Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 879K
2: EX-10.1 Material Contract HTML 258K
3: EX-10.3 Material Contract HTML 1.00M
4: EX-31.1 Certification -- §302 - SOA'02 HTML 30K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 30K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 27K
7: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
14: R1 Cover Page HTML 81K
15: R2 Consolidated Balance Sheets HTML 143K
16: R3 Consolidated Balance Sheets (Parenthetical) HTML 59K
17: R4 Consolidated Statements of Operations and HTML 126K
Comprehensive Income (Unaudited)
18: R5 Consolidated Statements of Operations and HTML 31K
Comprehensive Income (Unaudited) (Parenthetical)
19: R6 Consolidated Statements of Stockholders' Equity HTML 171K
(Unaudited)
20: R7 Consolidated Statements of Stockholders' Equity HTML 33K
(Unaudited) (Parenthetical)
21: R8 Consolidated Statements of Cash Flows (Unaudited) HTML 135K
22: R9 Business Description and Basis of Presentation HTML 34K
23: R10 Recent Accounting Pronouncements HTML 38K
24: R11 Fair Value of Financial Instruments HTML 31K
25: R12 Acquisitions HTML 53K
26: R13 Accounts Receivable and Allowance for Credit HTML 46K
Losses
27: R14 Property, Equipment and Software HTML 51K
28: R15 Leases HTML 79K
29: R16 Intangible Assets HTML 50K
30: R17 Goodwill HTML 32K
31: R18 Revenue Recognition HTML 74K
32: R19 Debt HTML 54K
33: R20 Share-Based Compensation HTML 84K
34: R21 Other Expenses HTML 44K
35: R22 Income Taxes HTML 34K
36: R23 8.00% Series A Convertible Preferred Stock HTML 36K
37: R24 Earnings (Loss) Per Share HTML 68K
38: R25 Commitments and Contingencies HTML 33K
39: R26 Related Party Transactions HTML 47K
40: R27 Deferred Contract Costs HTML 74K
41: R28 Segments and Customer Concentrations HTML 34K
42: R29 Derivative Financial Instruments HTML 32K
43: R30 Subsequent Events HTML 30K
44: R31 Recent Accounting Pronouncements (Policies) HTML 41K
45: R32 Acquisitions (Tables) HTML 50K
46: R33 Accounts Receivable and Allowance for Credit HTML 43K
Losses (Tables)
47: R34 Property, Equipment, and Software (Tables) HTML 53K
48: R35 Leases (Tables) HTML 54K
49: R36 Intangible Assets (Tables) HTML 53K
50: R37 Goodwill (Tables) HTML 32K
51: R38 Revenue Recognition (Tables) HTML 65K
52: R39 Debt (Tables) HTML 43K
53: R40 Share-Based Compensation (Tables) HTML 88K
54: R41 Other Expenses (Tables) HTML 44K
55: R42 8.00% Series A Convertible Preferred Stock HTML 36K
(Tables)
56: R43 Earnings (Loss) Per Share (Tables) HTML 65K
57: R44 Related Party Transactions (Tables) HTML 44K
58: R45 Deferred Contract Costs (Tables) HTML 34K
59: R46 Business Description and Basis of Presentation - HTML 32K
Narrative (Details)
60: R47 Acquisitions - Narrative (Details) HTML 81K
61: R48 Acquisitions - Fair Value of Assets Acquired and HTML 71K
Liabilities Assumed (Details)
62: R49 Acquisitions - Pro Forma Results (Details) HTML 33K
63: R50 Accounts Receivable and Allowance for Credit HTML 59K
Losses - Schedule of Allowance for Credit Losses
(Details)
64: R51 Property, Equipment, and Software - Schedule of HTML 47K
Property, Equipment and Software (Details)
65: R52 Property, Equipment, and Software - Allocation of HTML 34K
Depreciation and Amortization Expense between Cost
of Services and Selling, General and
Administrative Expenses (Details)
66: R53 Leases - Schedule of Lease Costs (Details) HTML 33K
67: R54 Leases - Schedule of Supplemental Cash Flow HTML 31K
Information (Details)
68: R55 Leases - Schedule of Operating and Finance Lease HTML 49K
Maturity (Details)
69: R56 Intangible Assets - Components of Intangible HTML 39K
Assets (Details)
70: R57 Intangible Assets - Narrative (Details) HTML 29K
71: R58 Intangible Assets - Future Amortization (Details) HTML 45K
72: R59 Goodwill - Schedule of Changes in Carrying Value HTML 32K
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73: R60 Revenue Recognition - Schedule of Disaggregated HTML 39K
Revenue by Source (Details)
74: R61 Revenue Recognition - Schedule of Contract HTML 41K
Balances (Details)
75: R62 Revenue Recognition - Narrative (Details) HTML 33K
76: R63 Revenue Recognition - Transaction Price Allocated HTML 79K
to the Remaining Performance Obligation (Details)
77: R64 Debt - Carrying Amounts of Debt (Details) HTML 46K
78: R65 Debt - Narrative (Details) HTML 105K
79: R66 Debt - Scheduled Maturities of Long-Term Debt HTML 40K
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Options Activity (Details)
85: R72 Other Expenses - Schedule of Other Expenses HTML 41K
(Details)
86: R73 Income Taxes - Narrative (Details) HTML 46K
87: R74 8.00% Series A Convertible Preferred Stock - HTML 53K
Narrative (Details)
88: R75 8.00% Series A Convertible Preferred Stock - HTML 45K
Schedule of Preferred Stock Activity (Details)
89: R76 Earnings (Loss) Per Share - Computation of Basic HTML 93K
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90: R77 Earnings (Loss) Per Share - Narrative (Details) HTML 36K
91: R78 Commitments and Contingencies - Narrative HTML 31K
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92: R79 Related Party Transactions - Net Services Revenue HTML 31K
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93: R80 Related Party Transactions - Summary Amounts HTML 40K
Included in Balance Sheet (Details)
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95: R82 Deferred Contract Costs - Summary of Deferred HTML 33K
Contract Costs (Details)
96: R83 Deferred Contract Costs - Narrative (Details) HTML 31K
97: R84 Segments and Customer Concentrations - Narrative HTML 44K
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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)
i434 W. Ascension Way
i84123
i6th
Floor
iMurray
iUtah
(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 27, 2021, the registrant had i278,870,428 shares of common stock, par value $0.01 per share, outstanding.
