|
|
3,560 |
|
|
|
4.4 |
% |
|
|
2,540 |
|
|
|
4.3 |
% |
Direct project costs |
|
|
9,818 |
|
|
|
12.4 |
% |
|
|
7,446 |
|
|
|
12.6 |
% |
Other operating costs |
|
|
4,664 |
|
|
|
5.8 |
% |
|
|
3,617 |
|
|
|
6.1 |
% |
Amortization of intangibles |
|
|
1,665 |
|
|
|
2.1 |
% |
|
|
1,211 |
|
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services |
|
|
52,320 |
|
|
|
65.4 |
% |
|
|
37,481 |
|
|
|
63.4 |
% |
Selling, general, and
administrative expenses |
|
|
9,424 |
|
|
|
11.8 |
% |
|
|
7,322 |
|
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
61,744 |
|
|
|
77.2 |
% |
|
|
44,803 |
|
|
|
75.7 |
% |
Operating income |
|
|
18,278 |
|
|
|
22.8 |
% |
|
|
14,361 |
|
|
|
24.3 |
% |
Interest expense |
|
|
(24 |
) |
|
|
0.0 |
% |
|
|
(254 |
) |
|
|
-0.4 |
% |
Net real estate expense |
|
|
(31 |
) |
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Net interest income |
|
|
32 |
|
|
|
0.0 |
% |
|
|
46 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
18,255 |
|
|
|
22.8 |
% |
|
|
14,153 |
|
|
|
23.9 |
% |
Income taxes |
|
|
7,209 |
|
|
|
9.0 |
% |
|
|
5,774 |
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,046 |
|
|
|
13.8 |
% |
|
$ |
8,379 |
|
|
|
14.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the three months ended September 30, 2010 was $80.0 million, an increase of $20.8
million or 35.3% compared to revenue of $59.2 million in the same quarter for the prior year.
Organic growth in existing client accounts provided $7.4 million of the increase in revenue,
together with changes in the yield and scope of these projects, and differences in the timing of
when client projects were completed in the current year compared to the prior year. Revenue
generated by our 2009 acquisitions, IntegriGuard and Verify Solutions, was $7.0 million. Revenue
generated by our 2010 acquisitions, AMG-SIU and Chapman Kelly, was $0.8 million. Revenue generated
by approximately 20 new clients for whom there was no revenue in the same quarter of the prior year
was $6.2 million. These increases were partially offset by a decrease in revenue of $0.6 million as
a result of expired contracts.
Compensation expense as a percentage of revenue was 35.0% for the three months ended September
30, 2010 compared to 32.4% for the three months ended September 30, 2009. Compensation expense for
the current quarter was $28.0 million, an $8.8 million or 46.0% increase over the same quarter for
the prior year expense of $19.2 million. During the quarter ended September 30, 2010, we averaged
1,455 employees, a 50.6% increase over our average of 966 employees during the quarter ended
September 30, 2009. The increase in compensation expense resulted from $6.8 million in additional
salary expense related to headcount additions, annual salary increases and a $2.0 million
increase in benefit expense.
24
Data processing expense as a percentage of revenue was 5.7% for the three months ended
September 30, 2010 compared to 5.9% for the three months ended September 30, 2009. Data processing
expense for the current quarter was $4.6 million, an increase of $1.1 million or 32.3% over the
same quarter for the prior year expense of $3.5 million. The increase resulted from a $0.6 million
increase in software expense associated with mainframe and network upgrades, a $0.3 million
increase in data communications and data costs related to the growth of our business, including the
number of employees and office locations, and a $0.2 million increase in hardware expense related
to upgrades and the use of hosted service environments.
Occupancy expense as a percentage of revenue was 4.4% for the three months ended September 30,
2010 compared to 4.3% for the three months ended September 30, 2009. Occupancy expense for the
current quarter was $3.5 million, a $1.0 million or 40.1% increase compared to the same quarter for
the prior year expense of $2.5 million. This increase reflects $1.0 million in higher occupancy
expense related to our acquisitions of IntegriGuard, AMG-SIU and Chapman Kelly.
Direct project expense as a percentage of revenue was 12.4% for the three months ended
September 30, 2010 compared to 12.6% for the three months ended September 30, 2009. Direct project
expense for the current quarter was $9.8 million, a $2.4 million or 31.9% increase compared to same
quarter for the prior year expense of $7.4 million. This increase resulted from a $1.2 million
increase in subcontractor fees, a $0.5 million increase in allowance for doubtful account expense,
a $0.4 million increase in delivery, postage and lockbox expenses, and a $0.3 million increase in
professional fees, primarily marketing partner and data conversion service fees.
