The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
results of operations and financial condition. The MD&A is provided as a
supplement to, and should be read in conjunction with, the Company's Annual
Report on Form 10-K for the fiscal year ended
In addition to historical data, the discussion contains forward-looking statements about the business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in Cautionary Notice Regarding Forward-Looking Statements and Part II, Item1A, Risk Factors.
Overview
We are a leading independent healthcare technology company, focused on
accelerating the transformation of the healthcare system through the power of
our healthcare platform. We provide data and analytics-driven solutions to
improve clinical, financial, administrative, and patient engagement outcomes in
the
21
--------------------------------------------------------------------------------
Our platform and comprehensive suite of software, analytics, technology enabled services and network solutions drive improved results in the complex workflows of healthcare system payers and providers by enhancing clinical decision making, simplifying billing, collection and payment processes, and enabling a better patient experience.
Our healthcare platform supports one of the largest clinical and financial
healthcare networks in the
We were originally formed to hold an equity investment in
Recent Developments
The UHG Transaction
On
The UHG Agreement contains representations, warranties, covenants, closing conditions and termination rights customary for transactions of this type. Until the earlier of the termination of the UHG Agreement and the consummation of the transaction, we have agreed to operate our business in the ordinary course and have agreed to certain other operating covenants, as set forth in the UHG Agreement.
On
Both the Company and UnitedHealth Group have now certified substantial
compliance with the Second Request. On
Term Loan Repayment
In the second quarter of fiscal year 2022, we repaid
Key Components of Our Results of Operations
Qualified McKesson Exit
Prior to the Merger, we accounted for our investment in the Joint Venture using the equity method of accounting. Subsequent to the Merger, we own 100% of the Joint Venture and consolidate its results of operations. We accounted for the Merger as a business combination achieved in stages in accordance with Accounting Standards Codification 805, Business Combinations ("ASC 805"). As a result of the accounting for this transaction and the change in basis of accounting, our consolidated results reflect fair value adjustments to various assets and liabilities, including deferred revenue, goodwill, and intangible assets.
Segments
We report our financial results in three reportable segments: Software and Analytics, Network Solutions and Technology-Enabled Services.
•The Software and Analytics segment provides solutions for revenue cycle management, provider network management,
22
--------------------------------------------------------------------------------
payment accuracy, value-based payments, clinical decision support, consumer engagement, risk adjustment and quality performance, and imaging and clinical workflow.
•The Network Solutions segment provides solutions for financial, administrative, clinical and pharmacy transactions, electronic payments and aggregation and analytics of clinical and financial data.
•The Technology-Enabled Services segment provides solutions for financial and administrative management, value-based care, communication and payment, pharmacy benefits administration and healthcare consulting.
Factors Affecting Results of Operations
The following are certain key factors that affect, will affect, or have recently affected, our results of operations:
Macroeconomic and Industry Trends
While conditions have improved since the onset of the COVID-19 pandemic, the spread of COVID-19 has driven lower healthcare utilization as a result of the significant reduction in, or in some cases temporary elimination of, elective medical procedures and healthcare visits, without a corresponding increase in COVID-19 related transactions. A portion of our business is tied to overall volume of activity in the healthcare system, and therefore, we have been adversely impacted by this industry trend. Additionally, unemployment rates continue to be higher than prior to the onset of the COVID-19 pandemic, which has caused commercial payer membership to decline and continues to impact healthcare utilization and transaction volumes.
In response to COVID-19, we initiated a number of actions with our employees' health being our first priority. We also focused on serving our customers and introducing new products and services to address their previously unexpected needs related to COVID-19. While the availability of approved COVID-19 vaccines and their impact on the economy has been encouraging, we cannot predict the length of time it may take for normal healthcare volumes to return and the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted by COVID-19. However, we continue to assess its impact on our business and are actively managing our response as the pandemic evolves. We believe the solutions we provide our customers will be as important, if not more, post-COVID-19.