Accounts
receivable, net of $i2.2 million and $i3.7 million allowance
i96.8
i91.3
Accounts
receivable, net of $i0.1 million and $i0.1 million allowance - related party
i31.9
i30.9
Prepaid
expenses and other current assets
i59.7
i59.4
Total
current assets
i353.3
i355.4
Property, equipment
and software, net
i89.8
i93.7
Operating
lease right-of-use assets
i56.5
i57.8
Intangible
assets, net
i162.2
i171.1
Goodwill
i375.5
i375.3
Non-current
deferred tax assets
i62.6
i73.7
Non-current
portion of restricted cash equivalents
i0.5
i1.0
Other
assets
i77.4
i61.0
Total
assets
$
i1,177.8
$
i1,189.0
Liabilities
Current liabilities:
Accounts payable
$
i21.0
$
i18.2
Current
portion of customer liabilities
i30.8
i16.7
Current
portion of customer liabilities - related party
i6.7
i15.3
Accrued
compensation and benefits
i76.6
i51.9
Current
portion of operating lease liabilities
i10.7
i12.2
Current
portion of long-term debt
i38.7
i32.3
Other
accrued expenses
i53.3
i59.7
Total
current liabilities
i237.8
i206.3
Non-current
portion of customer liabilities - related party
i16.4
i16.3
Non-current
portion of operating lease liabilities
i65.3
i71.0
Long-term
debt
i500.7
i519.7
Other
non-current liabilities
i35.5
i36.3
Total
liabilities
i855.7
i849.6
ii8.00/%
Series A convertible preferred stock, par value $ii0.01/,
iiino//
shares authorized, issued or outstanding as of June 30, 2021; i370,000 shares authorized, ii288,497/
shares issued and outstanding as of December 31, 2020 (aggregate liquidation value of $i294.3)
i—
i251.5
Stockholders’
equity:
Common stock, $ii0.01/ par
value, ii500,000,000/ shares authorized, i295,658,397
shares issued and i278,819,843 shares outstanding at June 30, 2021; i137,812,559 shares issued and i121,144,038
shares outstanding at December 31, 2020
Net services revenue ($i218.4 million
and $i433.9 million for the three and six months ended June 30, 2021, respectively, and $i206.4 million and $i414.8
million for the three and six months ended June 30, 2020, respectively, from related party)
$
i353.4
$
i314.7
$
i696.0
$
i635.2
Operating
expenses:
Cost of services
i287.0
i248.3
i554.2
i502.2
Selling,
general and administrative
i29.0
i23.3
i54.6
i48.8
Other
expenses
i9.8
i18.0
i22.8
i26.7
Total
operating expenses
i325.8
i289.6
i631.6
i577.7
Income
from operations
i27.6
i25.1
i64.4
i57.5
Net
interest expense
i3.4
i4.8
i7.3
i8.6
Income
before income tax provision
i24.2
i20.3
i57.1
i48.9
Income
tax provision
i5.8
i5.2
i12.9
i15.6
Net
income
$
i18.4
$
i15.1
$
i44.2
$
i33.3
Net
income (loss) per common share:
Basic
$
i0.07
$
i0.04
$
(i2.16)
$
i0.10
Diluted
$
i0.06
$
i0.03
$
(i2.16)
$
i0.08
Weighted
average shares used in calculating net income (loss) per common share:
Basic
i268,251,790
i115,067,552
i253,850,972
i114,754,298
Diluted
i320,832,913
i165,887,964
i253,850,972
i167,809,324
Consolidated
statements of comprehensive income
Net income
$
i18.4
$
i15.1
$
i44.2
$
i33.3
Other
comprehensive income (loss):
Net change on derivatives designated as cash flow hedges, net of tax
(i0.1)
i0.8
i0.4
(i3.6)
Foreign
currency translation adjustments
(i0.6)
(i0.2)
(i1.0)
(i2.3)
Comprehensive
income
$
i17.7
$
i15.7
$
i43.6
$
i27.4
Basic:
Net
income
$
i18.4
$
i15.1
$
i44.2
$
i33.3
Less
dividends on preferred shares
i—
(i5.6)
(i592.3)
(i11.0)
Less
income allocated to preferred shareholders
i—
(i4.7)
i—
(i11.0)
Net
income (loss) available/allocated to common shareholders - basic
$
i18.4
$
i4.8
$
(i548.1)
$
i11.3
Diluted:
Net
income
$
i18.4
$
i15.1
$
i44.2
$
i33.3
Less
dividends on preferred shares
i—
(i5.6)
(i592.3)
(i11.0)
Less
income allocated to preferred shareholders
i—
(i3.8)
i—
(i8.9)
Net
income (loss) available/allocated to common shareholders - diluted
$
i18.4
$
i5.7
$
(i548.1)
$
i13.4
See
accompanying notes to consolidated financial statements.
5
R1 RCM Inc.
Consolidated Statements of Stockholders’ Equity (Unaudited)
Adjustments
to reconcile net income to net cash provided by operations:
Depreciation and amortization
i35.5
i33.6
Amortization
of debt issuance costs
i0.5
i0.5
Share-based
compensation
i36.5
i9.1
Loss
on disposal and right-of-use asset write-downs
i0.6
i4.5
Provision
for credit losses
i0.2
i1.7
Deferred
income taxes
i10.5
i15.1
Non-cash
lease expense
i5.2
i6.0
Changes
in operating assets and liabilities:
Accounts receivable and related party accounts receivable
(i8.8)
(i5.4)
Prepaid
expenses and other assets
(i15.2)
(i10.5)
Accounts
payable
i2.2
i4.5
Accrued
compensation and benefits
i25.0
(i44.2)
Lease
liabilities
(i7.4)
(i5.9)
Other
liabilities
(i6.9)
i12.7
Customer
liabilities and customer liabilities - related party
i6.4
(i9.7)
Net
cash provided by operating activities
i128.5
i45.3
Investing
activities
Purchases of property, equipment, and software
(i18.4)
(i31.1)
Acquisition
of SCI, net of cash acquired and earn-out provision
i—
(i189.0)
Proceeds
from disposal of assets
i2.6
i—
Net
cash used in investing activities
(i15.8)
(i220.1)
Financing
activities
Issuance of senior secured debt, net of discount and issuance costs
i—
i190.6
Borrowings
on revolver
i—
i50.0
Repayment
of senior secured debt
(i12.9)
(i10.5)
Repayments
on revolver
i—
(i20.0)
Payment
of contingent consideration liability
(i4.8)
i—
Inducement
of preferred stock conversion
(i105.0)
i—
Exercise
of vested stock options
i5.7
i4.3
Shares
withheld for taxes
(i4.5)
(i1.1)
Other
i—
(i5.7)
Net
cash (used in) provided by financing activities
(i121.5)
i207.6
Effect
of exchange rate changes in cash, cash equivalents and restricted cash
(i0.6)
(i1.2)
Net
(decrease) increase in cash, cash equivalents and restricted cash
(i9.4)
i31.6
Cash,
cash equivalents and restricted cash, at beginning of period
i174.8
i92.5
Cash,
cash equivalents and restricted cash, at end of period
$
i165.4
$
i124.1
Supplemental
disclosures of cash flow information
Accrued dividends payable to preferred stockholders
$
i—
$
i5.6
Accrued
and other liabilities related to purchases of property, equipment and software
$
i13.5
$
i11.2
Accounts
payable related to purchases of property, equipment and software
$
i3.6
$
i0.6
Interest
paid
$
i7.4
$
i7.4
Income
taxes paid
$
i1.7
$
i2.5
Income
taxes refunded
$
i—
$
i0.2
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-driven solutions that transform the patient experience and financial performance of healthcare 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.