Other operating costs as a percentage of revenue were 5.8% for the three months ended
September 30, 2010 compared to 6.1% for the three months ended September 30, 2009. Other operating
costs for the current quarter were $4.7 million, an increase of $1.1 million or 28.9% compared to
the same quarter for the prior year expense of $3.6 million. This increase resulted primarily from
a $0.9 million increase in professional services, consisting of temporary help and consulting
services, $0.2 million for supplies, delivery and other office-related expenses, $0.1 million of
additional travel expenses related to business expansion, and $0.1 million of additional strategic
planning expense. These increases were offset by a $0.2 million decrease in employee relocation
expenses.
Amortization of acquisition-related software and intangibles as a percentage of revenue was
2.1% for the three months ended September 30, 2010 compared to 2.0% for the three months ended
September 30, 2009. Amortization of acquisition-related software and intangibles for the current
quarter was $1.7 million, a $0.5 million or 37.5% increase compared to the same quarter for the
prior year expense of $1.2 million. The $0.5 million increase compared to last year resulted from
our acquisitions of IntegriGuard, Verify Solutions, and our 2010 acquisitions of AMG-SIU and
Chapman Kelly. There was no amortization expense in the prior year period related to these
acquisitions.
Selling, general, and administrative expense as a percentage of revenue was 11.8% for the
three months ended September 30, 2010 compared to 12.4% for the three months ended September 30,
2009. Selling, general, and administrative expense for the current quarter was $9.4 million, a
$2.1 million or 28.7% increase compared to the same quarter for the prior year expense of $7.3
million. During the quarter ended September 30, 2010, we averaged 94 corporate employees, a 19.0%
increase over our average of 79 corporate employees during the quarter ended September 30, 2009.
Compensation expense increased by $1.2 million due to a $0.5 million increase related to headcount
additions and annual salary increases, a $0.3 million increase for variable compensation, a $0.3
million increase for stock compensation expense, and a $0.1 million increase in benefits expense.
Data processing expense increased by $0.2 million due to our use of hosting services and certain
software upgrades. Other operating expenses increased by $0.7 million, of which $0.4 million
related to employee recruitment and
relocation and $0.3 million related to costs associated with SEC filings, and board and
shareholder meetings.
25
Operating income for the three months ended September 30, 2010 was $18.3 million, an increase
of $3.9 million or 27.3%, compared to $14.4 million for the three months ended September 30, 2009.
This increase was primarily the result of increased revenue, which was partially offset by
incremental operating costs incurred during the quarter ended September 30, 2010.
Interest expense was $24,000 for the three months ended September 30, 2010 compared to
$254,000 for the same quarter for the prior year. In the current period, interest expense
represents commitment fees for our Credit Agreement and issuance fees for our Letter of Credit, as
our loan was repaid in October 2009. In the prior period, interest expense was attributable to
borrowings under the Term Loan, amortization of deferred financing costs, commitment fees for our
Credit Agreement and issuance fees for our Letter of Credit. Interest income was $32,000 for the
three months ended September 30, 2010 compared to interest income of $46,000 for the three months
ended September 30, 2009, principally due to lower interest rates partially offset by higher cash
balances. Net other expense relating to our building in Irving, Texas was $31,000. We did not
incur any real estate expense in the prior year period.
We recorded income tax expense of $7.2 million for the quarter ended September 30, 2010
compared to income tax expense of $5.8 million for the three months ended September 30, 2009, an
increase of $1.4 million. Our effective tax rate decreased to 39.5% for the quarter ended
September 30, 2010 from 40.8% for the quarter ended September 30, 2009 primarily due to a change in
state apportionments. The principal difference between the statutory rate and our effective rate is
state taxes.
Net income of $11.0 million in the current quarter represents an increase of $2.6 million, or
31.8%, compared to net income of $8.4 million in the same quarter for the prior year.
