Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 959K
2: EX-10.1 Material Contract HTML 73K
3: EX-10.2 Material Contract HTML 37K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 30K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 31K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 28K
7: EX-32.2 Certification -- §906 - SOA'02 HTML 28K
14: R1 Document and Entity Information HTML 82K
15: R2 Consolidated Balance Sheets HTML 128K
16: R3 Consolidated Balance Sheets (Parenthetical) HTML 59K
17: R4 Consolidated Statements of Operations and HTML 124K
Comprehensive Income (Loss) (Unaudited)
18: R5 Consolidated Statements of Operations and HTML 30K
Comprehensive Income (Loss) (Unaudited)
(Parenthetical)
19: R6 Consolidated Statements of Stockholders' Equity HTML 162K
(Deficit) (Unaudited)
20: R7 Consolidated Statements of Stockholders' Equity HTML 34K
(Deficit) (Unaudited) (Parenthetical)
21: R8 Consolidated Statements of Cash Flows (Unaudited) HTML 133K
22: R9 Business Description and Basis of Presentation HTML 34K
23: R10 Recent Accounting Pronouncements HTML 37K
24: R11 Fair Value of Financial Instruments HTML 32K
25: R12 Acquisition HTML 70K
26: R13 Accounts Receivable and Allowance for Credit HTML 55K
Losses
27: R14 Property, Equipment and Software HTML 63K
28: R15 Leases HTML 173K
29: R16 Intangible Assets HTML 67K
30: R17 Goodwill HTML 34K
31: R18 Revenue Recognition HTML 95K
32: R19 Debt HTML 58K
33: R20 Share-Based Compensation HTML 121K
34: R21 Other Expenses HTML 58K
35: R22 Income Taxes HTML 35K
36: R23 8.00% Series A Convertible Preferred Stock HTML 38K
37: R24 Earnings (Loss) Per Share HTML 90K
38: R25 Commitments and Contingencies HTML 32K
39: R26 Related Party Transactions HTML 53K
40: R27 Deferred Contract Costs HTML 95K
41: R28 Segments and Customer Concentrations HTML 35K
42: R29 Derivative Financial Instruments HTML 32K
43: R30 Subsequent Events HTML 32K
44: R31 Recent Accounting Pronouncements (Policies) HTML 43K
45: R32 Acquisition (Tables) HTML 66K
46: R33 Accounts Receivable and Allowance for Credit HTML 51K
Losses (Tables)
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48: R35 Leases (Tables) HTML 125K
49: R36 Intangible Assets (Tables) HTML 71K
50: R37 Goodwill (Tables) HTML 34K
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55: R42 8.00% Series A Convertible Preferred Stock HTML 39K
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57: R44 Related Party Transactions (Tables) HTML 51K
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59: R46 Recent Accounting Pronouncements - Narrative HTML 43K
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61: R48 Acquisition - Fair Value of Assets Acquired and HTML 71K
Liabilities Assumed (Details)
62: R49 Acquisition - Pro Forma Results (Details) HTML 34K
63: R50 Accounts Receivable and Allowance for Credit HTML 43K
Losses - Narrative (Details)
64: R51 Accounts Receivable and Allowance for Credit HTML 50K
Losses - Schedule of Allowance for Credit Losses
(Details)
65: R52 Property, Equipment, and Software - Schedule of HTML 47K
Property, Equipment and Software (Details)
66: R53 Property, Equipment, and Software - Allocation of HTML 34K
Depreciation and Amortization Expense between Cost
of Services and Selling, General and
Administrative Expenses (Details)
67: R54 Leases - Schedule of Lease Costs (Details) HTML 41K
68: R55 Leases - Schedule of Supplemental Cash Flow HTML 41K
Information (Details)
69: R56 Leases - Schedule of Supplemental Balance Sheet HTML 38K
Information (Details)
70: R57 Leases - Schedule of Operating and Finance Lease HTML 75K
Maturity (Details)
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Assets (Details)
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Revenue by Source (Details)
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Balances (Details)
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Contract Costs (Details)
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(Exact name of registrant as specified in its charter)
iDelaware
i02-0698101
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
i401 North Michigan Avenue
i60611
iSuite
2700
iChicago
iIllinois
(Address
of principal executive offices)
(Zip code)
(i312) i324-7820
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon stock, par value $0.01 per share
iRCM
iNASDAQ
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. iYesþ No ☐
Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesþ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
ý
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☑
As
of July 28, 2020, the registrant had i115,578,971 shares of common stock, par value $0.01 per share, outstanding.
Accounts
receivable, net of $i5.1 million and $i2.8 million allowance
i64.3
i52.3
Accounts
receivable, net of $i0.1 million and $i0.0 million allowance - related party
i25.3
i30.8
Prepaid
expenses and other current assets
i48.0
i41.6
Total
current assets
i260.7
i216.7
Property,
equipment and software, net
i112.3
i116.9
Operating
lease right-of-use assets
i68.3
i77.9
Intangible
assets, net
i240.0
i164.7
Goodwill
i379.8
i253.2
Non-current
deferred tax assets
i39.1
i64.2
Non-current
portion of restricted cash equivalents
i1.0
i0.5
Other
assets
i39.7
i35.0
Total
assets
$
i1,140.9
$
i929.1
Liabilities
Current liabilities:
Accounts payable
$
i24.2
$
i20.2
Current
portion of customer liabilities
i19.9
i14.0
Current
portion of customer liabilities - related party
i23.4
i34.1
Accrued
compensation and benefits
i52.4
i95.1
Current
portion of operating lease liabilities
i13.4
i12.8
Current
portion of long-term debt
i25.8
i16.3
Other
accrued expenses
i46.4
i40.0
Total
current liabilities
i205.5
i232.5
Non-current
portion of customer liabilities - related party
i18.2
i18.6
Non-current
portion of operating lease liabilities
i76.5
i82.7
Long-term
debt
i538.6
i337.7
Other
non-current liabilities
i15.9
i10.4
Total
liabilities
i854.7
i681.9
ii8.00/%
Series A convertible preferred stock, par value $ii0.01/,
i370,000 shares authorized, ii277,296/
shares issued and outstanding as of June 30, 2020 (aggregate liquidation value of $i282.8); i370,000 shares authorized, ii266,529/
shares issued and outstanding as of December 31, 2019 (aggregate liquidation value of $i271.9)
i240.1
i229.1
Stockholders’
equity:
Common stock, $ii0.01/ par
value, ii500,000,000/ shares authorized,
i129,289,960 shares issued and i115,374,788 shares outstanding at June 30, 2020; i127,807,546
shares issued and i114,021,280 shares outstanding at December 31, 2019
Net services revenue ($i206.4 million
and $i414.8 million for the three and six months ended June 30, 2020, respectively, and $i199.0 million and $i380.8
million for the three and six months ended June 30, 2019, respectively, from related party)
$
i314.7
$
i295.0
$
i635.2
$
i570.9
Operating
expenses:
Cost of services
i248.3
i246.1
i502.2
i483.3
Selling,
general and administrative
i23.3
i25.8
i48.8
i48.3
Other
expenses
i18.0
i10.7
i26.7
i19.5
Total
operating expenses
i289.6
i282.6
i577.7
i551.1
Income
from operations
i25.1
i12.4
i57.5
i19.8
Loss
on debt extinguishment
i—
i18.8
i—
i18.8
Net
interest expense
i4.8
i9.9
i8.6
i20.1
Income
(loss) before income tax provision (benefit)
i20.3
(i16.3)
i48.9
(i19.1)
Income
tax provision (benefit)
i5.2
(i11.1)
i15.6
(i14.1)
Net
income (loss)
$
i15.1
$
(i5.2)
$
i33.3
$
(i5.0)
Net
income (loss) per common share:
Basic
$
i0.04
$
(i0.09)
$
i0.10
$
(i0.14)
Diluted
$
i0.03
$
(i0.09)
$
i0.08
$
(i0.14)
Weighted
average shares used in calculating net income (loss) per common share:
Basic
i115,067,552
i110,956,014
i114,754,298
i110,382,509
Diluted
i165,887,964
i110,956,014
i167,809,324
i110,382,509
Consolidated
statements of comprehensive income (loss)
Net income (loss)
i15.1
(i5.2)
i33.3
(i5.0)
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
i0.8
i0.1
(i3.6)
i0.3
Foreign
currency translation adjustments
(i0.2)
i—
(i2.3)
i0.5
Comprehensive
income (loss)
$
i15.7
$
(i5.1)
$
i27.4
$
(i4.2)
Basic:
Net
income (loss)
$
i15.1
$
(i5.2)
$
i33.3
$
(i5.0)
Less
dividends on preferred shares
(i5.6)
(i5.1)
(i11.0)
(i10.1)
Less
income allocated to preferred shareholders
(i4.7)
i—
(i11.0)
i—
Net
income (loss) available/allocated to common shareholders - basic
$
i4.8
$
(i10.3)
$
i11.3
$
(i15.1)
Diluted:
Net
income (loss)
$
i15.1
$
(i5.2)
$
i33.3
$
(i5.0)
Less
dividends on preferred shares
(i5.6)
(i5.1)
(i11.0)
(i10.1)
Less
income allocated to preferred shareholders
(i3.8)
i—
(i8.9)
i—
Net
income (loss) available/allocated to common shareholders - diluted
$
i5.7
$
(i10.3)
$
i13.4
$
(i15.1)
See
accompanying notes to consolidated financial statements.
5
R1 RCM Inc.
Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)
Adjustments
to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization
i33.6
i25.8
Amortization
of debt issuance costs
i0.5
i1.2
Share-based
compensation
i9.1
i9.0
Loss
on disposal and right-of-use asset write-downs
i4.5
i—
Loss
on debt extinguishment
i—
i18.8
Provision
for credit losses
i1.7
i1.0
Deferred
income taxes
i15.1
(i17.3)
Non-cash
lease expense
i6.0
i5.6
Changes
in operating assets and liabilities:
Accounts receivable and related party accounts receivable
(i5.4)
i25.4
Prepaid
expenses and other assets
(i10.5)
(i10.1)
Accounts
payable
i4.5
i7.2
Accrued
compensation and benefits
(i44.2)
(i12.9)
Lease
liabilities
(i5.9)
(i5.5)
Other
liabilities
i12.7
i8.3
Customer
liabilities and customer liabilities - related party
(i9.7)
(i7.5)
Net
cash provided by operating activities
i45.3
i44.0
Investing
activities
Purchases of property, equipment, and software
(i31.1)
(i32.3)
Acquisition
of SCI, net of cash acquired and earn-out provision
(i189.0)
i—
Net
cash used in investing activities
(i220.1)
(i32.3)
Financing
activities
Issuance of senior secured debt, net of discount and issuance costs
i190.6
i321.8
Borrowings
on revolver
i50.0
i60.0
Repayment
of senior secured debt
(i10.5)
(i268.7)
Repayment
of subordinated notes and prepayment penalty
i—
(i112.2)
Repayments
on revolver
(i20.0)
i—
Exercise
of vested stock options
i4.3
i7.7
Shares
withheld for taxes
(i1.1)
(i4.7)
Finance
lease payments
(i0.7)
(i0.4)
Other
(i5.0)
i—
Net
cash provided by financing activities
i207.6
i3.5
Effect
of exchange rate changes in cash, cash equivalents and restricted cash
(i1.2)
i0.3
Net
increase in cash, cash equivalents and restricted cash
i31.6
i15.5
Cash,
cash equivalents and restricted cash, at beginning of period
i92.5
i65.1
Cash,
cash equivalents and restricted cash, at end of period
$
i124.1
$
i80.6
Supplemental
disclosures of cash flow information
Accrued dividends payable to preferred stockholders
$
i5.6
$
i5.1
Accrued
and other liabilities related to purchases of property, equipment and software
$
i11.2
$
i21.5
Accounts
payable related to purchases of property, equipment and software
$
i0.6
$
i2.1
Interest
paid
$
i7.4
$
i17.7
Income
taxes paid
$
i2.5
$
i2.6
Income
taxes refunded
$
i0.2
$
i0.1
See
accompanying notes to consolidated financial statements.
8
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
1.iBusiness
Description and Basis of Presentation
Business Description
R1 RCM Inc. (the “Company”) is a leading provider of technology-enabled revenue cycle management (“RCM”) services to healthcare providers, including health systems and hospitals, physician groups, and municipal and private emergency medical service (“EMS”) providers. The Company helps healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician, and staff satisfaction for its customers. For further information regarding the Company's business, including relationships with Ascension Health (“Ascension”), TowerBrook Capital Partners (“TowerBrook”),
and IHC Health Services, Inc. (“Intermountain”), and its prior acquisition of Intermedix Holdings, Inc. (“Intermedix”), refer to Note 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”).
SCI Solutions, Inc. Acquisition
On April 1, 2020, the Company completed the acquisition of scheduling.com, Inc. d/b/a SCI Solutions, Inc. (“SCI”) pursuant to a stock purchase agreement dated as of January 9, 2020
(“the Stock Purchase Agreement”), by and among the Company, Clearsight Intermediate Holdings, Inc. (“Clearsight Holdings”) and Clearsight Group Holdings, LLC (the “Seller”) (“the SCI Acquisition”). At the closing of the transaction, the Company purchased from the Seller all of the issued and outstanding equity interests of Clearsight Holdings, which owns all of the issued and outstanding equity interests of SCI. SCI is a leading provider of software-as-a-service (“SaaS”)-based scheduling and patient access solutions. SCI’s platform streamlines the patient and provider experience, creating efficient care networks where health systems’ capacity is digitally and conveniently accessible to all market constituents. The combination of R1 and SCI is expected to deliver
enhanced value for healthcare providers by enabling them to expand digital front door strategies for their patients, improve operating efficiency, and increase capacity utilization, among other benefits. Refer to Note 4, Acquisition for additional details.
i
Basis of Presentation
The accompanying unaudited consolidated financial statements reflect the Company's financial position as of June 30,
2020, the results of operations of the Company for the three and six months ended June 30, 2020 and 2019, and the cash flows of the Company for the six months ended June 30, 2020 and 2019. These financial statements include the accounts of R1 RCM Inc. and its wholly-owned subsidiaries. All material intercompany amounts have been eliminated in consolidation. These financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial
reporting and as required by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information, have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2020.
When preparing financial statements in conformity with GAAP, the Company must make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements. Actual results could differ from those estimates. For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company's 2019 Form 10-K.
9
R1
RCM Inc.
Notes to Unaudited Consolidated Financial Statements
2.iRecent Accounting Pronouncements
i
Recently
Issued Accounting Standards and Disclosures
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. The change will result in earlier recognition of credit losses. The Company adopted ASU 2016-13 effective January 1, 2020 utilizing a modified retrospective transition method. Adoption of the new standard resulted in the recording of additional allowance for credit losses of $i1.1 million
and a corresponding impact to retained earnings and deferred tax assets. The adoption also required changes to the Company's process of estimating expected credit losses on trade receivables and customer contract assets.
/
3.iFair
Value of Financial Instruments
The Company's accounting policy for fair values, including details of the fair value hierarchy levels, are outlined in Note 4 of the Company's 2019 Form 10-K.
The carrying amounts of the Company’s financial instruments, which include financial assets such as cash and cash equivalents, restricted cash equivalents, accounts receivable, net, and certain other current assets, as well as financial liabilities such as accounts payable, accrued service costs, accrued compensation and benefits and certain other current liabilities, approximate their fair values, due to the short-term nature of
these instruments. See Note 21, Derivative Financial Instruments, for a discussion of the fair value of the Company's forward currency derivative contracts and interest rate swaps.
The Company believes the carrying value of the senior term loan (see Note 11, Debt) approximates fair value as it is variable rate bank debt.
4. iAcquisition
SCI
On
April 1, 2020, the Company completed the acquisition of SCI. The SCI Acquisition has been accounted for under ASC 805, Business Combinations. Accordingly, the accounts of the acquired company, after adjustments to reflect fair values assigned to assets and liabilities, have been included in the Company’s consolidated financial statements since the date of the SCI Acquisition.
The purchase price for the SCI Acquisition was $i190.0 million,
subject to customary adjustments for cash, transaction expenses, earn-out consideration, and normalized working capital. The Company funded the purchase price for the SCI Acquisition and the Company’s associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness (see Note 11, Debt). The purchase price has been provisionally allocated, on a preliminary basis, to assets acquired and liabilities assumed based on their preliminary estimated fair values as of the completion of the SCI Acquisition.
10
R1
RCM Inc.
Notes to Unaudited Consolidated Financial Statements
At the effective date of the SCI Acquisition, the assets acquired and liabilities assumed are generally required to be measured at fair value. The fair value estimate of assets acquired and liabilities assumed are pending completion of multiple elements, including gathering further information about the identification and completeness of all assets and liabilities acquired, the finalization of an independent appraisal and valuations of fair value of the assets acquired and liabilities assumed and final review by the Company's management. Accordingly, management considers the balances shown in the following table to be preliminary. Some of the more significant amounts that are not yet finalized relate to the fair value of accounts
receivable, accounts payable, property, equipment and software, intangible assets, operating leases or commitments, contingent liabilities and income and non-income related taxes. Accordingly, there could be material adjustments to the consolidated financial statements, including changes in our depreciation and amortization expense related to the valuation of property equipment, and software, and intangible assets acquired and their respective useful lives among other adjustments. This measurement period will not exceed one year from the acquisition date.
The final determination of the assets acquired and liabilities assumed will be based on the established fair value of the assets acquired and the liabilities assumed as of the acquisition date. The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill. The final determination of the purchase price, fair values and resulting goodwill
may differ significantly from what is reflected in these consolidated financial statements.
i
The preliminary fair value of assets acquired and liabilities assumed is (in millions):
Purchase
Price Allocation
Total purchase consideration
$
i196.7
Allocation of consideration to assets acquired and liabilities assumed:
Cash
and cash equivalents
$
i2.9
Accounts receivable
i3.6
Prepaid
expenses and other current assets
i1.1
Property, equipment and software
i0.3
Operating
lease right-of-use assets
i1.2
Intangible assets
i84.3
Goodwill
i126.6
Accounts
payable
(i0.2)
Current portion of customer liabilities
(i4.6)
Accrued
compensation and benefits
(i1.9)
Current portion of operating lease liabilities
(i0.5)
Other
accrued expenses
(i0.3)
Non-current portion of operating lease liabilities
(i0.7)
Other
non-current liabilities
(i5.0)
Deferred income tax liabilities
(i10.1)
Net
assets acquired
$
i196.7
/
Other
non-current liabilities contained a note payable for $i5 million. The Company repaid this note prior to the end of the second quarter.
The goodwill recognized is primarily attributable
to synergies that are expected to be achieved from the integration of SCI. None of the goodwill is expected to be deductible for income tax purposes.
11
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The purchase price includes an earn-out provision, which is dependent on achieving certain revenue and operational targets in the year following the acquisition. The earn-out is binary, with the potential payment being either $i10 million
or $i0. Based on projections at the time of Acquisition, the earn-out was valued at $i4.8 million.
Potential future adjustments to the earn-out will be recorded through the income statement.
Included in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2020 are net sales of $ii6.6/ million
and net loss before income taxes of $i2.3 million related to the operations of SCI since the acquisition date of April 1, 2020.
Pro Forma Results
i
The
following table summarizes, on a pro forma basis, the combined results of the Company as though the SCI Acquisition had occurred as of January 1, 2019. These pro forma results are not necessarily indicative of either the actual consolidated results had the SCI Acquisition occurred as of January 1, 2019 or of the future consolidated operating results for any period. Pro forma results are (in millions):
Supplemental
pro-forma earnings were adjusted to exclude $i5.4 million of acquisition-related costs incurred by the Company in 2020 and include those costs in 2019. Adjustments were also made to earnings to adjust depreciation and amortization to reflect fair value of identified assets acquired, to record the effects of extinguishing the debt of SCI and replacing it with the debt of the
Company, and to record the income tax effect of these adjustments.