Ascension
On April 30, 2021, the Company and Ascension Health (“Ascension”)
entered into Amendment No. 5 to the Master Professional Services Agreement (“A&R MPSA”), effective as of May 1, 2021, extending the agreement to April 30, 2031, among other amendments. For further information regarding the Company's business, including relationships with Ascension, TowerBrook Capital Partners (“TowerBrook”), and TCP-ASC ACHI Series LLLP (“TCP-ASC” or the “Investor”), refer to Note 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Form 10-K”).
VisitPay Acquisition
On
July 1, 2021, the Company completed the acquisition of iVinci Partners, LLC d/b/a VisitPay (“VisitPay”) pursuant to an Agreement and Plan of Merger dated as of May 3, 2021 by and among the Company, iVinci Partners, LLC, Vine Merger Sub, LLC, Flare Capital Partners I, L.P., Flare Capital Partners Investment Company, and Vine Sellers’ Representative, LLC (the “VisitPay Acquisition”). At the closing of the transaction, the Company acquired all of the outstanding equity interests of VisitPay. VisitPay is a provider
of digital payment solutions. The Company acquired VisitPay for approximately $i298.0 million in cash, subject to customary adjustments for working capital, cash, and debt. The Company funded the VisitPay Acquisition and related fees and expenses with the proceeds from borrowings under its amended and restated senior secured credit facilities and cash on hand.
For more information on the amended and restated senior secured credit facilities, see Note 22, Subsequent Events.
i
Basis of Presentation
The accompanying unaudited consolidated financial statements reflect the Company's financial position as of June 30, 2021, the results of operations of the
Company for the three and six months ended June 30, 2021 and 2020, and the cash flows of the Company for the six months ended June 30, 2021 and 2020. 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, 2021 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2021.
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 2020 Form 10-K.
9
R1 RCM Inc.
Notes to Unaudited
Consolidated Financial Statements
2.iRecent Accounting Pronouncements
i
Recently
Issued Accounting Standards and Disclosures
No new accounting pronouncements issued or effective during the fiscal year had, or is expected to have, a material impact on the Company’s consolidated financial statements.
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 2020 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 accrued expenses, 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 revolver and term loan (see Note 11, Debt) approximates fair value as they are variable rate bank debt.
4. iAcquisitions
SCI
On
April 1, 2020, the Company completed the acquisition of scheduling.com, Inc. d/b/a SCI Solutions, Inc. (“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).
iThe
fair value of assets acquired and liabilities assumed is (in millions):
10
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Purchase Price Allocation
Total purchase consideration
$
i197.0
Allocation
of consideration to assets acquired and liabilities assumed:
Cash and cash equivalents
$
i2.9
Accounts receivable
i2.8
Prepaid
expenses and other current assets
i1.2
Property, equipment and software
i0.3
Operating
lease right-of-use assets
i1.2
Intangible assets
i86.1
Goodwill
i125.8
Accounts
payable
(i0.2)
Current portion of customer liabilities
(i4.0)
Accrued
compensation and benefits
(i1.6)
Current portion of operating lease liabilities
(i0.5)
Other
accrued expenses
(i0.4)
Non-current portion of operating lease liabilities
(i0.7)
Other
non-current liabilities
(i5.0)
Deferred income tax liabilities
(i10.9)
Net
assets acquired
$
i197.0
Other non-current liabilities contained a note payable for $i5.0 million.
The Company repaid this note in the second quarter of 2020.
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.
The purchase price included an earn-out provision, which was dependent on achieving certain revenue and operational targets in the year following the acquisition, all of which were achieved. Based on projections at the time of acquisition, the earn-out was valued at $i4.8 million.
The full earn-out of $i10.0 million was paid in the second quarter of 2021. Changes to the earn-out value were recorded as a component of other expenses.
RevWorks
On August 3, 2020, the Company completed the acquisition
of RevWorks. The RevWorks acquisition has been accounted for under ASC 805, Business Combinations. Accordingly, the accounts of the acquired company, after adjustments to reflect estimated fair values assigned to assets and liabilities, have been included in the Company’s consolidated financial statements since the date of the RevWorks acquisition.
11
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The $i30.0 million
purchase consideration for the RevWorks acquisition (inclusive of working capital) consisted of a $i5.0 million payment at closing and itwo
deferred payments, each of $ii12.5/
million and totaling $i25.0 million, which are due and payable on the first and second anniversary of the closing date. The itwo
deferred payments are contractual obligations of the Company; however, they are potentially effectively refundable to the Company contingent on the achievement of certain pre-existing customer revenue targets for the RevWorks business that were agreed in the purchase agreement. If such targets are not achieved, Cerner Corporation (“Cerner”) is required to return to the Company up to $i25.0 million.
At the time of the acquisition, the Company recorded a present value liability for the contractual deferred payments of $i24.3 million, and recorded an asset for the contingently returnable consideration of $i22.3 million,
including $i11.5 million in prepaid expenses and $i10.8 million
in other assets on the Consolidated Balance Sheets, which is measured at fair value. The Company reviewed the balances at June 30, 2021 and determined that the fair value remained the same.
The assets acquired in the RevWorks acquisition consist primarily of customer relationships of approximately $i2.8 million
and fixed assets. There were no significant pre-closing liabilities of the RevWorks business included in the RevWorks acquisition. The fair value estimate of assets acquired and liabilities assumed are pending finalization of the valuation of contingent consideration.
The goodwill recognized of approximately $i3.6 million is primarily attributable to synergies that are expected to be achieved from the integration of RevWorks.
Pro Forma Results
i
The
following table summarizes, on a pro forma basis, the combined results of the Company as though the SCI and RevWorks acquisitions had occurred as of January 1, 2019. These pro forma results are not necessarily indicative of either the actual consolidated results had the acquisitions occurred as of January 1, 2019 or of the future consolidated operating results for any period. Pro forma results are (in millions):
Adjustments
were made to earnings to adjust depreciation and amortization to reflect the 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 revenue cycle management (“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 practice management customers.