26
Nine Months Ended September 30, 2010 and 2009
The following table sets forth, for the periods indicated, certain items in our Consolidated
Statements of Income expressed as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Nine months ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
Revenue |
|
$ |
215,700 |
|
|
|
100.0 |
% |
|
$ |
162,920 |
|
|
|
100.0 |
% |
Cost of service: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
78,723 |
|
|
|
36.5 |
% |
|
|
54,537 |
|
|
|
33.5 |
% |
Data processing |
|
|
12,749 |
|
|
|
5.9 |
% |
|
|
10,113 |
|
|
|
6.2 |
% |
Occupancy |
|
|
9,882 |
|
|
|
4.6 |
% |
|
|
7,769 |
|
|
|
4.8 |
% |
Direct project costs |
|
|
25,596 |
|
|
|
11.9 |
% |
|
|
21,170 |
|
|
|
13.0 |
% |
Other operating costs |
|
|
12,085 |
|
|
|
5.6 |
% |
|
|
9,829 |
|
|
|
6.0 |
% |
Amortization of intangibles |
|
|
4,566 |
|
|
|
2.1 |
% |
|
|
3,643 |
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services |
|
|
143,601 |
|
|
|
66.6 |
% |
|
|
107,061 |
|
|
|
65.7 |
% |
Selling, general, and
administrative expenses |
|
|
25,920 |
|
|
|
12.0 |
% |
|
|
20,196 |
|
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
169,521 |
|
|
|
78.6 |
% |
|
|
127,257 |
|
|
|
78.1 |
% |
Operating income |
|
|
46,179 |
|
|
|
21.4 |
% |
|
|
35,663 |
|
|
|
21.9 |
% |
Interest expense |
|
|
(70 |
) |
|
|
0.0 |
% |
|
|
(820 |
) |
|
|
-0.5 |
% |
Net real estate expense |
|
|
(31 |
) |
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Net interest income |
|
|
73 |
|
|
|
0.0 |
% |
|
|
199 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
46,151 |
|
|
|
21.4 |
% |
|
|
35,042 |
|
|
|
21.5 |
% |
Income taxes |
|
|
18,414 |
|
|
|
8.5 |
% |
|
|
14,319 |
|
|
|
8.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,737 |
|
|
|
12.9 |
% |
|
$ |
20,723 |
|
|
|
12.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the nine months ended September 30, 2010 was $215.7 million, an increase of $52.8
million or 32.4% compared to revenue of $162.9 million in the same period for the prior year.
Organic growth in existing client accounts provided $25.3 million of the increase in revenue,
together with changes in the yield and scope of those projects, and differences in the timing of
when client projects were completed in the current year compared to the prior year. Revenue
generated by our 2009 acquisitions, IntegriGuard and Verify Solutions, was $18.3 million. Revenue
generated by our 2010 acquisitions, AMG-SIU and Chapman Kelly, was $0.8 million. Revenue generated
by approximately 20 new clients for whom there was no revenue in the same period of the prior year
was $15.0 million. These increases were partially offset by a decrease of $6.6 million as a result
of expired contracts.
Compensation expense as a percentage of revenue was 36.5% for the nine months ended September
30, 2010 compared to 33.5% for the nine months ended September 30, 2009. Compensation expense for
the current period was $78.7 million, a $24.2 million or 44.8% increase over the same period for
the prior year expense of $54.5 million. During the nine months ended September 30, 2010, we
averaged 1,353 employees, a 47.7% increase over our average of 916 employees during the nine months
ended September 30, 2009. The increase in compensation expense reflects increases of $18.5 million
in salary expense related to headcount additions and annual salary increases, $4.5 million for
benefits, and $1.2 million related to variable compensation.
27
Data processing expense as a percentage of revenue was 5.9% for the nine months ended
September 30, 2010 compared to 6.2% for the nine months ended September 30, 2009. Data processing
expense for the current period was $12.7 million, an increase of $2.6 million or 26.1% over the
same period for the prior year expense of $10.1 million. The increase reflects $1.6 million in
software expense associated with mainframe and network upgrades, a $0.7 million increase for data
communications and data costs related to a number of line and capacity upgrades, and a $0.3 million
increase in hardware maintenance and related costs.
Occupancy expense as a percentage of revenue was 4.6% for the nine months ended September 30,
2010 compared to 4.8% for the nine months ended September 30, 2009. Occupancy expense for the
current period was $9.9 million, an increase of $2.1 million or 27.2% over the same period for the
prior year expense of $7.8 million. Rent and related expense increases of $2.1 million resulting
from our acquisitions of IntegriGuard, Verify Solutions, AMG-SIU and Chapman Kelly and a decrease
of $0.6 million relating to the write off of accrued rent liabilities as a result of the Irving,
Texas building purchase. Other increases included a $0.2 million increase in depreciation of
furniture and fixtures, leasehold improvements, office and telephone equipment, a $0.2 million
increase in utilities and telephone expense, a $0.2 million increase in equipment expense, rental
and maintenance, primarily of photocopy and mail machines.