5.iiAccounts
Receivable and Allowance for Credit Losses/
Accounts receivable is comprised of unpaid balances pertaining to modular services and end-to-end RCM customers, net receivable balances for end-to-end RCM customers after considering cost reimbursements owed to such customers, including related accrued balances, and amounts due from physician RCM and PM customers.
On January 1, 2020 (the "adoption date"), the Company replaced its previous incurred loss impairment model for estimating credit
losses on accounts receivables with an expected loss model prepared in accordance with ASC 326. While the incurred loss impairment model had the Company recognize credit losses when it was probable that a loss had been incurred, ASC 326 requires the Company to estimate future expected credit losses on such instruments before an impairment may occur. On the adoption date, the Company recorded an initial increase of $i1.1 million
to the Company's allowance for credit losses, with an offset recorded as an opening adjustment to accumulated deficit and deferred tax assets.
The Company evaluates its accounts receivable for expected credit losses quarterly. The Company maintains an estimated allowance for credit losses to reduce its accounts receivable to the amount that it believes will be collected. This allowance is based on the Company’s historical experience, its assessment of each customer’s ability to pay, the length of time a balance has been outstanding, input from
key Company resources assigned to each customer, the status of any ongoing operations with each applicable customer, and environmental factors such as significant shifts in the healthcare environment which the Company believes may have impacted or will impact its customers’ financial health and ability to pay.
The full effects of COVID-19 on the Company’s customers are highly uncertain and cannot be predicted. As a result, the Company’s future collection experience may differ significantly from historical collection trends.
12
R1
RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The Company has presented the rollforward below on a consolidated basis as the currently expected credit losses for its large Integrated Delivery Network customers are not anticipated to be material.
i
Movements in the allowance
for credit losses are as follows (in millions):
The
following table summarizes the allocation of depreciation and amortization expense between cost of services and selling, general and administrative expenses (in millions):
The
Company's accounting policy for leases, including the elections made as part of the adoption of ASC 842 effective January 1, 2019, are outlined in Note 8 of the Company's 2019 Form 10-K. iThe components of lease costs are as follows (in millions):
13
R1
RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Cash paid for amounts included in the measurement
of lease liabilities:
Operating cash flows for operating leases
$
i10.1
$
i9.1
Operating
cash flows for finance leases
i0.1
i0.1
Financing
cash flows for finance leases
i0.7
i0.4
ROU
assets obtained in exchange for lease obligations:
Operating leases
i3.2
i11.6
Finance
leases
i—
i0.5
The
Company presents all non-cash transactions related to adjustments to the lease liability or right-of-use asset as non-cash transactions. This includes all non-cash charges related to any modification or reassessment events triggering remeasurement.
i
Supplemental balance sheet information related to leases are as follows:
iiMaturities
of lease liabilities as of June 30, 2020 are as follows (in millions):/
14
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Operating
Leases
Finance Leases
Remainder of 2020
$
i10.6
$
i0.1
2021
i18.8
i0.5
2022
i16.3
i0.1
2023
i15.1
i—
2024
i14.9
i—
2025
i14.7
i—
Thereafter
i33.5
i—
Total
i123.9
i0.7
Less:
Imputed
interest
i34.0
i—
Present
value of lease liabilities
$
i89.9
$
i0.7
8.
iIntangible Assets
i
The following table provides the gross carrying value and accumulated amortization for each major
class of intangible asset at June 30, 2020 and December 31, 2019 (in millions):
Through
the SCI Acquisition, the Company acquired the following intangible assets in 2020 (in millions, except weighted average useful life):
Weighted Average Useful Life
Gross Carrying Value
Customer relationships
i10
years
$
i2.8
Technology
i10
years
$
i81.5
/
Intangible asset amortization expense was $i5.6
million and $i9.1 million for the three and six months ended June 30, 2020, and $i3.5 million
and $i7.0 million for the three and six months ended June 30, 2019.
iEstimated
annual amortization expense related to intangible assets with definite lives as of June 30, 2020 is as follows (in millions):
15
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Remainder of 2020
$
i11.2
2021
i22.3
2022
i22.3
2023
i22.3
2024
i19.4
2025
i17.9
Thereafter
i124.6
Total
$
i240.0
9.
iGoodwill
In the first six months of 2020, there were no events or circumstances that would have required an interim impairment test. Annually, during the fourth quarter, goodwill is tested for impairment.
i
Changes
in the carrying amount of goodwill for the six months ended June 30, 2020 were (in millions):
The Company follows the guidance under Topic 606, Revenue from Contracts with Customers (“Topic 606”). Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a service to a customer, which is
typically over the contact term. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved.
Disaggregation of Revenue
i
In the following table, revenue is disaggregated by source (in millions):
Notes to Unaudited Consolidated Financial Statements
(1) Receivables are included in accounts receivable, net. The balance includes accounts receivable, net - related party.
(2) Contract assets and contract liabilities are included in other current assets and customer liabilities, respectively. The contract liabilities balance contains related party amounts, including $i4.1 million
and $i4.2 million of current customer liabilities and $i18.2 million and $i18.6 million
of non-current customer liabilities for the six months ended June 30, 2020 and year ended December 31, 2019, respectively.
A receivable is recognized in the period the Company provides services when the Company’s right to consideration is unconditional. Payment terms on invoiced amounts are typically 30-60 days.
The Company recognized revenue of $i87.0
million and $i68.2 million during the six months ended June 30, 2020 and 2019, which amounts were included in contract liabilities at the beginning of the respective periods. These revenue amounts include $i85.0
million and $i66.7 million for the six months ended June 30, 2020 and 2019, respectively, related to advanced billings which become accounts receivable and contract liabilities on the first day of the respective service period.
Transaction
Price Allocated to the Remaining Performance Obligation
i
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in millions). The estimated revenue does not include amounts of variable consideration that are constrained.
Net
operating fees
Incentive fees
Other
2020
$
i39.4
$
i7.4
$
i—
2021
i22.3
i1.7
i3.9
2022
i9.5
i—
i5.7
2023
i6.9
i—
i5.7
2024
i4.1
i—
i5.7
2025
i4.1
i—
i2.9
Thereafter
i0.5
i—
i—
Total
$
i86.8
$
i9.1
$
i23.9
/
The
amounts presented in the table above include variable fee estimates for the non-cancellable term of the Company's physician groups and EMS providers RCM services contracts, fixed fees which are typically recognized ratably as the performance obligation is satisfied, and incentive fees which are measured cumulatively over the contractually defined performance period.
Estimates of revenue expected to be recognized in future periods exclude unexercised customer options to purchase services within the Company's PAS contracts that do not
represent material rights to the customer. Customer options that do not represent a material right are only accounted for as revenues when the customer exercises its option to purchase additional goods or services.
11. iDebt
iThe
carrying amounts of debt consist of the following (in millions):
17
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
On June 26, 2019, the Company and certain of its subsidiaries entered into a senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders named therein, for senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $i325.0
million senior secured term loan facility (the “Senior Term Loan”) issued at i99.66% of par and a $i100.0 million senior secured revolving credit facility (the “Senior Revolver”).
On
March 20, 2020, the Company entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), pursuant to which the lenders named in the Amendment agreed to provide an additional $i191.1 million incremental delayed-draw term loan facility (the “Incremental Term Loan”) on the same terms as its existing Senior Term Loan provided under the Credit Agreement.
The
Incremental Term Loan was drawn substantially concurrently with the closing of the SCI Acquisition on April 1, 2020. The proceeds of the Incremental Term Loan were used to fund the purchase price for the SCI Acquisition and related expenses. For further details on the closing, refer to Note 4, Acquisition. The Incremental Term Loan has terms consistent with those of the Senior Term Loan, including with respect to interest, maturity, amortization and prepayments and has the same affirmative and negative covenants and events of default as those applicable to the Senior Term Loan under the Credit Agreement. The drawing of the Incremental Term Loan increased the balance of the obligation due under the Senior Term Loan, and therefore is shown as one consolidated obligation.
In accordance with ASC 470-50, the Amendment was treated as a loan
modification in the financial statements.
The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. As of June 30, 2020, the Company had $i70.0
million in borrowings, ino letters of credit outstanding, and $i30.0 million of availability under the Senior Revolver.
Borrowings
under the Senior Secured Credit Facilities bear interest, at the Company’s option, at: (i) an Alternate Base Rate (“ABR”) equal to the greater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus i0.50% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus i100
basis points, plus between i0.75% and i1.75% dependent on the Company's
Net Leverage Ratio (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than i0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than i0.00%
per annum), plus between i1.75% and i2.75%, dependent on the Company's
Net Leverage Ratio. The interest rate as of June 30, 2020 was i2.68%. The Company is also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate between i0.30%
and i0.50% of the average daily unutilized commitments thereunder dependent on the Company's net leverage ratio.
18
R1 RCM Inc.
Notes to Unaudited Consolidated
Financial Statements
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase the Company’s capital stock; (vi) make investments, loans or advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x) amend material agreements governing certain of the
Company’s junior indebtedness; (xi) change the Company’s lines of business; (xii) make certain acquisitions; and (xiii) limitations on the letter of credit cash collateral account. The Credit Agreement contains customary affirmative covenants and events of default. In addition, the Company is required to maintain minimum consolidated total net leverage and consolidated interest coverage ratios. The Company was in compliance with all of the covenants in the Credit Agreement as of June 30, 2020.
Debt Maturities
i
Scheduled
maturities of the Company’s long-term debt are summarized as follows (in millions):
Scheduled Maturities
2020
$
i12.9
2021
i32.3
2022
i38.7
2023
i45.2
2024
i438.4
Total
$
i567.5
/
For
further details on the Company's debt, refer to Note 13 of the Company's 2019 Form 10-K.