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 continue to be uncertain. As a result, the Company’s future collection experience may differ 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 healthcare system 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 2020 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
$
i14.4
$
i10.1
Right-of-use
assets obtained in exchange for operating lease obligations:
i5.6
i3.2
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, and obtaining new leases for non-cash consideration.
i
Maturities of lease liabilities as of June 30, 2021 are as follows (in millions):
Operating
Leases
Remainder of 2021
$
i8.8
2022
i15.6
2023
i14.8
2024
i15.1
2025
i15.1
2026
i11.9
Thereafter
i21.9
Total
i103.2
Less:
Imputed
interest
i27.2
Present value of lease liabilities
$
i76.0
/
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, 2021 and December 31, 2020 (in millions):
Notes to Unaudited Consolidated Financial Statements
Intangible asset amortization expense was $i4.3 million and $i8.7
million for the three and six months ended June 30, 2021, and $i5.6 million and $i9.1 million for the
three and six months ended June 30, 2020.
i
Estimated annual amortization expense related to intangible assets with definite lives as of June 30, 2021 is as follows (in millions):
Remainder
of 2021
$
i8.7
2022
i17.5
2023
i17.5
2024
i15.7
2025
i14.3
2026
i14.3
Thereafter
i74.2
Total
$
i162.2
/
9.
iGoodwill
Unless otherwise required, goodwill is tested for impairment annually in the fourth quarter. iChanges in the carrying amount of goodwill
for the six months ended June 30, 2021 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):
(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 $i2.3 million
and $i5.6 million of current customer liabilities and $i16.4 million and $i16.3 million
of non-current customer liabilities as of June 30, 2021 and December 31, 2020, 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 $i96.1
million and $i87.0 million during the six months ended June 30, 2021 and 2020, which amounts were included in contract liabilities at the beginning of the respective periods. These revenue amounts include $i88.1
million and $i85.0 million for the six months ended June 30, 2021 and 2020, 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
Remainder
of 2021
$
i62.3
$
i23.9
$
i0.7
2022
i73.5
i4.7
i0.8
2023
i54.9
i—
i—
2024
i34.0
i—
i—
2025
i10.9
i—
i—
2026
i8.2
i—
i—
Thereafter
i7.8
i—
i—
Total
$
i251.6
$
i28.6
$
i1.5
/
The
amounts presented in the table above include variable fee estimates for the non-cancellable term of the Company's physician groups RCM services contracts, fixed fees which are typically recognized ratably as the performance obligation is satisfied, and forecasted 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 physician advisory services (“PAS”) contracts
that do not represent material rights to the customer.
11. iDebt
iThe
carrying amounts of debt consist of the following (in millions):
16
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, Acquisitions. The Incremental Term Loan had terms consistent with those of the Senior Term Loan, including with respect to interest, maturity, amortization, and prepayments and had 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.
On January 13, 2021,
the Company entered into Amendment No. 2 and Waiver to Credit Agreement (the “Second Amendment”), pursuant to which the lenders agreed (i) to waive the Company’s obligation to use the $i135.0 million of net proceeds from the disposition of the
Company’s emergency medical services business for purposes of reinvestments in useful assets of the Company, or to prepay the loans under the Credit Agreement, as otherwise required by the terms of the Credit Agreement, (ii) to amend the restricted payments covenant to permit the Company to make additional cash payments to the Investor in an amount not to exceed $i105.0 million
in connection with the preferred stock conversion (refer to Note 15. i8.00% Series A Convertible Preferred Stock) and reduce the “Available Amount” from which the Company can make certain investments, debt prepayments, or restricted payments by $i105.0 million
and (iii) that the excess cash flow sweep would begin with fiscal year ended December 31, 2021 instead of fiscal year ended December 31, 2020.
The Senior Revolver included 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 reduced the amount available under the revolving credit facility. As of June 30, 2021, the Company had $i70.0
million in borrowings, $i0.5 million letters of credit outstanding, and $i29.5 million of availability under the Senior Revolver.
17
R1
RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Borrowings under the Senior Secured Credit Facilities bore 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, 2021 was i2.35%. The Company was 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.
The Credit Agreement contained 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 contained customary affirmative covenants and events of default. In
addition, the Company was 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, 2021.
On July 1, 2021, the Company entered into an amended and restated credit agreement (the “A&R Credit Agreement”) and used a portion of the proceeds thereof to refinance, in full, all existing debt under the Credit Agreement. For more information on the A&R Credit Agreement, see Note 22, Subsequent
Events.
Debt Maturities
i
Scheduled maturities of the Company’s long-term debt are summarized as follows (in millions):
Scheduled
Maturities
Remainder of 2021
$
i19.4
2022
i38.7
2023
i45.2
2024
i438.4
Total
$
i541.7
/
For
further details on the Company's debt, refer to Note 13 of the Company's 2020 Form 10-K.
12.iShare-Based Compensation
The share-based compensation expense relating to the Company’s stock options, restricted stock units (“RSUs”), and performance-based restricted stock units (“PBRSUs”) for the three months ended June 30, 2021 and 2020 was $i23.8 million and $i4.3 million,
respectively, with related tax benefits of approximately $i4.9 million and $i0.7
million, respectively. The share-based compensation expense relating to the Company’s stock options, RSUs, and PBRSUs for the six months ended June 30, 2021 and 2020 was $i36.5 million and $i9.1 million,
respectively, with related tax benefits of approximately $i7.1 million and $i1.4 million,
respectively.
18
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
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 $i4.3
million and $i1.1 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the three months ended June 30, 2021 and 2020, respectively. The Company recognized $i6.6 million
and $i1.7 million of income tax benefit from windfalls associated with vesting and exercises of equity awards for the six months ended June 30, 2021 and 2020, respectively.
i
Total
share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows (in millions):
The
Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of their grant dates. The Company assesses current performance on performance-based PBRSUs by reviewing historical performance to date, along with any adjustments which have been approved to the reported performance, and changes to the projections to determine the probable outcome of the awards. The current estimates are then compared to the scoring metrics and any necessary adjustments are reflected in the current period to update share-based compensation expense to the current performance expectations.
i
The
following table sets forth the significant assumptions used in the Black-Scholes option pricing model and the calculation of share-based compensation expense for the six months ended June 30, 2021 and 2020:
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
iA
summary of the options activity during the six months ended June 30, 2021 is shown below:
19
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Shares
surrendered for taxes for the six months ended June 30, 2021
i170,033
i—
Cost
of shares surrendered for taxes for the six months ended June 30, 2021 (in millions)
$
i4.5
$
i—
Shares
surrendered for taxes for the six months ended June 30, 2020
i128,906
i—
Cost
of shares surrendered for taxes for the six months ended June 30, 2020 (in millions)
$
i1.1
$
i—
/
PBRSUs
vest 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 outstanding PBRSUs is i6,375,432.
13.
iOther Expenses
iOther expenses consist of the following (in
millions):
20
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
(1)
Costs related to evaluating, pursuing, and integrating acquisitions, performing portfolio and capital structure analyses and transactions, and other inorganic business projects as part of the Company’s growth strategy. Costs include vendor spend, employee time and expenses spent on activities, severance and retention amounts associated with integration activities, and changes to contingent consideration related to acquisitions. For the three and six months ended June 30, 2021, $i0.0 million
and $i0.5 million of contingent consideration changes were included, respectively.
(2) As part of evaluating its footprint, the Company has exited certain leased facilities. Costs include asset impairment charges and other costs related to exited leased facilities.
(3)
For the three and six months ended June 30, 2021, other includes $i2.7 million and $i4.4 million,
respectively, of expenses related to the COVID-19 pandemic, inclusive of appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, telemedicine and testing costs for employees, and other costs related to the COVID-19 pandemic. For the three and six months ended June 30, 2020, includes $i2.7 million and $i5.3 million,
respectively, of expenses 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 global intangible low-taxed income (“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 Company recognized income tax expense for the
three and six months ended June 30, 2021 on the year-to-date pre-tax income. The deviation from the federal statutory tax rate of ii21/% is
primarily attributable to recognizing the provisions for state taxes, GILTI, non-deductible expense, and discrete items.