Direct project expense as a percentage of revenue was 11.9% for the nine months ended
September 30, 2010 compared to 13.0% for the nine months ended September 30, 2009. Direct project
expense for the current period was $25.6 million, a $4.4 million or 20.9% increase compared to the
same period for the prior year expense of $21.2 million. This increase resulted from a $1.4 million
increase in professional fees, primarily marketing partner and data conversion service fees, a $1.1
million increase in delivery, postage and lockbox expenses, a $0.8 million increase in
subcontractor fees, a $0.5 million increase in allowance for doubtful account expense, a $0.3
million increase in travel expenses, and $0.3 million of other direct costs, including
project-specific training and other charges.
Other operating costs as a percentage of revenue were 5.6% for the nine months ended September
30, 2010 compared to 6.0% for the nine months ended September 30, 2009. Other operating costs for
the current period were $12.1 million, an increase of $2.3 million or 23.0% compared to the same
period for the prior year expense of $9.8 million. This resulted from a $1.4 million increase in
professional services, consisting of temporary help and consulting services, $0.6 million for
supplies, delivery and other office-related expenses, and $0.3 million of additional travel
expenses related to business expansion.
Amortization of acquisition-related software and intangibles as a percentage of revenue was
2.1% for the nine months ended September 30, 2010 compared to 2.2% for the nine months ended
September 30, 2009. Amortization of acquisition-related software and intangibles for the current
period was $4.6 million, a $1.0 million or 25.3% increase compared to the same period for the prior
year expense of $3.6 million. The $1.0 million increase compared to last year resulted from our
acquisitions of IntegriGuard, Verify Solutions, AMG-SIU and Chapman Kelly. There was no
amortization in the prior year period related to these acquisitions.
Selling, general, and administrative expense as a percentage of revenue was 12.0% for the nine
months ended September 30, 2010 compared to 12.4% for the nine months ended September 30, 2009.
Selling, general, and administrative expense for the current period was $25.9 million, a $5.7
million or 28.3% increase compared to the same period for the prior year expense of $20.2 million.
Compensation expense increased by $3.5 million due to a $1.5 million increase in salary expense, a
$0.7 million increase in variable compensation, a $0.9 million increase in stock compensation
expense, and a $0.4 million increase in benefits expenses. During the period ended September 30,
2010, we averaged 92 corporate employees, a 24.3% increase over our average of 74 employees during
the period ended September 30, 2009. Other operating expenses increased by $2.1 million, which
included $0.6 million related to accounting fees and $0.5 million related to transaction fee
expenses primarily for the AMG-SIU acquisition. Other increases included $0.4 million in costs
related to SEC filings, board and shareholder meetings, $0.3 million for insurance, supplies,
delivery, subscriptions and dues, $0.2 million for employee recruitment and relocation expense, and
$0.1 million for travel expenses. Data processing expense increased by $0.2 million related to our
use of hosting services and software upgrades. Occupancy expense decreased by $0.1 million,
primarily due to our vacating and subleasing one floor of office space at our New York City office
starting in May 2009.
28
Operating income for the nine months ended September 30, 2010 was $46.2 million, an increase
of $10.5 million or 29.5%, compared to $35.7 million for the nine months ended September 30, 2009.
This increase was the result of increased revenue, which was partially offset by incremental
operating costs incurred during the period ended September 30, 2010.
Interest expense was $70,000 for the nine months ended September 30, 2010 compared to $820,000
for the nine months ended September 30, 2009. In the current period, interest expense represents
commitment fees for our Credit Agreement and issuance fees for our Letter of Credit, as our loan
was repaid in October 2009. In the prior period, interest expense was attributable to borrowings
under the Term Loan, amortization of deferred financing costs, commitment fees for our Credit
Agreement and issuance fees for our Letter of Credit. Interest income was $73,000 for the nine
months ended September 30, 2010 compared to interest income of $199,000 for the nine months ended
September 30, 2009, principally due to lower interest rates, partially offset by higher cash
balances. Net other expense relating to our building in Irving, Texas was $31,000. We did not
incur any real estate expense in the prior year period.