Acquisitions and Divestitures
Prior to entering into the UHG Agreement, we actively evaluated opportunities to improve and expand our business through targeted acquisitions that are consistent with our strategy. As the UHG Agreement places certain restrictions on the types of acquisitions we can engage in without UnitedHealth Group's consent, we anticipate such activity to be more limited prior to the expected closing of the UHG Transaction. On occasion, and subject to the restrictions set forth in the UHG Agreement, we may also dispose of certain components of our business that no longer fit within our overall strategy. Because of the acquisition and divestiture activity as well as the shifting revenue mix of our business due to this activity, our results of operations may not be directly comparable among periods. See Note 4, Business Combinations, and Note 5, Dispositions, for details of recent activity.
23
--------------------------------------------------------------------------------
Results of Operations
Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 Three Months Ended September 30, $ % (amounts in millions) (1) 2021 2020 Change Change Revenue Solutions revenue $ 774.2$ 705.9 $ 68.3 9.7 % Postage revenue 52.6 50.0 2.6 5.1 % Total revenue 826.8 755.9 70.9 9.4 % Operating expenses Cost of operations (exclusive of depreciation and amortization below) $ 346.6$ 326.7 $ 19.9 6.1 % Research and development 67.1 54.1 13.0 24.0 % Sales, marketing, general and administrative 183.0 171.6 11.4 6.7 % Customer postage 52.6 50.0 2.6 5.1 % Depreciation and amortization 163.5 146.9 16.6 11.3 % Accretion and changes in estimate with related parties, net 2.9 3.6 (0.7) (20.3) % Gain on sale of businesses - (0.2) 0.2 NMF Total operating expenses $ 815.6$ 752.6 $ 63.0 8.4 % Operating income (loss) $ 11.1$ 3.3 $ 7.8 237.3 % Non-operating (income) expense Interest expense, net 59.5 61.6 (2.1) (3.5) % Loss on extinguishment of debt 2.2 1.5 0.7 48.8 % Other, net 2.6 (3.8) 6.4 NMF Total non-operating (income) $ $ $ expense 64.3 59.4 4.9 8.2 % Income (loss) before income tax provision (benefit) (53.2) (56.0) 2.8 (5.1) % Income tax provision (benefit) (16.7) (13.4) (3.3) NMF Net income (loss) $ (36.4)$ (42.6) $ 6.2 (14.5) %
(1)As a result of displaying amounts in millions, rounding differences may exist in the table above.
Revenue Solutions revenue
Solutions revenue increased
Postage revenue
Postage revenue increased
Operating Expenses
Cost of operations (exclusive of depreciation and amortization)
Cost of operations increased
Research and development
24
--------------------------------------------------------------------------------
Research and development expense increased
Sales, marketing, general and administrative
Sales, marketing, general and administrative expense increased
Customer postage
Customer postage increased
Depreciation and amortization
Depreciation and amortization expense increased
Non-Operating Income and Expense
Interest expense, net
Interest expense, net decreased
Other, net
Other, net primarily reflects mark to market adjustments on our investments.
Income Taxes
Our effective tax rate for the three months ended
25
--------------------------------------------------------------------------------
Solutions Revenue and Adjusted EBITDA
Three Months Ended September 30, $ % (amounts in millions) (1) 2021 2020 Change Change Solutions revenue (2) Software and Analytics $ 363.4$ 354.9 $ 8.5 2.4 % Network Solutions $ 215.6$ 184.1 $ 31.5 17.1 % Technology-Enabled Services $ 231.9$ 231.8 $ 0.1 0.1 % Adjusted EBITDA Software and Analytics $ 112.3$ 117.4 $ (5.1) (4.3) % Network Solutions $ 113.0$ 94.5 $ 18.5 19.6 % Technology-Enabled Services $ 21.2$ 19.9 $ 1.3 6.3 %
(1)As a result of displaying amounts in millions, rounding differences may exist in the table above.
(2)Includes inter-segment revenue and excludes deferred revenue purchase accounting adjustments resulting from the Merger.