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 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 2017 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.
21
R1
RCM Inc.
Notes to Unaudited Consolidated Financial Statements
At December 31, 2020, the Company had gross deferred tax assets of $i146.1 million, of which $i81.6
million related to net operating loss (“NOL”) 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.
The Company's completed acquisition of SCI and purchase accounting included $i10.9 million
of net deferred tax liabilities. In this amount is a deferred tax asset related to net operating loss carryforwards of approximately $i10.4 million generated since 2002. Since a portion of state net operating loss will not be realizable, partial valuation allowance was established for the net operating loss. Through the SCI acquisition, the Company also acquired a deferred tax asset related to research and experimentation credits of approximately $i3.7 million
that management believes will not be realized, and a full valuation allowance was established.
15. i8.00% Series A Convertible Preferred Stock
On January 15, 2021, TCP-ASC, a limited liability limited partnership jointly owned by Ascension Health Alliance, the parent entity of Ascension, and investment funds affiliated with TowerBrook, a related
party, converted all of its i294,266 shares (the “Preferred Shares”) of preferred stock into i117,706,400
shares of common stock of the Company into which the Preferred Shares were convertible pursuant to the Certificate of Designation of the preferred stock, and, in consideration therefor, the Company (i) issued i21,582,800 additional shares of common stock to the Investor, and (ii) paid the Investor $i105.0 million
in cash. On January 19, 2021, the Company filed a Certificate of Elimination of i8.00% Series A Convertible Preferred Stock with the Secretary of State of the State of Delaware to eliminate the Certificate of Designations of the i8.00%
Series A Convertible Preferred Stock. The consideration paid to induce the conversion was recorded as a dividend of $i592.3 million and reduced income available to common shareholders in our earnings per share calculation. The dividend was calculated as the cash paid of $i105.0 million
plus the fair value on the conversion date of the additional i21,582,800 shares of common stock issued as consideration for the conversion.
i
The
following summarizes the preferred stock activity for the six months ended June 30, 2021 (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.
22
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
Diluted net income per share is calculated using the more dilutive of the if-converted or the two-class method. For the six months ended June 30, 2021 and the three and six months ended June 30, 2020, 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 and shares issuable upon vesting of RSUs and PBRSUs.
i
Basic and diluted net income (loss) per common share are calculated as follows (in millions, except share and per share data):
Net
income (loss) available/(allocated) to common shareholders - basic
$
i18.4
$
i4.8
$
(i548.1)
$
i11.3
Diluted
EPS:
Net income
$
i18.4
$
i15.1
$
i44.2
$
i33.3
Less
dividends on preferred shares (1)
i—
(i5.6)
(i592.3)
(i11.0)
Less
income allocated to preferred shareholders
i—
(i3.8)
i—
(i8.9)
Net
income (loss) available/(allocated) to common shareholders - diluted
$
i18.4
$
i5.7
$
(i548.1)
$
i13.4
Basic
weighted-average common shares
i268,251,790
i115,067,552
i253,850,972
i114,754,298
Add:
Effect of dilutive equity awards
i6,551,978
i10,608,629
i—
i11,198,960
Add:
Effect of dilutive warrants
i46,029,145
i40,211,783
i—
i41,856,066
Diluted
weighted average common shares
i320,832,913
i165,887,964
i253,850,972
i167,809,324
Net
income (loss) per common share (basic)
$
i0.07
$
i0.04
$
(i2.16)
$
i0.10
Net
income (loss) per common share (diluted)
$
i0.06
$
i0.03
$
(i2.16)
$
i0.08
(1)
The 2021 dividend on preferred shares includes amounts related to the conversion of the preferred shares. See Note 15, i8.00% Series A Convertible Preferred Stock, for more information.
/
Because of their anti-dilutive effect, i386,079
and i14,606,241 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, 2021, respectively. Additionally, for the six months ended June 30, 2021, the Investor's and IHC Health Services, Inc.’s (“Intermountain”) exercisable warrants to acquire
up to i40.5 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.
For the three and six months ended June 30, 2020, i322,512 and i250,279
common share equivalents have been excluded from the diluted earnings per share calculation because of their anti-dilutive effect.
23
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
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.
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. Both the Company’s and plaintiff’s motions for summary judgment were denied in December 2020, and the parties are presently conducting damages and expert discovery. Discovery and dispositive motions are expected to extend through January 2022, with trial, if necessary, in mid-to-late 2022.
On April 13, 2021 and April 19, 2021, respectively, certain purported stockholders of the Company filed itwo
complaints in the Delaware Court of Chancery regarding the Company’s January 15, 2021 recapitalization transaction with TCP-ASC. Both complaints allege that TCP-ASC, Ascension, and TowerBrook controlled the Company and breached their fiduciary duties by using that alleged control to force the Company to overpay in redeeming TCP-ASC’s preferred stock as part of the recapitalization transaction. The plaintiffs seek an unspecified amount of damages against TCP-ASC, Ascension, and TowerBrook. The plaintiffs also allege that the Company and TCP-ASC entered into amendments to the Investor
Rights Agreement that the plaintiffs contend contains provisions that are void under the Company’s charter, bylaws, and the Delaware General Corporation Law. The plaintiffs seek a declaratory judgment that these amendments are invalid, as well as attorneys’ fees and costs. The Company believes that it has meritorious defenses to all claims against the Company and intends to vigorously defend itself against these claims.
18.
iRelated Party Transactions
This note encompasses transactions between Ascension and its affiliates, including AMITA Health, and the Company pursuant to the 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 2020 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 $i0.1 million
allowance - related party
$
i31.9
$
i30.9
Current
portion of customer liabilities
$
i6.7
$
i15.3
Non-current
portion of customer liabilities
$
i16.4
$
i16.3
Total
customer liabilities
$
i23.1
$
i31.6
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.
On May 27, 2021 and May 28, 2021, the Company issued i16,750,000
shares of common stock to TCP-ASC upon the cashless exercise of a warrant to purchase i19,535,145 shares of common stock at an exercise price of $i3.50
per share based upon a market value of $i24.54 to $i24.64 per share as determined under the terms of the warrant.
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):
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, 2021, total amortization was $i1.0 million and $i2.2 million,
respectively, and there were iino/
associated impairment losses. 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.
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, 2021 and 2020, net services revenue from healthcare organizations affiliated with Ascension accounted for i62% and i66%
of the Company's total net services revenue, respectively. For the six months ended June 30, 2021 and 2020, net services revenue from Ascension accounted for i62%and i65%,
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, 2021 and 2020, Intermountain accounted for i13% and i14%
of the Company's total net services revenue, respectively. For the six months ended June 30, 2021 and 2020, Intermountain accounted for i14% and i15%
of the Company’s total net services revenue, respectively.