12.iShare-Based
Compensation
The share-based compensation expense relating to the Company’s stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PBRSUs”) for the three months ended June 30, 2020 and 2019 was $i4.3 million and $i4.6 million,
respectively, with related tax benefits of approximately $i0.7 million and $i0.7
million, respectively. The share-based compensation expense relating to the Company’s stock options, RSAs, RSUs and PBRSUs for the six months ended June 30, 2020 and 2019 was $i9.1 million and $i9.0 million,
respectively, with related tax benefits of approximately $i1.4 million and $i1.4 million,
respectively.
The Company accounts for forfeitures as they occur. Excess tax benefits and shortfalls for share-based payments are recognized in income tax expense (benefit) and included in operating activities. The Company recognized $i1.1
million and $i1.5 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the three months ended June 30, 2020 and 2019, respectively. The Company recognized $i1.7 million
and $i3.4 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the six months ended June 30, 2020 and 2019, respectively.
iTotal
share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows (in millions):
19
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The
Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of their grant dates. Monte Carlo simulations are used to estimate the fair value of its market-based PBRSUs. The market-based PBRSUs vest upon satisfaction of both time-based requirements and market targets based on share price. Expected life is based on the market condition to which the vesting is tied.
i
The following table sets forth the significant assumptions used in the
Black-Scholes option pricing model and the Monte Carlo simulations and the calculation of share-based compensation expense for the six months ended June 30, 2020 and 2019:
The risk-free interest rate input is based on U.S. Treasury instruments, and the expected volatility of the share price is based on review of the historical volatility levels of the
Company’s common stock in conjunction with that of public companies that operate in similar industries or are similar in terms of stage of development or size and a projection of this information toward its future expected volatility. The Company used the simplified method to estimate the expected option life. The simplified method was used due to the lack of sufficient historical data available to provide a reasonable basis upon which to estimate the expected term of each stock option.
Stock options
i
A
summary of the options activity during the six months ended June 30, 2020 is shown below:
Shares
surrendered for taxes for the six months ended June 30, 2020
i—
i128,906
i—
Cost
of shares surrendered for taxes for the six months ended June 30, 2020 (in millions)
$
i—
$
i1.1
$
i—
Shares
surrendered for taxes for the six months ended June 30, 2019
i380,564
i106,173
i—
Cost
of shares surrendered for taxes for the six months ended June 30, 2019 (in millions)
$
i3.7
$
i1.0
$
i—
/
Outstanding
PBRSUs issued prior to May 2019 vest upon satisfaction of both time-based requirements and market targets based on share price with certain awards vesting between December 31, 2020 and December 31, 2022. Depending on the percentage level at which the market-based condition is satisfied, the number of shares vesting could be between i0%
and i350% of the number of PBRSUs originally granted. PBRSUs issued subsequent to April 2019 vest in December 2021 upon satisfaction of both time-based and performance-based conditions. Depending on the award, performance condition targets may include cumulative adjusted EBITDA, end-to-end RCM agreement growth, scored revenue growth, or other
specific performance factors. Depending on the percentage level at which the performance-based conditions are satisfied, the number of shares vesting could be between i0% and i200%
of the number of PBRSUs originally granted. Based on the established targets, the maximum number of shares that could vest for all PBRSUs is i9,184,321.
13. iOther
Expenses
i
Other expenses (income) consist of the following (in millions):
Notes to Unaudited Consolidated Financial Statements
(1) Costs related to evaluating, pursuing and integrating acquisitions, performing portfolio analyses, and other inorganic business projects as part of the Company’s growth strategy. Costs include vendor spend, employee time and expenses spent on activities, and severance and retention amounts associated with integration activities.
(2) As part of the transition of personnel to the Company under certain operating partner model contracts, the
Company has agreed to reimburse, or directly pay the affected employees, for certain severance and retention costs related to certain employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.
(3) Project costs related to the Company's initial efforts to automate its transactional environment.
(4) Costs include charges associated with exiting leased facilities.
(5) For the three and six months ended June 30, 2020, includes $i2.7 million
and $i5.3 million, respectively, of expenses pertaining to appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, and other costs related to the COVID-19 pandemic.
14.iIncome
Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant and infrequent or unusual items which are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the projected annual pre-tax earnings by jurisdiction and the allocation of certain expenses in various taxing jurisdictions where the Company conducts its business. These taxing jurisdictions apply a broad range of statutory income tax rates.
The Tax Cut and Jobs Act (“Tax Act”) enacted on December 22, 2017 includes two sets of provisions aimed at preventing or decreasing
U.S. tax base erosion - the global intangible low-taxed income (“GILTI”) provisions and the base erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions impose taxes on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The
Company included the current year impact of the GILTI tax and BEAT in the estimated annual effective tax rate calculation.
The Company recognized income tax expense for the three months ended June 30, 2020 on the year-to-date pre-tax income. The deviation from the federal statutory tax rate of i21% is
primarily attributable to recognizing the provisions for GILTI plus the geographical mix of earnings, permanent differences and discrete items. The income tax expense for the six months ended June 30, 2020 was higher than the amount derived by applying the federal statutory tax rate of i21% primarily due to GILTI and discrete items.
The
Company recognized income tax benefit for the three and six months ended June 30, 2019 on the year-to-date pre-tax loss. The deviation from the federal statutory tax rate of i21% is primarily attributable to recognizing the provisions of BEAT and GILTI plus the geographical mix of earnings and permanent differences. The income tax benefit for the three and six months ended June 30, 2019 was higher
than the amount derived by applying the federal statutory tax rate of i21% primarily due to discrete items.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. U.S. federal income tax returns since
2016 are currently open for examination. State jurisdictions vary for open tax years. The statute of limitations for most states ranges from three to isix years.
At December 31, 2019, the Company had gross deferred tax assets of $i135.0
million, of which $i64.1 million related to net operating loss carryforwards. The majority of the Company's carryforwards were generated in 2014 and 2016. The Company expects to be profitable, allowing the Company to utilize its NOL carryforward and other deferred tax assets.
22
R1
RCM Inc.
Notes to Unaudited Consolidated Financial Statements
15. i8.00% Series A Convertible Preferred Stock
The preferred stock is held by a related party, TCP-ASC ACHI Series LLLP, a limited liability limited partnership jointly owned by Ascension Health Alliance and investment funds affiliated with TowerBrook (the “Investor”).
i
The
following summarizes the preferred stock activity for the six months ended June 30, 2020 (in millions, except per share data):
Basic net income per share is computed by dividing net income, less any dividends, accretion or decretion, redemption or induced conversion on the preferred stock, by the weighted average number of common shares outstanding during the period. As the preferred stock participates in dividends alongside the Company’s common stock (per their participating dividends), the preferred stock would constitute participating
securities under ASC 260-10 and are applied to earnings per share using the two-class method. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends.
Diluted net income per share is calculated using the more dilutive of the if-converted or the two-class method. For the three and six months ended June 30, 2020 and 2019, the two-class method was more dilutive and was computed by adjusting the denominator used in the basic net income per share computation by potentially dilutive securities outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, shares issuable upon vesting of RSAs, RSUs, PBRSUs and shares issuable upon conversion of
preferred stock.
iBasic and diluted net income (loss) per common share are calculated as follows (in millions, except share and per share data):
23
R1 RCM Inc.
Notes to Unaudited Consolidated Financial
Statements
Net
income (loss) available/(allocated) to common shareholders - basic
$
i4.8
$
(i10.3)
$
i11.3
$
(i15.1)
Diluted
EPS:
Net income (loss)
$
i15.1
$
(i5.2)
$
i33.3
$
(i5.0)
Less
dividends on preferred shares
(i5.6)
(i5.1)
(i11.0)
(i10.1)
Less
income allocated to preferred shareholders
(i3.8)
i—
(i8.9)
i—
Net
income (loss) available/(allocated) to common shareholders - diluted
$
i5.7
$
(i10.3)
$
i13.4
$
(i15.1)
Basic
weighted-average common shares
i115,067,552
i110,956,014
i114,754,298
i110,382,509
Add:
Effect of dilutive equity awards
i10,608,629
i—
i11,198,960
i—
Add:
Effect of dilutive warrants
i40,211,783
i—
i41,856,066
i—
Diluted
weighted average common shares
i165,887,964
i110,956,014
i167,809,324
i110,382,509
Net
income (loss) per common share (basic)
$
i0.04
$
(i0.09)
$
i0.10
$
(i0.14)
Net
income (loss) per common share (diluted)
$
i0.03
$
(i0.09)
$
i0.08
$
(i0.14)
Because
of their anti-dilutive effect, i322,512 and i250,279
common share equivalents comprised of stock options, PBRSUs, and RSUs have been excluded from the diluted earnings per share calculation for the three and six months ended June 30, 2020.
For the three and six months ended June 30, 2019, ii25,113,533/
common share equivalents have been excluded from the diluted earnings per share calculation because of their anti-dilutive effect. Additionally, for the three and six months ended June 30, 2019, the Investor's and Intermountain's exercisable warrants to acquire up to i60 million and i1.5
million shares, respectively, of the Company's common stock have been excluded from the diluted earnings per share calculation because they are anti-dilutive.
17.iCommitments and Contingencies
Legal
Proceedings
Other than as described below, the Company is not presently a party to any material litigation or regulatory proceeding and is not aware of any pending or threatened litigation or regulatory proceeding against the Company which, individually or in the aggregate, could have a material adverse effect on its business, operating results, financial condition or cash flows.
24
R1 RCM Inc.
Notes
to Unaudited Consolidated Financial Statements
In May 2016, the Company was served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of the Company’s customers, MedStar Inc.’s Washington Hospital Center (“WHC”), along with WHC and three other hospitals that were PAS customers and a place holder, John Doe hospital, representing all PAS customers (U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.), and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees. The Third Amended Complaint alleges that the Company’s
PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago, and the U.S. Attorney declined to intervene. The Company believes that it has meritorious defenses to all claims in the case and intends to vigorously defend itself against these claims. The Company and plaintiff have filed motions for summary judgment, which are fully briefed and pending the judge's decision. The outcome is not presently determinable.