Income tax expense of $18.4 million was recorded for the nine months ended September 30, 2010
compared to $14.3 million for the nine months ended September 30, 2009, an increase of $4.1
million. Our effective tax rate decreased to 39.9% for the nine months ended September 30, 2010
from 40.9% for the period ended September 30, 2009 primarily due to a change in state
apportionments. The principal difference between the statutory rate and our effective rate is state
taxes.
Net income of $27.7 million for the nine months ended September 30, 2010 represents an
increase of $7.0 million, or 33.8%, compared to net income of $20.7 million for the nine months
ended September 30, 2009.
Off-Balance Sheet Arrangements
Other than our Letter of Credit, we do not have any off-balance sheet arrangements. See
Footnote 5 of the Notes to Unaudited Consolidated Financial Statements.
Liquidity and Capital Resources
Our principal source of funds has been operations and we believe that we have sufficient cash
and cash equivalents to support our operating needs through at least the next 12 months. At
September 30, 2010, our cash and cash equivalents and net working capital were $66.0 million and
$121.8 million, respectively. Although we expect that operating cash flows will continue to be a
primary source of liquidity for our operating needs, we also have $20.4 million available under our
Revolving Loan for future cash flow needs. There are currently no loans outstanding under the
Revolving Loan; however, we have a $4.6 million Letter of Credit that reduces the availability
under the Revolving Loan.
Net cash provided by operating activities for the nine months ended September 30, 2010 was
$35.1 million compared to $24.7 million for the same period in 2009. The increase in cash provided
by operating activities primarily resulted from net income of $27.7 million, decreases in deferred
tax assets and other assets, in addition to non-cash expenses of share-based compensation,
depreciation and
amortization. These sources of cash were partially offset by increases in accounts receivable and
prepaid assets.
29
Net cash used in investing activities for the nine months ended September 30, 2010 was $47.7
million compared to $13.0 million for the same period in 2009. Cash used in investing activities
for the nine months ended September 30, 2010 included the acquisitions of Chapman Kelly for $13.0
million and AMG-SIU for $12.8 million, and the purchase of land and a building in Irving, Texas for
$9.9 million.
Investments in property, equipment and purchased software were $10.5 million compared to $6.5
million for the same period in 2009. Investment in capitalized software for the nine months ended
September 30, 2010 was $1.5 million compared to $1.2 million for the same period in 2009.
Net cash provided by financing activities for the nine months ended September 30, 2010 was
$13.8 million compared to $8.6 million for the same period in 2009. Proceeds from stock option
exercises in 2010 and 2009 were $5.5 million and $5.7 million, respectively. The excess tax
benefits from stock option exercises for the nine months ended September 30, 2010 and 2009 were
$8.3 million and $7.6 million, respectively. Repayment of debt for the nine months ended September
30, 2009 was $4.7 million. We had no debt outstanding during 2010, as our debt was repaid in full
in October 2009.
The net increase in cash and cash equivalents for the nine months ended September 30, 2010 was
$1.2 million compared to $20.3 million for the same period in 2009.
The number of days sales outstanding for the nine months ended September 30, 2010 increased to
85 days from 84 days at September 30, 2009.
Operating cash flows could be adversely affected by a decrease in demand for our services.
The majority of our client relationships have been in place for several years, and as a result, we
do not expect any decrease in the demand for our services in the near term.
Contractual Obligations
The table below has been updated to reflect contingent consideration that may be paid pursuant
to asset purchases or business combinations (in thousands) and the decrease in operating lease
expense associated with the purchase of the Irving, Texas facility on June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
than 5 |
|
Contractual obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
Years |
|
Operating leases |
|
$ |
36,876 |
|
|
$ |
12,547 |
|
|
$ |
18,993 |
|
|
$ |
4,414 |
|
|
$ |
922 |
|
Interest expense (1) |
|
|
117 |
|
|
|
94 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
Earn out payments |
|
|
14,545 |
|
|
|
4,461 |
|
|
|
10,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,538 |
|
|
$ |
17,102 |
|
|
$ |
29,100 |
|
|
$ |
4,414 |
|
|
$ |
922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest expense represents the commitment fee due on the Credit Agreement and the
interest due on the Letter of Credit. See Note 5 of the Notes to Consolidated Financial
Statements for additional information regarding the Credit Agreement. |
30
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board, FASB, issued guidance that amends
ASC Topic 820, Fair Value Measurements and Disclosures, that requires reporting entities to make
new disclosures about recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair-value measurements and information about
purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3
fair-value measurements. This guidance also clarifies existing fair-value measurement disclosure
guidance about the level of disaggregation, inputs, and valuation techniques. Except for the
detailed Level 3 roll forward disclosures, which were effective, the guidance was effective for
reporting periods beginning after December 15, 2009 and did not have an impact on our consolidated
interim financial statement.