25
R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements
The Company utilizes cash flow hedges to manage 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, 2021, the Company has recorded $i0.2 million of unrealized gains and $i1.5
million of unrealized losses in accumulated other comprehensive income for the foreign currency hedges and interest rate swaps, respectively. The Company estimates that $i0.2 million of gains and $i1.3
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 gain of $i0.2 million and $i0.6 million
during the three and six month periods ended June 30, 2021, respectively, and a net loss of $i0.6 million and $i0.7 million
during the three and six month periods ended June 30, 2020, respectively. The amounts related to the interest rate swaps that were reclassified into interest expense were a net loss of $i0.3 million and $i0.8 million
during the three and six month periods ended June 30, 2021, respectively, and a net loss of $i0.4 million and $i0.3 million
during the three and six month periods ended June 30, 2020, respectively.
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, 2021, the Company’s currency forward contracts have maturities extending no later than March 31, 2022. The Company's interest rate swaps extend no later than
August of 2022.
As of June 30, 2021, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $i67.5 million and $i100.0
million, respectively. As of December 31, 2020, the notional amounts of the Company's open foreign currency forward contracts and interest rate swaps were approximately $i55.9 million and $i200.0
million, respectively. As of June 30, 2021, 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
Amended and Restated Senior Credit Agreement
In conjunction with the closing of the VisitPay Acquisition, the Company entered into the A&R Credit Agreement with Bank of America, N.A., as administrative agent, and the lenders named therein, governing the Company’s amended and restated senior secured credit facilities, consisting of a $i700.0 million
senior secured term loan and a $i450.0 million senior secured revolving credit facility. Upon closing, the aggregate borrowings incurred under the senior secured revolving credit facility were $i120.0 million.
The proceeds from the A&R Credit Agreement, in addition to cash on hand, were used to (1) to refinance, in full, all existing indebtedness under the Credit Agreement, and amend and restate all commitments thereunder (the “Refinancing”), (2) to pay certain fees and expenses incurred in connection with the entry into the A&R Credit Agreement and the Refinancing, and (3) to fund the VisitPay Acquisition, and to pay the fees, premiums, expenses and other transaction costs incurred in connection therewith; and in the future, will be used to finance working capital needs of the Company and its subsidiaries for general corporate purposes.
26
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.
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 elsewhere in this Report, and those set forth in Part I, Item 1A of the 2020 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
We are a leading provider of technology-driven solutions that transform the patient experience and financial performance of healthcare 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 revenue cycle management (“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.
27
Our primary service offering consists of end-to-end RCM services for health systems, hospitals, and physician
groups, 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, 2021 and 2020, 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 (“PX”), 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 PX 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, we 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, we 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 $190.0 million in cash, adjusted pursuant to the Stock Purchase Agreement for cash and working capital. The agreement also contained an earn-out of $10.0 million for meeting certain financial and operational targets. The earn-out was paid out in full in the second quarter of 2021.
28
RevWorks Acquisition
On
August 3, 2020, we completed the acquisition of the RevWorks services business pursuant to an asset purchase agreement dated as of June 2, 2020 (the “RevWorks Purchase Agreement”) by and among the Company and Cerner Corporation (the “RevWorks Acquisition”). At the closing of the transaction, we purchased certain assets relating to the RevWorks services business, as specified in the RevWorks Purchase Agreement. The combination of R1 and RevWorks is expected to provide enhanced revenue cycle capabilities and expertise to RevWorks clients, helping drive sustainable financial improvements for providers while improving their patients’ overall experience.
Emergency Medical Services Disposition
On
October 30, 2020, we disposed of the emergency medical services (“EMS”) business, including EMS Revenue Cycle Management and Electronic Patient Care Reporting, for $140.0 million, inclusive of a $5.0 million hold-back amount subject to the completion of certain transition services, to be paid approximately one year from the date of the disposition. We recognized a gain on the sale of $55.7 million, which was subject to customary working capital adjustments.
VisitPay Acquisition
On July 1, 2021, we completed the acquisition of iVinci Partners, LLC d/b/a VisitPay (“VisitPay”) pursuant to an Agreement and Plan of Merger dated
as of May 3, 2021 by and among the Company, iVinci Partners, LLC, Vine Merger Sub, LLC, Flare Capital Partners I, L.P., Flare Capital Partners Investment Company, and Vine Sellers’ Representative, LLC (the “VisitPay Acquisition”). We acquired VisitPay for approximately $298.0 million in cash, subject to customary adjustments for working capital, cash, and debt. The Company funded the VisitPay Acquisition and related fees and expenses with the proceeds from additional borrowings and cash on hand.
In conjunction with the closing, we entered into an amended and restated senior credit agreement (the “A&R Credit Agreement”) with Bank of America, N.A.,
as administrative agent, and the lenders named therein, governing the Company’s amended and restated senior secured credit facilities, consisting of a $700.0 million senior secured term loan and a $450.0 million senior secured revolving credit facility. Upon closing, the aggregate borrowings incurred under the senior secured revolving credit facility were $120.0 million.The proceeds from the A&R Credit Agreement were used, in addition to cash on hand, (1) to refinance, in full, all existing indebtedness under the Credit Agreement, and amend and restate all commitments thereunder (the “Refinancing”), (2) to pay certain fees and expenses incurred in connection with the entry into the A&R Credit Agreement and the Refinancing, and (3) to fund the VisitPay Acquisition, and to pay the fees, premiums, expenses and other transaction costs incurred in connection therewith; and
in the future, will be used to finance working capital needs of the Company and its subsidiaries for general corporate purposes.
Coronavirus Pandemic
On January 31, 2020, the Secretary of Health and Human Services (“HHS”) announced a determination that a Public Health Emergency existed in the U.S. as a result of the 2019 Novel Coronavirus (hereafter, “COVID-19”). Since that time, HHS has repeatedly renewed its determination of the Public Health Emergency, most recently as of July 19, 2021. Further, in March 2020, the World Health
Organization characterized COVID-19 as a pandemic and that characterization remains in place. In turn, and based on continuously updated international, federal, state, and local guidelines, certain restrictions on businesses and travel remain in place, varying by locality, and cannot be reasonably predicted.
29
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 2020 that have continued in 2021 to ensure (1) the health, safety, and well-being of our workforce; (2) uninterrupted and, in many respects, expanded support for our customers and the patients and communities they serve;
and (3) business and operational continuity. Among our specific actions to support our workforce, we have maintained our work-from-home model for more than 15,000 global employees, offered zero out-of-pocket cost for COVID-19 testing and telemedicine visits, offered mental wellness programming, and recently launched the R1 Cares vaccination support program for our India workforce. In addition, we have continued to deliver customer support that includes: our PX mobile patient registration technology which reduces risk of patient and R1 staff exposure and preserves the use of critical personal protective equipment for clinical staff; reporting to allow for detailed COVID-19 order tracking, scheduling, and follow-up; in-depth regulatory resource guidance and content to aid our customers in navigating a rapidly developing and changing series of healthcare regulations during the public health emergency; and providing operational best practices for implementation and revenue
cycle management of telehealth services. We continue to track new COVID-19 variants and monitor and assess the current situation and guidance both locally and globally, and may adjust the above efforts as needed based on our ongoing assessment.