18. iRelated
Party Transactions
This note encompasses transactions between Ascension and the Company pursuant to the amended and restated Master Professional Services Agreement (“A&R MPSA”), including all supplements, amendments and other documents entered into in connection therewith. For further details on the Company's agreements with Ascension, see Note 1 and Note 18 of the Company's 2019 Form 10-K.
i
Net
services revenue from services provided to Ascension included in the Company’s consolidated statements of operations were (in millions):
Accounts receivable, net of $i0.1
million and $i0.0 million allowance - related party
$
i25.3
$
i30.8
Current
portion of customer liabilities
$
i23.4
$
i34.1
Non-current
portion of customer liabilities
$
i18.2
$
i18.6
Total
customer liabilities
$
i41.6
$
i52.7
/
Since
Ascension is the Company's largest customer, a significant percentage of the Company's cost of services is associated with providing services to Ascension. However, due to the nature of the Company's global business services and information technology operations, it is impractical to assign the dollar amount associated with services provided to Ascension.
Certain costs associated with the initial
phases of customer contracts and the related transition of customer hospitals and physician groups are deferred. These fulfillment costs relate directly to the Company’s responsibilities under the corresponding customer contracts, generate or enhance resources of the Company that will be used in satisfying its performance obligations in the future, and are expected to be recovered through the margins realized. iThe
following table summarizes the breakout of deferred contract costs (in millions):
25
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The associated assets are amortized as services are transferred to the customer over the remaining life of the contracts. For the three and six months ended June 30, 2020, total amortization was $i1.2 million and $i2.3 million,
respectively, and there were iino/
associated impairment losses. For the three and six months ended June 30, 2019, total amortization was $i0.8 million and $i1.5 million,
respectively, and there were iino/
associated impairment losses.
20.iSegments and Customer Concentrations
The Company has determined that it has a single operating segment in accordance with how its business activities are managed and evaluated. All of the
Company’s significant operations are organized around the single business of providing end-to-end management services of revenue cycle operations for U.S.-based healthcare providers. Accordingly, for purposes of segment disclosures, the Company has only ione reportable segment.
Healthcare providers affiliated with Ascension have accounted for a significant portion of the
Company’s net services revenue each year since the Company’s formation. For the three months ended June 30, 2020 and 2019, net services revenue from healthcare organizations affiliated with Ascension accounted for i66% and i67%
of the Company's total net services revenue, respectively. For the six months ended June 30, 2020 and 2019, net services revenue from Ascension accounted for i65% and i67%,
respectively. The loss of customers within the Ascension health system could have a material adverse impact on the Company’s operations. For the three months ended June 30, 2020 and 2019, Intermountain Healthcare accounted for i14% and i14%
of the Company's total net services revenue, respectively. For the six months ended June 30, 2020 and 2019, Intermountain Healthcare accounted for i15% and i14%
of the Company’s total net services revenue, respectively.
As of June 30, 2020 and December 31, 2019, the Company had a concentration of credit risk with Ascension accounting for i28% and i37% of
accounts receivable, respectively.
21. iDerivative Financial Instruments
The Company utilizes cash flow hedges to mitigate its currency risk arising from its global delivery resources and
to reduce variability in interest cash flows from its outstanding debt. As of June 30, 2020, the Company has recorded $i1.0 million and $i3.4
million of existing losses in accumulated other comprehensive income for the foreign currency hedges and interest rate swaps, respectively. The Company estimates that $i1.0 million and $i1.9
million of losses reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months for the foreign currency hedges and interest rate swaps, respectively. The amounts related to foreign currency hedges that were reclassified into cost of services were a net loss of $i0.6 million and $i0.7 million
during the three and six month period ended June 30, 2020, and a net gain of $i0.4 million and $i0.5 million
during the three and six month period ended June 30, 2019. The amounts related to the interest rate swaps that were reclassified into interest expense were a net loss of $i0.4 million and $i0.3 million
during the three and six month period ended June 30, 2020, respectively. The interest rate swaps were entered into in the third quarter of 2019, and therefore had no impact on the three and six month period ended June 30, 2019.
The Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows. As of June 30, 2020, the Company’s currency forward contracts have maturities extending no later than December
31, 2020. The Company's interest rate swaps extend no later than August of 2022.
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R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
As of June 30, 2020, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $i26.9
million and $i200.0 million, respectively. As of December 31, 2019, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $i52.6
million and $i100.0 million, respectively. As of June 30, 2020, the Company held no derivatives, or non-derivative hedging instruments, that were designated in fair value or net investment hedges. Fair values for derivative financial instruments are based on prices computed using third-party valuation models and are classified as Level 2 in accordance with the three-level hierarchy of fair value measurements.
22.
iSubsequent Events
RevWorks Acquisition
On June 2, 2020, the Company entered into a definitive agreement to acquire the RevWorks services business (the “RevWorks Acquisition”) from Cerner Corporation.
Pursuant
to the terms of the definitive agreement, the Company will acquire RevWorks for $i30 million in cash. The Company intends to fund the RevWorks Acquisition and the related fees and expenses with cash on hand. The payments to Cerner Corporation will occur in ithree
installments between the closing and the second anniversary of closing.
The closing of the acquisition occurred on August 3, 2020.
Emergency Medical Services Sale
On July 19, 2020, the Company entered into a definitive agreement to dispose of its emergency medical services (EMS) business, including EMS Revenue Cycle Management and Electronic Patient Care Reporting (the “EMS Disposition”).
Pursuant to the terms of the definitive agreement, the disposition price will
be $i140 million, inclusive of a $i5 million
hold-back amount subject to the completion of certain transition services, to be paid approximately ione year from the date of the disposition. The disposition price is subject to customary adjustments for working capital, cash, and transaction expenses.
The closing of the EMS Disposition is expected to take place in the third quarter of 2020, subject to satisfaction of certain closing conditions. As of June
30, 2020, the assets and liabilities of the EMS business were not classified as held-for-sale as management had not committed to a formal plan to sell the business.
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context indicates
otherwise, references in this Quarterly Report on Form 10-Q to “R1,”“the Company,”“we,”“our,” and “us” mean R1 RCM Inc., and its subsidiaries.
The following discussion and analysis is an integral part of understanding our financial results and is provided as an addition to, and should be read in connection with, our consolidated financial statements and the accompanying notes. Also refer to Note 1 of our consolidated financial statements.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws, that involve substantial risks and uncertainties. These statements
are often identified by the use of words such as “anticipate,”“believe,”“estimate,”“expect,”“intend,”“designed,”“may,”“plan,”“predict,”“project,”“would” and similar expressions or variations. These forward-looking statements include, among other things, statements about the potential impacts of the COVID-19 pandemic, our strategic initiatives, our capital plans, our costs, our ability to successfully deliver on our commitments to our customers, our ability to deploy new business as planned, our ability to successfully implement new technologies, our future financial performance, and our liquidity. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, the severity, magnitude and duration of the COVID-19 pandemic; responses to the pandemic by the government and healthcare providers and the direct and indirect impacts of the pandemic on our customers and personnel; the disruption of national, state and local economies as a result of the pandemic; the impact of the pandemic on our financial results, including possible lost revenue and increased expenses; as well as those discussed in the section titled “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q, and elsewhere in this Report, and those set forth in Part I, Item 1A of the 2019 Form 10-K and our other filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements
at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Our Business
R1 is a leading provider of technology-enabled revenue cycle management (“RCM”) services to healthcare providers, including health systems and hospitals, physicians groups, and municipal and private emergency medical service (“EMS”) providers. Our services help healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician and staff satisfaction for our customers.
We achieve these results for our customers
by managing healthcare providers’ revenue cycle operations, which encompass processes including patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation and collections from patients and payers. We do so by deploying a unique operating model that leverages our extensive healthcare site experience, innovative technology and process excellence. We assist our RCM customers in managing their revenue cycle operating costs while simultaneously increasing the portion of the maximum potential services revenue they receive. Together, these benefits can generate significant and sustainable improvements in operating margins and cash flows for our customers.
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Our primary service offering
consists of end-to-end RCM services for health systems, hospitals, physician groups, and EMS providers, which we deploy through an operating partner relationship or a co-managed relationship. Under an operating partner relationship, we provide comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology solutions and process workflow. Under a co-managed relationship, we leverage our customers’ existing RCM staff and processes, and supplement them with our infused management, subject matter specialists, proprietary technology solutions and other resources. Under the operating partner model, we record higher revenue and expenses due to the fact that almost all of the revenue cycle personnel are our employees and more third-party vendor contracts are controlled by us. Under the co-managed model, the majority of the revenue cycle personnel
and more third-party vendor contracts remain with the customer and those costs are netted against our co-managed revenue. For the six months ended June 30, 2020 and 2019, substantially all of our net operating and incentive fees from end-to-end RCM services were generated under the operating partner model.
We also offer modular services, allowing customers to engage us for only specific components of our end-to-end RCM service offering, such as physician advisory services (“PAS”), practice management (“PM”), revenue integrity solutions (“RIS”), patient experience, coding management, and business office services. Our PAS offering assists healthcare organizations in complying
with payer requirements regarding whether to classify a hospital visit as an in-patient or an out-patient observation case for billing purposes. Our PM services offer administrative and operational support to allow healthcare providers to focus on delivering high quality patient care and outsource non-core functions to us. Our RIS offering includes charge capture, charge description master (“CDM”) maintenance and pricing services that help providers ensure they are capturing the maximum net compliant revenue for services delivered. Our patient experience offering helps patients manage their data in one easy-to-use environment, enabling eligibility validation and insurance plan attribution, demographic accuracy, meeting authorization and referral requirements, medical necessity validation, and patient out-of-pocket cost estimation. Our coding management offering drives performance, quality, and consistent results via business intelligence and analysis, human capital
management, an accountability framework, and a quality management program. Our business office services can help providers with the entire billing function or to specifically recoup revenue that may otherwise be lost by focusing skilled resources in lower priority areas with significant revenue potential.
Once implemented, our technology solutions, processes and services are deeply embedded in our customers’ day-to-day revenue cycle operations. We believe our service offerings are adaptable to meet an evolving healthcare regulatory environment, technology standards and market trends.