In October 2009, the Financial Accounting Standards Board, FASB, issued Accounting Standards
Update 2009-13, Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging
Issues Task Force, to provide amendments to the criteria in Subtopic 609-24 of the Accounting
Standards Codification, which we refer to as ASU 2009-13, for separating consideration into
multiple-deliverable revenue arrangements. ASU 2009-13 establishes a selling price hierarchy for
determining the selling price of each specific deliverable, which includes vendor-specific
objective evidence, or VSOE, if available, third party evidence if VSOE is not available or
estimated selling price if neither VSOE nor third party evidence is available. ASU 2009-13 also
eliminates the residual method for allocating revenue between the elements of an arrangement and
requires that arrangement consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price method, which allocates any discount in the
arrangement proportionally to each deliverable on the basis of each deliverables selling price.
This update expands the disclosure requirements regarding a vendors multiple-deliverable revenue
arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the impact of ASU 2009-13 on our consolidated financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) that are designed to ensure that information required to be disclosed by us in
reports that we file under the Exchange Act is recorded, processed, summarized and reported as
specified in the SECs rules and forms, and that such information required to be disclosed by us in
reports that we file under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions
regarding required disclosure.
As required by Rule 13a-15(b) under the Exchange Act, management, with the participation of
our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the
effectiveness of our disclosure controls and procedures as of September 30, 2010. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this quarterly
report.
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation of our controls performed during the quarter ended September 30,
2010
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
31
PART II OTHER INFORMATION
Item 1A. Risk Factors
Risks that could have a negative impact on our business, results of operations and financial
condition include without limitation (i) the development by competitors of new or superior services
or products or the entry into the market of new competitors; (ii) all the risks inherent in the
development, introduction, and implementation of new products and services; (iii) the loss of a
major customer, customer dissatisfaction or early termination of customer contracts triggering
significant costs or liabilities; (iv) variations in our results of operations; (v) negative
results of government reviews, audits or investigations to verify our compliance with contracts and
applicable laws and regulations; (vi) changing conditions in the healthcare industry which could
simplify the reimbursement process and reduce the need for and price of our services; (vii)
government regulatory, political and budgetary pressures that could affect the procurement
practices and operations of healthcare organizations, reducing the demand for our services; and
(viii) our failure to comply with laws and regulations governing health data or to protect such
data from theft and misuse. A more detailed description of each of these and other risk factors can
be found under the caption Risk Factors in our most recent Annual Report on Form 10-K, filed with
the SEC on February 26, 2010. There have been no material changes to the risk factors described in
our most recent Annual Report on Form 10-K.
Item 6. Exhibits
The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed on the Exhibit Index
immediately following the Signatures.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Date: November 8, 2010 |
|
HMS HOLDINGS CORP. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ William C. Lucia
William C. Lucia
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
and Duly Authorized Officer |
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Walter D. Hosp
Walter D. Hosp
|
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
and Duly Authorized Officer |
|
|
|
|
|
|
(Principal Financial Officer) |
|
|
33
Exhibit Index
|
|
|
Exhibit No. |
|
Description |
|
|
|
10.1
|
|
HMS Holdings Corp. Director Deferred Compensation Plan |
|
|
|
10.2
|
|
Form of 2010 Director Non-Qualified Stock Option Agreement
Under the Third Amendment and Restated 2006 Stock
Plan |
|
|
|
10.3
|
|
Form of 2010 Director Restricted Stock Unit Agreement
Under the Third Amendment and Restated 2006 Stock Plan |
|
|
|
10.4
|
|
Form 2010 Employee Non-Qualified Stock Option Agreement Under
the Third Amendment and Restated 2006 Stock Plan |
|
|
|
10.5
|
|
Form of 2010 Employee Restricted Stock Unit Agreement Under
the Third Amendment and Restated 2006 Stock Plan |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Principal
Executive Officer of HMS Holdings Corp., as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Principal
Financial Officer of HMS Holdings Corp. , as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Section 1350 Certification of the Principal Executive Officer
of HMS Holdings Corp. , as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Section 1350 Certification of the Principal Financial Officer
of HMS Holdings Corp. , as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
101.INS
|
|
XBRL Instance Document |
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
34