Software and Analytics
Software and Analytics revenue increased
Software and Analytics adjusted EBITDA decreased
Network Solutions
Network Solutions revenue increased
Network Solutions adjusted EBITDA increased
Technology-Enabled Services
Technology-Enabled Services revenue increased
Technology-Enabled Services adjusted EBITDA increased
26
--------------------------------------------------------------------------------
Six Months EndedSeptember 30, 2021 Compared to Six Months EndedSeptember 30, 2020 Six Months Ended September 30, $ % (amounts in millions) (1) 2021 2020 Change Change Revenue Solutions revenue $ 1,590.9$ 1,354.3 $ 236.6 17.5 % Postage revenue 103.8 95.8 8.0 8.3 % Total revenue 1,694.6 1,450.1 244.5 16.9 % Operating expenses Cost of operations (exclusive of depreciation and amortization $ $ $ below) 698.7 645.2 53.5 8.3 % Research and development 138.3 109.8 28.5 26.0 % Sales, marketing, general and administrative 361.0 337.1 23.9 7.1 % Customer postage 103.8 95.8 8.0 8.3 % Depreciation and amortization 331.7 285.4 46.3 16.2 % Accretion and changes in estimate with related parties, net 5.9 9.5 (3.6) (37.8) % Gain on sale of businesses - (28.3) 28.3 (100.0) % Total operating expenses $ 1,639.3$ 1,454.5 $ 184.8 12.7 % Operating income (loss) $ 55.3$ (4.3) $ 59.6 NMF Non-operating (income) expense Interest expense, net 118.9 124.3 (5.4) (4.4) % Loss on extinguishment of debt 2.2 1.5 0.7 48.8 % Other, net (0.6) (2.0) 1.4 NMF Total non-operating (income) $ $ $ expense 120.5 123.8 (3.3) (2.7) % Income (loss) before income tax provision (benefit) (65.2) (128.2) 63.0 (49.1) % Income tax provision (benefit) (25.2) (26.8) 1.6 (6.0) % Net income (loss) $ (40.0)$ (101.3) $ 61.3 (60.5) %
(1)As a result of displaying amounts in millions, rounding differences may exist in the table above.
Revenue Solutions revenue
Solutions revenue increased
Postage revenue
Postage revenue increased
Operating Expenses
Cost of operations (exclusive of depreciation and amortization)
Cost of operations increased
Research and development
Research and development expense increased
27
--------------------------------------------------------------------------------
Sales, marketing, general and administrative
Sales, marketing, general and administrative expense increased
Customer postage
Customer postage increased
Depreciation and amortization
Depreciation and amortization expense increased
Gain on sale of businesses
Gain on sale of businesses decreased
Non-Operating Income and Expense
Interest expense, net
Interest expense, net decreased
Other, net
Other, net primarily reflects mark to market adjustments on our investments.
Income Taxes
Our effective tax rate for the six months ended
Six Months Ended September 30, $ % (amounts in millions) (1) 2021 2020 Change Change Solutions revenue (2) Software and Analytics $ 783.7$ 746.4 $ 37.3 5.0 % Network Solutions $ 425.1$ 326.9 $ 98.2 30.0 % Technology-Enabled Services $ 457.5$ 419.5 $ 38.0 9.0 % Adjusted EBITDA Software and Analytics $ 272.7$ 261.3 $ 11.4 4.4 % Network Solutions $ 222.5$ 165.0 $ 57.5 34.8 % Technology-Enabled Services $ 34.0$ 2.4 $ 31.6 NMF
(1)As a result of displaying amounts in millions, rounding differences may exist in the table above.
(2)Includes inter-segment revenue and excludes deferred revenue purchase accounting adjustments resulting from the Merger.
28
--------------------------------------------------------------------------------
Software and Analytics
Software and Analytics revenue increased
Software and Analytics adjusted EBITDA increased
Network Solutions
Network Solutions revenue increased
Network Solutions adjusted EBITDA increased
Technology-Enabled Services
Technology-Enabled Services revenue increased
Technology-Enabled Services adjusted EBITDA increased
Significant Changes in Assets and Liabilities
In addition to the
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash flows provided by operating activities, cash and cash equivalents on hand, and our Revolving Facility. Our principal uses of liquidity are working capital, capital expenditures, debt service, business acquisitions and other general corporate purposes. Pursuant to the UHG Agreement, however, there are limitations on how we conduct our business during the period from the signing of the UHG Agreement through the close of the transaction, including limitations on our ability to, among other things, engage in certain acquisitions or incur indebtedness. We anticipate our cash on hand, cash generated from operations, and funds available under the Revolving Facility will be sufficient to fund our planned capital expenditures, debt service obligations, permitted business acquisitions and operating needs. Further, we may be required to make additional principal payments on the Term Loan Facility based on excess cash flows of the prior year, as defined in the credit agreement governing the Term Loan Facility.