We operate our business as a single segment configured with our significant operations and offerings organized around the business of providing revenue cycle operations for healthcare providers.
SCI Solutions, Inc. Acquisition
On
April 1, 2020, the Company completed the acquisition of scheduling.com, Inc. d/b/a SCI Solutions, Inc. (“SCI”) pursuant to a stock purchase agreement dated as of January 9, 2020 (“the Stock Purchase Agreement”), by and among the Company, Clearsight Intermediate Holdings, Inc. (“Clearsight Holdings”) and Clearsight Group Holdings, LLC (the “Seller”) (“the SCI Acquisition”). At the closing of the transaction, the Company purchased from the Seller all of the issued and outstanding equity interests of Clearsight Holdings, which owns all of the issued and outstanding equity interests
of SCI. SCI is a leading provider of software-as-a-service (“SaaS”)-based scheduling and patient access solutions. SCI’s platform streamlines the patient and provider experience, creating efficient care networks where health systems’ capacity is digitally and conveniently accessible to all market constituents. The combination of R1 and SCI is expected to deliver enhanced value for healthcare providers by enabling them to expand digital front door strategies for their patients, improve operating efficiency, and increase capacity utilization, among other benefits. The aggregate purchase price consisted of $190 million in cash, which was adjusted pursuant to the Stock Purchase Agreement for estimated cash and working capital at the closing of the transaction, and is subject to a post-closing adjustment process. We will also be required to make an additional earn-out payment of up to $10 million if certain financial and operational targets are met within twelve months
following the closing date.
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On June 26, 2019, we entered into a senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent and the lenders named therein for senior secured credit facilities consisting of a $325.0 million senior secured term loan facility (the “Senior Term Loan”) and a $100.0 million senior secured revolving credit facility. On March 20, 2020, we entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), pursuant to which the lenders named in the Amendment agreed to provide an additional $191.1 million
incremental delayed-draw term loan facility (the “Incremental Term Loan”) on the same terms as its existing Senior Term Loan provided under the Credit Agreement.
The Incremental Term Loan was drawn substantially concurrently with the acquisition of SCI. The proceeds of the Incremental Term Loan were used to fund the purchase price for SCI and related expenses. The Incremental Term Loan has terms consistent with those of the Senior Term Loan, including with respect to interest, maturity, amortization and prepayments and has the same affirmative and negative covenants and events of default as those applicable to the Senior Term Loan under the Credit Agreement.
Coronavirus Pandemic
In March 2020, the World Health Organization characterized
COVID-19 as a pandemic. The United States, where we are headquartered and where the majority of our customers’ operations are based, has declared a state of emergency. Governments around the world have enacted temporary closures of businesses, issued stay-at-home orders, and taken other restrictive measures in response to the COVID-19 pandemic. Re-opening of businesses are occurring based on state and local guidelines and vary by locality and cannot be reasonably predicted.
Given the ongoing challenges associated with efforts to contain the spread of COVID-19 and related business impact for our customers, we initiated a number of actions in the first half of 2020 to ensure (1) the health and safety of our workforce and (2) uninterrupted and, in many respects, expanded support for our customers and the patients and communities they serve. Our efforts to date include: restricting all non-essential
domestic and international travel; repositioning more than 15,000 global employees to a work-from-home operating environment; offering free COVID-19 testing; expanding paid time off for employees impacted by low work volumes; providing appreciation bonuses to our front-line, patient-facing services employees; launching a new remote patient registration tool to minimize contact between patients and registration staff and conserve personal protective equipment; leveraging capabilities acquired via our SCI acquisition to assist customers with processes to restart elective procedure scheduling; offering in-depth regulatory analysis and guidance for our customers given numerous changes to healthcare regulatory federal and state rules; and providing customers with operational best practices for implementation and revenue cycle management of telehealth services.
We have been able to substantially
offset the revenue pressure faced during the six months ended June 30, 2020 by implementing measures to control costs and cash spending, including freezing hiring for non-critical roles, reducing non-COVID-related and non-SCI-related capital expenditures, eliminating discretionary spending, and suspending our 401(k) match and non-essential travel for the remainder of 2020. We are deferring our payroll tax remittances to the federal government as allowed under the CARES Act, allowing us to shift cash outflows from 2020 to 2021 and 2022. In addition, we are receiving an employee retention credit for allowable payroll expenses in conjunction with the CARES Act. We have also accelerated corporate cost savings initiatives that were originally planned for the fourth quarter into the second and third quarters. We have conducted a comprehensive review of our cost structure and capital expenditure needs, which have contributed
to our cost control measures that we have implemented and continue to implement. As we navigate the uncertainties of the pandemic, our focus has been on balancing long-term growth opportunities with short-term challenges.
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Given the ongoing impact of the pandemic, there continues to be decreased patient volumes for our customers. We have continued to employ our full customer-facing workforce, even during lower patient volumes, because it is important to have that capacity available to serve our customers as volumes return. As restrictions are lifted, we expect a corresponding return in patient volumes, however we anticipate continued volume constraints and corresponding revenue pressure to
continue into the second half of 2020. Despite the impacts of the pandemic, we have been able to complete the acquisition of SCI and RevWorks and sign Penn State Health, and we continue to be active in additional strategic initiatives. We have been able to maintain our cash on hand by obtaining an incremental term loan to fund the acquisition of SCI, and continue to have strong operating cash flows through the first half of 2020.
The impact of the COVID-19 pandemic is fluid and continues to evolve. We cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. However, we continue to assess its impact on our business and are actively managing our response. For further details on the potential impact of COVID-19 on our business, refer to “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form
10-Q.
CONSOLIDATED RESULTS OF OPERATIONS
The following table provides consolidated operating results and other operating data for the periods indicated:
We supplement our GAAP consolidated financial statements with the non-GAAP financial measure adjusted EBITDA. Adjusted EBITDA is utilized by our Board and management team as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating actual results against such expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive incentive compensation programs, as well as for incentive compensation plans for employees.
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Selected Non-GAAP Measure
Adjusted EBITDA
We
define adjusted EBITDA as net income before net interest income/expense, income tax provision/benefit, depreciation and amortization expense, share-based compensation expense, expense arising from debt extinguishment, strategic initiatives costs, transitioned employee restructuring expense, digital transformation office expenses, and other items which are detailed in the table below.
We understand that, although non-GAAP measures are frequently used by investors, securities analysts, and others in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted
EBITDA does not reflect share-based compensation expense;
•Adjusted EBITDA does not reflect income tax expenses or cash requirements to pay taxes;
•Adjusted EBITDA does not reflect interest expenses or cash required to pay interest;
•Adjusted EBITDA does not reflect certain other expenses which may require cash payments;
•Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect cash requirements for such replacements or other purchase commitments, including lease commitments; and
•Other companies in
our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Reconciliation of GAAP and Non-GAAP Measures
The following table represents a reconciliation of adjusted EBITDA to net income (loss), the most comparable GAAP measure, for each of the periods indicated:
(1) Share-based
compensation expense represents the expense associated with stock options, restricted stock units and restricted stock awards granted, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 12, Share-Based Compensation, to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the detail of the amounts of share-based compensation expense.
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(2) Loss on debt extinguishment represents the loss associated with the repayment of the credit agreement and subordinated notes dated May 8, 2018, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). For further details on the extinguishment,
see Note 13 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
(3) Other expenses consist of the following (in millions):
(1)
Costs related to evaluating, pursuing and integrating acquisitions, performing portfolio analyses, and other inorganic business projects as part of the Company’s growth strategy. Costs include vendor spend, employee time and expenses spent on activities, and severance and retention amounts associated with integration activities.
(2) As part of the transition of personnel to the Company under certain operating partner model contracts, the Company has agreed to reimburse, or directly pay the affected employees, for certain severance and retention costs related to certain employees
who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.
(3) Project costs related to the Company's initial effort to automate its transactional environment.
(4) Costs include charges associated with exiting leased facilities.
(5) For the three and six months ended June 30, 2020, includes $2.7 million and $5.3 million, respectively, of expenses pertaining to appreciation bonuses for the
Company’s front-line employees, pandemic response mobilization efforts, and other costs related to the COVID-19 pandemic.
Net services revenue increased by $19.7 million, or 7%, from $295.0 million for the three months ended June 30, 2019, to $314.7 million for the three months ended June 30, 2020. The increase was primarily driven by organic growth at existing customers and new customer wins in the last twelve months,
partially offset by lower incentive fees.
Cost of Services
Cost of servicesincreased by $2.2 million, or 1%, from $246.1 million for the three months ended June 30, 2019, to $248.3 million for the three months ended June 30, 2020. The increase was primarily driven by an increase in costs associated with new customers onboarded in the last twelve months and the SCI acquisition, partially offset by lower compensation costs, healthcare claims experience and CARES Act relief.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $2.5 million, or 10%, from $25.8 million for the three months ended June
30, 2019, to $23.3 million for the three months ended June 30, 2020. The decrease was primarily driven by lower travel and marketing expenses due to COVID-19 and lower compensation costs.
Other Expenses
Other expenses increased by $7.3 million, or 68%, from $10.7 million for the three months ended June 30, 2019, to $18.0 million for the three months ended June 30, 2020. The increase was primarily driven by expenses related to COVID-19, including pandemic response mobilization efforts, facility-exit expenses, and expenses related to strategic initiatives.
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Income
Tax Provision (Benefit)
Income tax expense increased by $16.3 million from a $11.1 million income tax benefit for the three months ended June 30, 2019, to a $5.2 million income tax expense for the three months ended June 30, 2020, primarily due to higher pre-tax income and higher GILTI. Our effective tax rate (including discrete items) was approximately 26% and 68% for the three months ended June 30, 2020 and 2019, respectively. The interim tax accounting guidance requires the use of the estimated Annual Effective Tax Rate (“AETR”) based on a full year of forecasted income and tax expense/(benefit) applied to year to date income/(loss). Our tax rate is also affected by discrete items that may occur in any given year, but
are not necessarily consistent from year to year.