Due to the impact of the pandemic, there continues to be decreased patient volumes for our customers. Corresponding to the decreased volume, we anticipate that our second half 2021 revenues on average will be modestly below pre-COVID amounts. Given the continued uncertainty of the pandemic, we cannot reasonably predict when volumes will return to their pre-COVID levels. 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 continue
to actively manage 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
CONSOLIDATED RESULTS OF OPERATIONS
The following table provides consolidated operating results and other operating data for the periods indicated:
(1) Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results.
Use of Non-GAAP Financial Information
In order to provide a more comprehensive understanding of the information used by our management team in financial and operational decision-making, we supplement our consolidated financial statements that have been prepared in accordance with GAAP with the non-GAAP financial measure adjusted
EBITDA. Adjusted EBITDA is utilized by our Board and management team as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating actual results against such expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive incentive compensation programs, as well as for incentive compensation plans for employees.
Selected Non-GAAP Measure
Adjusted EBITDA
We define adjusted EBITDA as net income before net interest income/expense, income tax provision/benefit, depreciation and amortization expense, share-based compensation expense, strategic initiatives costs, and other items which are detailed in the table below.
We understand that, although non-GAAP measures are frequently used by investors, securities analysts,
and others in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect:
•Changes in, or cash requirements for, our working capital needs;
•Share-based compensation expense;
•Income tax expenses or cash requirements to pay taxes;
•Interest expenses or cash required to pay interest;
•Certain other expenses which may require cash payments;
•Although
depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect cash requirements for such replacements or other purchase commitments, including lease commitments; and
•Other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Reconciliation of GAAP and Non-GAAP Measures
The following table represents a reconciliation of adjusted EBITDA to net income, the most closely 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 performance-based restricted stock units granted, as reflected in our Consolidated Statements of Operations and Comprehensive Income. 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.
(2) Other expenses consist of the following (in millions):
(a)
Costs related to evaluating, pursuing, and integrating acquisitions, performing portfolio and capital structure analyses and transactions, and other inorganic business projects as part of the Company’s growth strategy. Costs include vendor spend, employee time and expenses spent on activities, severance and retention amounts associated with integration activities, and changes to contingent consideration related to acquisitions. For the three and six months ended June 30, 2021, $0.0 million and $0.5 million of contingent consideration changes were included, respectively.
(b) As part of evaluating our footprint, we have exited certain leased facilities. Costs include asset impairment charges and other costs related to exited leased facilities.
(c)
For the three and six months ended June 30, 2021, other includes $2.7 million and $4.4 million, respectively, of expenses related to the COVID-19 pandemic, inclusive of appreciation bonuses for the Company’s front-line employees, pandemic response mobilization efforts, telemedicine and testing costs for employees, and other costs related to the COVID-19 pandemic. For the three and six months ended June 30, 2020, includes $2.7 million and $5.3 million, respectively, of expenses related to the COVID-19 pandemic.
Net services revenue increased by $38.7 million, or 12%, from $314.7 million for the three months ended June 30, 2020, to $353.4 million for the three months ended June 30, 2021. The increase was largely driven by improvement in incentive fees, primarily due to COVID-19 recovery.
Cost of Services
Cost of servicesincreased by $38.7 million, or 16%, from $248.3 million for the three months ended June 30, 2020, to $287.0 million for the three months ended June 30, 2021.
The increase in cost of services was primarily driven by the SCI and RevWorks acquisitions, costs associated with onboarding new customers in the last twelve months, and an increase in share-based compensation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $5.7 million, or 24%, from $23.3 million for the three months ended June 30, 2020, to $29.0 million for the three months ended June 30, 2021. The increase was primarily driven by increased share-based compensation expense and costs associated with customer contracting activities.
32
Other
Expenses
Other expenses decreased by $8.2 million, or 46%, from $18.0 million for the three months ended June 30, 2020, to $9.8 million for the three months ended June 30, 2021. The decrease was primarily due to reduced strategic initiative expenses.
Income Tax Provision
Income tax expense increased by $0.6 million from $5.2 million for the three months ended June 30, 2020, to $5.8 million for the three months ended June 30, 2021, primarily due to higher pre-tax income and higher non-deductible expenses, partially offset by higher discrete benefits. Our effective tax rate (including discrete items) was approximately 24% and 26% for the three
months ended June 30, 2021 and 2020, 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 $60.8 million, or 10%, from $635.2 million for the six months ended June
30, 2020, to $696.0 million for the six months ended June 30, 2021. The increase was largely driven by higher incentive fees, primarily due to COVID-19 recovery.
Cost of Services
Cost of servicesincreased by $52.0 million, or 10%, from $502.2 million for the six months ended June 30, 2020, to $554.2 million for the six months ended June 30, 2021. The increase in cost of services was primarily driven by the SCI and RevWorks acquisitions, costs associated with onboarding new customers in the last twelve months, and an increase in share-based compensation.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses increased by $5.8 million, or 12%, from $48.8 million for the six months ended June 30, 2020, to $54.6 million for the six months ended June 30, 2021. The increase was primarily driven by increased share-based compensation expense and costs associated with customer contracting activities, partially offset by favorability in other corporate expenses.
Other Expenses
Other expenses decreased by $3.9 million, or 15%, from $26.7 million for the six months ended June 30, 2020, to $22.8 million for the six months ended June 30, 2021. The decrease was primarily due to reduced strategic initiative expenses.
Income
Tax Provision
Income tax expense decreased by $2.7 million from $15.6 million for the six months ended June 30, 2020, to $12.9 million for the six months ended June 30, 2021, primarily due to higher discrete benefits. Our effective tax rate (including discrete items) was approximately 23% and 32% for the six months ended June 30, 2021 and 2020, 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.
33
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 2020 Form 10-K. There have been no material changes to the critical accounting policies disclosed in our 2020 Form 10-K.
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
Our primary sources of liquidity include our cash and cash equivalents, cash flows from operations, and borrowings under our Credit Agreement. As of June 30, 2021 and December 31, 2020, we had cash and cash equivalents of $164.9 million and $173.8 million, respectively. The primary driver for the decreased cash position at June 30, 2021 was the payment made related to the conversion of the preferred stock, offset
by cash inflows from operations.
As of June 30, 2021, our Credit Agreement included a senior secured revolving credit facility (the “Senior Revolver”) with a total capacity of $100.0 million. As of June 30, 2021, we had drawn $70.0 million, issued $0.5 million in letters of credit, and had $29.5 million remaining under the Senior Revolver. As of December 31, 2020, we had drawn $70.0 million, issued $0.0 million in letters of credit, and had $30.0 million remaining under the Senior Revolver. See Note 11, Debt, to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on our Credit Agreement. As of June 30, 2021 we had total available liquidity of $194.4 million reflecting
our cash and cash equivalents as well as remaining availability under our revolver.