Cash and cash equivalents totaled
29
--------------------------------------------------------------------------------
Cash Flows
The following table summarizes the net cash flow from operating, investing and financing activities:
Six Months Ended Six Months Ended $ %
(amounts in millions) (1)
$ $ operating activities 261.4 296.6 (35.2) (11.9) % Cash provided by (used in) investing activities (127.8) (510.4) 382.6 (75.0) % Cash provided by (used in) financing activities (166.3) (31.7) (134.6) 424.6 % Effects of exchange rate changes on cash and cash equivalents 0.1 2.7 (2.6) (96.3) % Net change in cash and cash equivalents $ (32.6) $ (242.9)$ 210.3 (86.6) %
(1)As a result of displaying amounts in millions, rounding differences may exist in the table above.
Operating Activities
Cash provided by operating activities is primarily affected by operating income,
including the impact of debt service payments, integration-related costs and the
timing of collections and disbursements. Cash provided by operating activities
includes
Investing Activities
Cash used in investing activities reflects routine capital expenditures related
to purchases of property and equipment and the development of software. For the
six months ended
Financing Activities
Cash used in financing activities reflects payments under the Term Loan
Facility, tax receivable agreements, interest rate cap agreements, deferred
financing obligations, employee tax withholdings on vesting of equity awards,
and tangible equity unit agreements partially offset by proceeds from the
exercise of equity awards. Cash provided by financing activities in the prior
year reflects the issuance of additional Senior Notes during the six months
ended
Capital Expenditures
We incur capital expenditures to grow our business by developing new and enhanced capabilities, to increase the effectiveness and efficiency of the organization and to reduce risks. Additionally, we incur capital expenditures for product development, disaster recovery, security enhancements, regulatory compliance and the replacement and upgrade of existing equipment at the end of its useful life.
Debt
Senior Credit Facilities and Senior Notes
In
On
In second quarter of fiscal year 2022, we repaid
Tangible Equity Units
In connection with our initial public offering in
30
--------------------------------------------------------------------------------
amount of
Hedges
From time to time, we execute interest rate cap agreements with various
counterparties that effectively cap our LIBOR exposure on a portion of our
existing Term Loan Facility or similar replacement debt. The following table
summarizes the terms of our interest rate cap agreements at
Receive LIBOR Pay
Effective Date Expiration Date Notional Amount Exceeding(1) Fixed Rate
1.00 % 1.82 % August 31, 2018 December 31, 2021$ 900,000,000 1.00 % 1.82 % March 31, 2020 March 31, 2024$ 250,000,000 1.00 % 0.18 % March 31, 2020 March 31, 2024$ 250,000,000 1.00 % 0.18 % March 31, 2020 March 31, 2024$ 250,000,000 1.00 % 0.18 % March 31, 2020 March 31, 2024$ 250,000,000 1.00 % 0.19 %
(1)All based on 1-month LIBOR.
The interest rate cap agreements are recorded on the balance sheet at fair value and changes in the fair value are recorded in other comprehensive income (loss). Amounts are reclassified from other comprehensive income (loss) to interest expense in the same period the interest expense on the underlying hedged debt impacts earnings. Any payments we receive to the extent LIBOR exceeds the specified cap rate are also reclassified from other comprehensive income (loss) to interest expense in the period received.
LIBOR Transition
LIBOR is a commonly used indicative measure of the average interest rate at
which major global banks could borrow from one another. On
Effect of Certain Debt Covenants
A breach of any of the covenants under the agreements governing existing debt could limit our ability to borrow funds under the Term Loan Facility and could result in a default under the Term Loan Facility. Upon the occurrence of an event of default under the Term Loan Facility, the lenders could elect to declare all amounts then outstanding to be immediately due and payable, and the lenders could terminate all commitments to extend further credit. If we were unable to repay the amounts declared due, the lenders could proceed against any collateral granted to them to secure that indebtedness.