Net services revenue increased by $64.3 million, or 11%, from $570.9 million for the six months ended June 30, 2019, to $635.2 million for the six months ended June 30, 2020. The increase was primarily driven by organic growth at existing customers and new customer wins since the beginning of 2019.
Cost of Services
Cost of services increased by $18.9 million, or 4%, from $483.3 million for the six months ended
June 30, 2019, to $502.2 million for the six months ended June 30, 2020. The increase was primarily driven by an increase in costs associated with new customers onboarded in the last twelve months and the SCI acquisition, partially offset by lower compensation costs, healthcare claims experience and CARES Act relief .
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $0.5 million, or 1%, from $48.3 million for the six months ended June 30, 2019, to $48.8 million for the six months ended June 30, 2020. The increase was primarily driven by investments in human resources and information technology spend to support scaling business operations,
partially offset by lower travel and marketing expenses due to COVID-19.
Other Expenses
Other expenses increased by $7.2 million, or 37%, from $19.5 million for the six months ended June 30, 2019, to $26.7 million for the six months ended June 30, 2020. This increase was primarily driven by increased expenses related to COVID-19, including pandemic response mobilization efforts, facility-exit expenses, and expenses related to strategic initiatives.
Income Tax Provision (Benefit)
Income tax expense increased by $29.7 million from a $14.1 million income tax benefit for the six months ended June 30, 2019, to a $15.6 million income tax expense for
the six months ended June 30, 2020, primarily due to higher pre-tax income and certain permanent items. Our effective tax rate (including discrete items) was approximately 32% and 74% for the six months ended June 30, 2020 and 2019, respectively. The interim tax accounting guidance requires the use of the estimated Annual Effective Tax Rate (“AETR”) based on a full year of forecasted income and tax expense/(benefit) applied to year to date income/(loss). Our tax rate is also affected by discrete items that may occur in any given year, but are not necessarily consistent from year to year.
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CRITICAL
ACCOUNTING POLICIES
Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective, or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies and Use of Estimates” of our 2019 Form 10-K. There have been no material changes to the critical accounting policies disclosed in our 2019 Form 10-K other than the impact of adopting new accounting standards.
NEW ACCOUNTING PRONOUNCEMENTS
For additional information regarding new
accounting guidance, see Note 2, Recent Accounting Pronouncements, to our consolidated financial statements included in this Quarterly Report on Form 10-Q, which provides a summary of our recently adopted accounting standards and disclosures.
Liquidity and Capital Resources
Cash flows from operating, investing and financing activities, as reflected in our consolidated statements of cash flows, are summarized in the following table:
Cash provided by operating activities increased by $1.3 million from $44.0 million for the six months ended June 30, 2019, to $45.3 million for the six months ended June 30, 2020. Cash provided by operating activities increased due to increased net income from operations of $37.7 million, offset by the timing of accounts receivables collections resulting in higher cash provided from operating activities for the six months ended June 30, 2019.
Investing Activities
Cash used in investing activities increased by $187.8 million
from $32.3 million for the six months ended June 30, 2019, to $220.1 million for the six months ended June 30, 2020. Cash used in investing activities increased due to the SCI Acquisition.
Financing Activities
Cash provided by financing activities increased by $204.1 million from $3.5 million for the six months ended June 30, 2019, to $207.6 million for the six months ended June 30, 2020. This change was due to the incremental term loan drawn in conjunction with the SCI Acquisition, as well as increased borrowing under our revolver in 2020 in order to maintain sufficient cash on hand in light of the COVID-19 pandemic.
35
Future
Capital Needs
In June 2019, we refinanced our debt, paying off the prior senior credit facility and subordinated notes and replacing them with one senior secured credit facility, including a senior term loan of $325.0 million and a senior revolver providing for borrowings of up to $100.0 million.
On March 20, 2020, the Company entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), pursuant to which the lenders named in the Amendment agreed to provide an additional $191.1 million incremental delayed-draw term loan facility (the “Incremental Term Loan”) on the same terms as its existing Senior Term Loan provided under the Credit Agreement.
The
Incremental Term Loan was drawn substantially concurrently with the closing of the SCI Acquisition on April 1, 2020. The proceeds of the Incremental Term Loan were used to fund the purchase price for the SCI Acquisition and related expenses.
We continue to invest capital in order to achieve our strategic initiatives. In addition, we plan to continue to enhance customer service by continuing our investment in technology to enable our systems to more effectively integrate with our customers’ existing technologies in connection with our strategic initiatives. We plan to continue to deploy resources to strengthen our information technology infrastructure, including automation, in order to drive additional value for our customers. We also expect to continue to invest in our shared services infrastructure and capabilities, and selectively pursue
acquisitions and/or strategic relationships that will enable us to broaden or further enhance our offerings. Due to the COVID-19 impact on the economy, we have reduced discretionary spending in order to ensure we maintain sufficient cash reserves throughout the time frame which we are impacted. Additionally, in the first quarter of 2020, we borrowed an additional $30 million under our senior revolver to maintain sufficient cash on hand in light of the COVID-19 pandemic.
New business development remains a priority as we plan to continue to invest in our sales and marketing efforts. Additionally, we expect to incur costs associated with implementation and transition costs to onboard new customers.
We believe that our available cash balances, cash flows expected to be generated from operations, and additional capacity under the revolving credit facility will be sufficient to satisfy
our current and planned working capital and investment needs for the next twelve months. No assurance can be given, however, that this will be the case. The extent to which COVID-19 will ultimately impact our results will depend on future developments, which are highly uncertain, but could materially adversely impact our business, results of operations, and liquidity in future periods.
Debt and Financing Arrangements
Senior Secured Credit Facilities
On June 26, 2019, we entered into a senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders named therein, for senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $325.0 million senior secured
term loan facility (the “Senior Term Loan”) issued at 99.66% of par and a $100.0 million senior secured revolving credit facility (the “Senior Revolver”).
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On April 1, 2020, substantially concurrently with the closing of the SCI Acquisition, we borrowed an additional $191.1 million under an incremental delayed-draw term loan facility (the “Incremental Term Loan”) on the same terms as our existing Senior Term Loan provided under the Credit Agreement. The proceeds of the Incremental Term Loan were used to fund the purchase price for the SCI Acquisition and related expenses. The Incremental Term Loan has terms consistent with
those of the Senior Term Loan, including with respect to interest, maturity, amortization and prepayments and has the same affirmative and negative covenants and events of default as those applicable to the Senior Term Loan under the Credit Agreement. The drawing of the Incremental Term Loan increased the balance of the obligation due under the Senior Term Loan, and therefore is shown as one consolidated obligation.
In accordance with ASC 470-50, the Amendment was treated as a loan modification in the financial statements.
The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility.
As of June 30, 2020, we had $70.0 million in borrowings, no letters of credit outstanding, and $30.0 million of availability under the Senior Revolver.
Borrowings under the Senior Secured Credit Facilities bear interest, at our option, at: (i) an Alternate Base Rate (“ABR”) equal to the greater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus 0.50% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus between 0.75% and 1.75% dependent on our Net Leverage Ratio (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be
less than 0.00% per annum), plus between 1.75% and 2.75%, dependent on our Net Leverage Ratio. The interest rate as of June 30, 2020 was 2.68%. We are also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate between 0.30% and 0.50% of the average daily unutilized commitments thereunder dependent on our net leverage ratio.
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and our subsidiaries' ability to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase our capital stock; (vi) make investments, loans or
advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x) amend material agreements governing certain of our junior indebtedness; (xi) change our lines of business; (xii) make certain acquisitions; and (xiii) limitations on the letter of credit cash collateral account. The Credit Agreement contains customary affirmative covenants and events of default. In addition, we are required to maintain minimum consolidated total net leverage and consolidated interest coverage ratios. We were in compliance with all of the covenants in the Credit Agreement as of June 30, 2020.
For further details on our debt, refer to Note 13 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019
(the “2019 Form 10-K”).
CONTRACTUAL OBLIGATIONS
The following table presents a summary of our contractual obligations as of June 30, 2020 (in millions):
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2020
2021
2022
2023
2024
2025
Thereafter
Total
Operating
leases (1)
$
10.6
$
18.8
$
16.3
$
15.1
$
14.9
$
14.7
$
33.5
$
123.9
Purchase
and finance lease obligations (2)
$
1.6
$
5.5
$
5.2
$
4.0
$
—
$
—
$
—
$
16.3
Debt
obligations
$
12.9
$
32.3
$
38.7
$
45.2
$
438.4
$
—
$
—
$
567.5
Interest
on debt
$
8.9
$
16.2
$
14.3
$
12.7
$
5.6
$
—
$
—
$
57.7
Total
$
34.0
$
72.8
$
74.5
$
77.0
$
458.9
$
14.7
$
33.5
$
765.4
(1)
Obligations and commitments to make future minimum rental payments under non-cancelable operating leases having remaining terms in excess of one year.
(2) Includes obligations associated with IT software and service costs.
We do not have any other off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial results.
Item 3.
Qualitative and Quantitative Disclosures
about Market Risk
Interest Rate Sensitivity. Our results of operations and cash flows are subject to fluctuations due to changes in interest rates due to our debt and banking arrangements, which can result in fluctuations in our interest income and expense. As of June 30, 2020, we have hedged $100.0 million of our $567.5 million outstanding floating rate debt to a fixed rate of 1.4% plus the applicable spread defined in the Credit Agreement. An additional $100.0 million of our outstanding floating rate debt is hedged to a fixed rate of 1.1065% plus the applicable spread defined in the Credit Agreement. The remaining $367.5 million outstanding is subject to an average variable rate of 2.68% as of June 30, 2020. Assuming the current level of borrowings, a one percentage
point increase or decrease in interest rates would increase or decrease our annual interest expense by approximately $3.7 million.
Our interest income is primarily generated from variable rate interest earned on operating cash accounts.