Concurrent with the close of the VisitPay Acquisition on July 1, 2021, we entered into the A&R Credit Agreement, consisting of a $700.0 million senior secured term loan and a $450.0 million senior secured revolving credit facility. Upon closing, the aggregate borrowings incurred under the senior secured revolving credit facility were $120.0 million. Taking into account cash paid for the VisitPay Acquisition and additional borrowing capacity under the A&R Credit Agreement, our liquidity as of July 1, 2021 was approximately $470.0 million.
Our liquidity is influenced by many factors, including timing of revenue and corresponding cash collections, the amount and timing of investments in strategic
initiatives, our investments in property, equipment and software, and the use of cash to pay tax withholding obligations upon surrender of shares upon vesting of equity awards. We continue to invest capital in order to achieve our strategic initiatives. In addition, we plan to enhance customer service by continuing our investment in technology to enable our systems to more effectively integrate with our customers' existing technologies.
We plan to continue to deploy resources to strengthen our information technology infrastructure, including automation, in order to drive additional value for our customers. We also expect to continue to invest in our global business services infrastructure and capabilities, and selectively pursue acquisitions and/or strategic relationships that will enable us to broaden or further enhance our offerings. New business development remains a priority as we plan to continue to boost our sales and
marketing efforts. Additionally, we expect to incur costs associated with implementation and transition costs to onboard new customers.
34
We expect cash and cash equivalents, cash flows from operations, and our availability under the revolver in the A&R Credit Agreement to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, including debt maturities and material capital expenditures, for at least the next 12 months. The extent to which COVID-19 will ultimately impact our results will depend on future developments, but could adversely impact our business, results of operations, and liquidity in future periods.
Cash flows
from operating, investing, and financing activities, as reflected in our consolidated statements of cash flows, are summarized in the following table:
Net cash (used in) provided by financing
activities
$
(121.5)
$
207.6
Cash Flows from Operating Activities
Cash provided by operating activities increased by $83.2 million from $45.3 million for the six months ended June 30, 2020, to $128.5 million for the six months ended June 30, 2021. Cash provided by operating activities increased due to increased net income of $10.9 million, inclusive of an increase in share-based compensation expense of $27.4 million which is a non-cash item, and a smaller cash bonus pay-out
related to the 2020 bonus plan compared to the 2019 bonus plan.
Cash Used in Investing Activities
Cash used in investing activities primarily includes our investments in property, equipment and software and our inorganic growth initiatives. Outflows for significant acquisitions are typically offset by cash inflows from financing activities related to obtaining new debt.
Cash used in investing activities decreased by $204.3 million from $220.1 million for the six months ended June 30, 2020, to $15.8 million for the six months ended June 30, 2021. Cash used in investing activities for the six months ended June 30, 2020 included the purchase of SCI. Additionally, cash
use decreased due to timing of payments for property, equipment and software.
Cash Flows from Financing Activities
Cash flows from financing activities primarily relate to borrowings and repayments of debt. We utilize our revolver to ensure we have sufficient cash on hand to support the needs of the business at any given point in time. Cash flows from financing activities also include cash received from exercises of stock options and the use of cash to pay tax withholding obligations upon surrender of shares upon vesting of equity awards, as well as other cash financing activities.
Cash used in financing activities increased by $329.1 million from cash provided of $207.6 million for the six months ended June 30, 2020, to cash used of $121.5 million for the six months ended June
30, 2021. For the six months ended June 30, 2020, cash was provided through new borrowings made under the Credit Agreement in conjunction with our acquisition of SCI. For the six months ended June 30, 2021, there were no additional borrowings under the Credit Agreement, and additionally we made a payment in conjunction with the conversion of the preferred stock, which together drove the overall change in cash flows from financing activities.
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Debt and Financing Arrangements
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”). On April 1, 2020, we drew an additional $191.1 million in conjunction with Amendment No. 1 to the Credit Agreement (the “Amendment”) on the same terms as our existing Senior Term Loan provided under the Credit Agreement. As of June 30, 2021, we had $471.7 million outstanding on our term loan facilities and had drawn $70.0 million on our Senior Revolver, with $29.5 million of availability remaining. The term loans required quarterly payments, and bore interest
at a floating rate, which was 2.35% at June 30, 2021.
The Credit Agreement contained a number of financial and non-financial covenants. We were 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, 2021.
See Note 11, Debt, to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
On July 1, 2021, in conjunction with the closing
of the VisitPay Acquisition, we entered into the A&R Credit Agreement with Bank of America, N.A., as administrative agent, and the lenders named therein, governing the Company’s amended and restated senior secured credit facilities, consisting of a $700.0 million senior secured term loan facility and a $450.0 million senior secured revolving credit facility. Upon closing, the aggregate borrowings incurred under the senior secured revolving credit facility were $120.0 million.
CONTRACTUAL OBLIGATIONS
The following table presents a summary of our contractual obligations as of June 30,
2021 (in millions):
2021
2022
2023
2024
2025
2026
Thereafter
Total
Operating
leases (1)
$
8.8
$
15.6
$
14.8
$
15.1
$
15.1
$
11.9
$
21.9
$
103.2
Purchase
obligations (2)
$
29.1
$
43.1
$
41.9
$
27.8
$
24.7
$
11.4
$
—
$
178.0
Debt
obligations
$
19.4
$
38.7
$
45.2
$
438.4
$
—
$
—
$
—
$
541.7
Interest
on debt
$
7.1
$
13.0
$
11.2
$
5.0
$
—
$
—
$
—
$
36.3
Total
$
64.4
$
110.4
$
113.1
$
486.3
$
39.8
$
23.3
$
21.9
$
859.2
(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, 2021, we have hedged $100.0 million of our $541.7 million outstanding floating rate debt to a fixed rate of 1.4% plus the applicable spread defined in the Credit Agreement. The remaining $441.7 million outstanding is subject to an average variable rate of 2.35% as of June 30, 2021. 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 $4.4 million.
36
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 because a portion of our operating expenses are incurred by our subsidiary in India and are denominated in Indian rupees. We do not generate significant revenues outside of the United States. For each of the six months ended June 30, 2021 and 2020, 9% of our expenses were denominated in foreign currencies. As of June 30, 2021 and 2020, we had net assets of $59.7 million and $48.1 million in foreign entities, respectively. Before the impact of our
foreign currency hedging activities discussed below, the reduction in earnings from a 10% change in foreign currency spot rates would be $6.4 million and $5.8 million at June 30, 2021 and 2020, 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, 2021, it was anticipated that approximately $0.1 million of gains, 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 $6.2 million as of June 30, 2021.
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, 2021. Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2021, 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 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
37
PART
II
Item 1.
Legal Proceedings
Other than the litigation described in Note 17, Commitments and Contingencies, to our consolidated financial statements included in this Quarterly Report on Form 10-Q, 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.
Item 1A.
Risk Factors
There have been no material changes in our risk factors from those disclosed in our 2020 Form 10-K. The risk factors disclosed in Part I, Item 1A of our 2020 Form 10-K, in addition to the other information set forth in this Quarterly Report on Form 10-Q, could materially affect our business, financial condition or future results. 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.
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 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.
38
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)
+
Portions of this exhibit (indicated therein by asterisks) have been omitted for confidential treatment.
39
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.