With certain exceptions, the Term Loan Facility obligations are secured by a
first-priority security interest in substantially all of our assets. The Term
Loan Facility contains various restrictions and nonfinancial covenants, along
with a senior secured net leverage ratio test. The nonfinancial covenants
include restrictions on dividends, investments, dispositions, future borrowings
and other specified payments, as well as additional reporting and disclosure
requirements. The senior secured net leverage test must be met as a condition to
incur additional indebtedness, but otherwise is applicable only to the extent
that amounts drawn exceed 35% of the Revolving Facility at the end of any fiscal
quarter. As of
Our ability to meet liquidity needs depends on our subsidiaries' earnings and cash flows, the terms of our indebtedness along with our subsidiaries' indebtedness, and other contractual restrictions.
Cautionary Notice Regarding Forward-Looking Statements
This Quarterly Report contains "forward-looking statements" within the meaning of federal securities laws. Any statements
31
--------------------------------------------------------------------------------
made in this Quarterly Report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plans and strategies. These statements often include words such as "anticipate," "expect," "suggest," "plan," "believe," "intend," "estimate," "target," "project," "should," "could," "would," "may," "will," "forecast," "outlook," "potential," "continues," "seeks," "predicts," and the negatives of these words and other similar expressions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that factors affecting our actual financial results could cause actual results to differ materially from those expressed in the forward-looking statements, including those described below.
Summary of Material Risks
Our actual results may differ significantly from any results expressed or implied by any forward-looking statements. A summary of the principal risk factors that make investing in us risky and might cause our actual results to differ is set forth below. The following is only a summary of the principal risks that may materially adversely affect our business, financial condition and results of operations. Factors that could materially affect our financial results or such forward-looking statements include, among others, the following factors:
•the inability to complete the transactions contemplated by the UHG Transaction due to the failure to satisfy the conditions to the completion of the UHG Transaction, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the UHG Transaction;
•risks related to disruption of management's attention from business operations due to the UHG Transaction;
•the effect of the announcement of the UHG Transaction on our relations with our customers, operations results and business generally;
•the risk that the UHG Transaction will not be consummated in a timely manner, exceeding the expected costs of the UHG Transaction;
•the occurrence of any event, change or other circumstances that could give rise to the termination of the UHG Agreement;
•macroeconomic and industry trends and adverse developments in the debt, consumer credit and financial services markets;
•uncertainty and risks related to the impact of the COVID-19 pandemic (including the rise of COVID-19 variant strains such as the Delta variant) on the national and global economy, our business, suppliers, customers, and employees;
•our ability to retain and recruit key management personnel and other talent (including while the UHG Transaction is pending and in light of our recently imposed COVID-19 vaccine mandate);
•our ability to retain or renew existing customers and attract new customers;
•our ability to connect a large number of payers and providers;
•our ability to provide competitive services and prices while maintaining our margins;
•further consolidation in our end-customer markets;
•our ability to effectively manage our costs;
•our ability to effectively develop and maintain relationships with our channel partners;
•our ability to timely develop new services and improve existing solutions;
•our ability to deliver services timely without interruption;
•a decline in transaction volume in the
•our ability to maintain our access to data sources;
•our ability to maintain the security and integrity of our data;
•our reliance on key management personnel;
•our ability to manage and expand our operations and keep up with rapidly changing technologies;
•the ability of our outside service providers and key vendors to fulfill their obligations to us;
•risks related to our international operations;
•our ability to protect and enforce our intellectual property, trade secrets and other forms of unpatented intellectual property;
•our ability to defend our intellectual property from infringement claims by third parties;
•government regulation and changes in the regulatory environment;
•changes in local, state, federal and international laws and regulations, including related to taxation;
•economic and political instability in the
•litigation or regulatory proceedings;
•losses against which we do not insure;
•our ability to make acquisitions and integrate the operations of acquired businesses;
•our ability to make timely payments of principal and interest on our indebtedness;
•our ability to satisfy covenants in the agreements governing our indebtedness;
•our ability to maintain our liquidity;
•our adoption of new, or amendments to existing, accounting standards;
•the potential dilutive effect of future issuance of shares of our common stock,
par value
32
--------------------------------------------------------------------------------
•the impact of anti-takeover provisions in our organizational documents and
under
There may be other factors, many of which are beyond our control, that may cause
our actual results to differ materially from the forward-looking statements,
including factors disclosed in our Annual Report on Form 10-K for the fiscal
year ended
Our forward-looking statements made herein speak only as of the date on which made. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.
© Edgar Online, source