Foreign Currency Exchange Risk. Our results of operations and cash flows are subject to fluctuations due to changes in the Indian rupee and the Euro because a portion of our operating expenses are incurred by our subsidiaries in India and Lithuania, and are denominated in Indian rupees and Euros, respectively. We do not generate significant revenues outside of the United States. For the six months ended June 30, 2020 and 2019,
9% and 7% of our expenses were denominated in foreign currencies, respectively. As of June 30, 2020 and 2019, we had net assets of $51.5 million and $41.1 million in foreign entities, respectively. The reduction in earnings from a 10% change in foreign currency spot rates would be $5.8 million and $4.4 million at June 30, 2020 and 2019, respectively.
For designated cash flow hedges, gains and losses currently recorded in accumulated other comprehensive loss will be reclassified into earnings at the time when certain anticipated intercompany charges are accrued as cost of services. As of June 30, 2020, it was anticipated that approximately $0.6 million of losses, net of tax, currently
recorded in accumulated other comprehensive loss will be reclassified into cost of services within the next 12 months.
We use sensitivity analysis to determine the effects that market foreign currency exchange rate fluctuations may have on the fair value of our hedge portfolio. The sensitivity of the hedge portfolio is computed based on the market value of future cash flows as affected by changes in exchange rates. This sensitivity analysis represents the hypothetical changes in value of the hedge position and does not reflect the offsetting gain or loss on the underlying exposure. A 10% change in the levels of foreign currency exchange rates against the U.S. dollar (or other base currency of the hedge if not a U.S. dollar hedge) with all other variables held constant would have resulted in a change in the fair value of our hedge instruments of approximately $2.4 million as of June 30,
2020.
38
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are designed to ensure that information
required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management including its principal executive officer and principal financial officer to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2020. Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, our disclosure controls and procedures were
effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
39
PART II
Item 1.
Legal
Proceedings
Other than as described below, we are presently not a party to any material litigation or regulatory proceeding and are not aware of any pending or threatened litigation or regulatory proceeding against us which, individually or in the aggregate, could have a material adverse effect on our business, operating results, financial condition or cash flows.
In May 2016, we were served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of our customers, MedStar Inc.’s Washington Hospital Center (“WHC”), along with WHC and three other hospitals that were PAS customers and a place holder, John Doe hospital, representing all PAS customers (U.S. ex rel. Graziosi vs. Accretive Health,
Inc. et. al.), and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees. The Third Amended Complaint alleges that our PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago, and the U.S. Attorney declined to intervene. We believe that we have meritorious defenses to all claims in the case and intend to vigorously defend the Company against these claims. We and the plaintiff have filed motions for summary judgment, which are fully briefed and pending the judge's decision. The outcome is not presently determinable.
Item 1A.
Risk
Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
There
have been no material changes in our risk factors from those disclosed in the 2019 Form 10-K, except as follows:
The novel coronavirus (“COVID-19”) pandemic has negatively affected and will likely continue to negatively affect our business, operating results, and financial condition.
On March 11, 2020, the COVID-19 outbreak was characterized as a pandemic by the World Health Organization. In response to the pandemic, governments around the world have implemented numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns. Re-opening of businesses are occurring based on state and local guidelines and vary by locality and cannot be reasonably predicted. Even after re-openings,
a resurgence of cases may lead to further shut-downs or restrictions after the initial re-opening. These measures have impacted and may further impact all or portions of our workforce and operations and the operations of our customers. These impacts include decreases in patient volumes, the need for personal protective equipment and other protective measures for front-line employees, and work-from-home arrangements. Restrictions on our employees’ ability to travel could affect our ability to sell or onboard certain services. Our business, along with the global economy, has been adversely affected by these measures, which have resulted in a significant reductions in spending, volatile economic conditions and business disruptions across markets globally.
40
During
the six months ended June 30, 2020, the adverse impacts to our results of operations which resulted from certain revenue pressure due to declining volumes were substantially offset by our cost control initiatives which were implemented in the first half of 2020. However, due to the continued global spread of COVID-19, including throughout the U.S., we anticipate adverse effects on our results of operations throughout our business during the second half of 2020 as customers continue to experience disruptions to their businesses. In response to governmental restrictions and/or concerns regarding the spread of the virus, many patients and/or providers have delayed or cancelled routine and non-essential medical procedures and physician visits. As a result, a number of our customers have a reduced need for our personnel on site to manage their RCM activities. However, even with decreased patient volumes, we have continued
to employ our full customer-facing workforce. We also have a large number of employees now working from home, and such arrangements may involve increased use of public Wi-Fi and use of office equipment off premises, which may make our business more vulnerable to cybersecurity breach attempts. This period of uncertainty could also lead to an increase in phishing and other scams, fraud, theft or other criminal activity. In addition, we have a significant number of personnel internationally, including in India, which has implemented strict travel restrictions across the country. Travel restrictions or other containment measures or the sudden spread of COVID-19 in India or in any other country where we have a large number of personnel or critical operations could impair our ability to manage day-to-day service delivery for our customers, which could result in, among other things, losses of revenue or breaches of our customer contracts
if a large number of personnel were unable to work at the same time. Further, adverse impacts to our customers’ businesses as a result of the COVID-19 pandemic could cause delays in, or limit their ability to, make timely payments to us, which could adversely affect our results of operations. The COVID-19 pandemic and the response to it have caused an economic slowdown. An economic slowdown, recession or economic uncertainty as a result of the COVID-19 outbreak could negatively affect us by reducing patient or service volumes and payment ability. The extent to which COVID-19 will ultimately impact our results will depend on future developments, which are highly uncertain, but could materially and adversely impact our business, results of operations, and liquidity in future periods. The COVID-19 pandemic has also significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets, which can increase the cost of
capital and adversely impact our ability to access capital.
These and other impacts of the COVID-19 pandemic could have the effect of heightening many of the other risks described in the “Risk Factors” section in our Annual Report on Form 10-K for the Year Ended December 31, 2019. The extent to which the COVID-19 pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, the duration of the pandemic, travel restrictions, business closures or business disruption and the actions taken throughout the world, including in our markets, to contain COVID-19 or treat its impact. The severity, magnitude and duration of the COVID-19 pandemic is uncertain, rapidly changing and difficult to predict and depends
on events beyond our knowledge or control. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. As a result, we cannot at this time predict the impact of the COVID-19 pandemic, but it could have a material adverse effect on our business, results of operations, financial condition and cash flows.
41
Disruptions
in service or damage to our global business services centers and third-party operated data centers could adversely affect our business.
Our global business services centers and third-party operated data centers are essential to our business. Our operations depend on our ability to operate our global business services centers and maintain and protect our applications, which are located in data centers that are operated for us by third parties. We cannot control or assure the continued or uninterrupted availability of these third-party data centers. In addition, our information technologies and systems, as well as our data centers and global business services centers, are vulnerable to damage or interruption from various causes, including (1) acts of God and other natural disasters, war, acts of terrorism and pandemics and other public health events, including the COVID-19 pandemic, and
(2) power losses, computer systems failures, internet and telecommunications or data network failures, operator error, losses of and corruption of data and similar events. We have a business continuity plan and maintain insurance against fires, floods, other natural disasters and general business interruptions to mitigate the adverse effects of a disruption, relocation or change in operating environment at one of our data centers or global business services centers, but the situations we plan for and the amount of insurance coverage we maintain may not be adequate in every particular case. In addition, the occurrence of any of these events could result in interruptions, delays or cessations in service to our customers, or in interruptions, delays or cessations in the direct connections we establish between our customers and payers. Any of these events could impair or inhibit our ability to provide our services, reduce the attractiveness of our services to current or
potential customers and adversely affect our financial condition and results of operations.
In addition, despite the implementation of security measures, our infrastructure, data centers, global business services centers or systems that we interface with, including the internet and related systems, may be vulnerable to physical break-ins, improper employee or contractor access, programming errors, cyber attacks, computer viruses, malicious code, phishing attacks, denial-of-service attacks or other information security threats by third parties seeking to disrupt operations or misappropriate information or similar physical or electronic breaches of security. Any of these can cause system failure, including network, software or hardware failure, which can result in service disruptions. As a result, we may be required to expend significant capital and other resources to protect against security
breaches and hackers or to alleviate problems caused by such breaches.
Our growing global business services operations expose us to risks that could have a material adverse effect on our costs of operations.
We employ a significant number of personnel internationally and expect to continue to add personnel in India. While there are cost and service advantages to operating in India, significant growth in the technology sector in India has increased competition to attract and retain skilled employees and has led to a commensurate increase in compensation expense. In the future, we may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure in India.
Our reliance on an
international workforce exposes us to disruptions in the business, political and economic environment in those regions. Maintenance of a stable political environment is important to our operations, and terrorist attacks and acts of violence or war may directly affect our physical facilities and workforce or contribute to general instability. Our global business services operations require us to comply with local laws and regulatory requirements, which are complex and of which we may not always be aware, and expose us to foreign currency exchange rate risk. Our global business services operations may also subject us to trade restrictions, reduced or inadequate protection for intellectual property rights, security breaches, pandemics and other public health events, including the COVID-19 pandemic, and other factors that may adversely affect our business. Negative developments in any of these areas could increase our costs of operations or otherwise harm our business.
42
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table provides information about our repurchases of common stock during the periods indicated:
Period
Number
of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs (in millions) (2)
Includes
the surrender of shares of our common stock related to employees’ tax withholding upon vesting of restricted stock. See Note 12, Share-Based Compensation, to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
(2)
On November 13, 2013, the Board authorized, subject to the completion of the restatement of our financial statements, the repurchase of up to $50.0 million of our common stock from time to time in the open market or in privately negotiated transactions (the “2013 Repurchase Program”). The timing and amount of any shares repurchased under the 2013 Repurchase Program will be determined by our management based on its evaluation of market conditions and other factors. The 2013 Repurchase Program may be suspended or discontinued at any time.
43
Item 6.
Exhibits
The
following are filed or incorporated by reference as a part of this Quarterly Report on Form 10-Q:
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
+
Management contract or compensatory plan or arrangement.
Portions of this exhibit (indicated therein by asterisks)
have been omitted for confidential treatment.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
