UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

Or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                 

 

Commission File Number 000-50194

HMS HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware		11-3656261
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
5615 High Point Drive, Irving, TX		75038
(Address of principal executive offices)		(Zip Code)

 

(Registrant’s Telephone Number, Including Area Code)

(214) 453-3000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). ☒ Yes   ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of November 4, 2016, there were approximately 84,658,861 shares of the registrant’s common stock (par value $0.01 per share) outstanding.

HMS HOLDINGS CORP. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

INDEX

 

		Page
PART I - Financial Information		3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets September 30, 2016 (unaudited) and December 31, 2015	3
	Consolidated Statements of Income Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	4
	Consolidated Statement of Shareholders’ Equity Nine Months Ended September 30, 2016 (unaudited)	5
	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2016 and 2015 (unaudited)	6
	Notes to the Consolidated Financial Statements Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II - Other Information		29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 6.	Exhibits	30
Signatures		31
Exhibit Index		32

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q of HMS Holdings Corp. (together with its subsidiaries “HMS,” the “Company,” “we,” “our” or “us”) contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts.

 

We have tried, wherever possible, to identify such statements by using words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “project,” “seek,” “target,” “will,” “would,” “could,” “should,” and similar expressions and references to guidance, although some forward-looking statements may be expressed differently. In particular, these include statements relating to future actions, business plans, objectives and prospects, future operating or financial performance or results of current and anticipated services, acquisitions and the performance of companies we have acquired, sales efforts, expenses, interest rates, financial results, and the impact of current, pending and future U.S. healthcare legislation or changes to healthcare spending affecting Medicare, Medicaid or other publicly funded or subsidized health programs.

 

We cannot guarantee that any forward-looking statement will be realized. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. These risks and uncertainties include, among other things, changes in the U.S. healthcare environment or healthcare financing system; negative or reduced growth rate of spending on Medicaid/Medicare; our ability to retain customers or the loss of one or more major customers; the unexpected reduction in scope or termination of a significant contract; customer dissatisfaction or our non-compliance with contractual provisions or regulatory requirements; our failure to meet performance standards triggering significant costs or liabilities under our contracts; emergence of new competitors or competitors’ introduction of new or superior products or services; intellectual property rights, confidential and proprietary information; the cancellation or delay of procurements or contract implementation due to protests or challenges to government awards; regulatory, budgetary or political actions that affect procurement practices; our ability to continue to secure contracts or favorable contract terms through the competitive bidding process; our ability to execute our business plans or growth strategy; variations in our results of operations; development and implementation of new product solutions or new process improvements; the risk that guidance may not be achieved; our ability to maintain effective information and technology systems and networks, and to protect them from damage, interruption or breach, including cyber-security breaches and other disruptions; our failure to comply with applicable laws and regulations governing the conduct of certain electronic health transactions and the confidentiality of individually identifiable health information or to protect such information from theft and misuse; the nature of investment and acquisition opportunities we are pursuing, and the successful execution of such investments and acquisitions; our ability to successfully integrate acquired businesses; the failure to realize the full value of goodwill or intangible assets from acquisitions; negative results of government or customer reviews, audits or investigations; state or federal limitations related to the outsourcing of certain government programs or functions; our reliance on subcontractors, vendors or other third party providers and sources to perform services; pending or threatened litigation; unfavorable outcomes in legal proceedings; restrictions on bidding or performing certain work due to perceived conflicts of interests; our ability to attract and retain qualified employees and key personnel and to manage leadership transitions effectively; our cash flows from operations, available cash and ability to generate sufficient cash to cover our interest and principal payments under our credit facility or to borrow or use credit; unanticipated changes in our effective tax rates; unanticipated increases in the number or amount of claims for which we are self-insured; the market price of our common stock and lack of dividend payments; risks related to internal control over financial reporting; and anti-takeover provisions in our corporate governance documents. These and other risks are discussed under the headings “Part I, Item 1. Business,” “Part I, Item 1A, Risk Factors” and “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2015 and in other documents we file with the Securities and Exchange Commission.

 

Any forward-looking statements made by us in this Quarterly Report on Form 10-Q speak only as of the date on which they are made. Factors or events that could cause actual results to differ may emerge from time to time and it is not possible for us to predict all of them. We undertake no obligation to publicly update forward- looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. You are advised, however, to consult any further disclosures we make on related subjects in our other filings with the Securities and Exchange Commission, including, but not limited to, our Current Reports on Form 8- K.

 

Market and Industry Data

 

This Quarterly Report on Form 10-Q contains market, industry and government data and forecasts that have been obtained from publicly available information, various industry publications and other published industry sources. We have not independently verified the information and cannot make any representation as to the accuracy or completeness of such information. None of the reports and other materials of third party sources referred to in this Quarterly Report on Form 10-Q were prepared for use in, or in connection with, this Quarterly Report.

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

See accompanying notes to unaudited consolidated financial statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

 

 

See accompanying notes to unaudited consolidated financial statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

See accompanying notes to the unaudited consolidated financial statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2016 and 2015

(unaudited)

 

 

 

 

 

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the other sections of this Quarterly Report on Form 10-Q and with our 2015 Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, including under “Cautionary Statement Regarding Forward-Looking Statements,” and in Part I, Item 1A. “Risk Factors” and Part II, Item 7A. “ Quantitative and Qualitative Disclosures about Market Risk” of our 2015 Form 10-K.

 

We operate in the U.S. healthcare insurance benefit cost containment marketplace. We provide coordination of benefits services to government and private healthcare payers and sponsors to ensure that the responsible party pays healthcare claims. Our payment integrity services ensure that healthcare claims are billed accurately and appropriately. Our care management technology helps risk-bearing organizations manage the care delivered to their members. Together, these various services help customers recover improper payments, including those from liable third parties; prevent future improper payments; reduce fraud, waste and abuse; ensure regulatory compliance; and improve outcomes.

 

Our customers are state and federal healthcare agencies, including state Medicaid agencies, health plans, including Medicaid managed care, Medicare Advantage and group and individual health lines of business; government and private employers; and other healthcare payers and sponsors. As of September 30, 2016, we served 46 state Medicaid programs and the District of Columbia; federal government health agencies, including CMS and the Veterans Health Administration; and approximately 250 health plans. We additionally served as a subcontractor to certain business outsourcing and technology firms.

 

The Company has grown both organically and through targeted asset and stock acquisitions. Initially, the Company provided coordination of benefits services to state Medicaid agencies, then expanded its business by providing similar services to managed care organizations when Medicaid began delegating members to those plans. After launching payment integrity services in 2007, HMS grew its product suite and expanded its reach in the marketplace by acquiring IntegriGuard, LLC (2009), Verify Solutions, Inc. (2009), Chapman Kelly, Inc. (2010), HDI (2011), MedRecovery Management, LLC (2012), and Essette, Inc. (2016).

 

Healthcare Environment

 

The Patient Protection and Affordable Care Act (the “ACA”) was signed into law in 2010. This legislation touched almost every sector of the healthcare system, and affords HMS a range of growth opportunities across a number of services. We are focused on three critical areas related to this legislation:

 

·

Medicaid Expansion;

·

Payment Integrity; and

·

Employer-Sponsored Health Coverage.

 

Medicaid Expansion: States that expand their Medicaid programs in accordance with the ACA receive federal funding for the total cost of the expansion for a period of three years, and reduced funding thereafter. As of early 2016, approximately two-thirds of the states opted to expand their Medicaid programs as provided under the ACA. According to the CMS National Health Expenditures (“NHE”) Projections, the number of individuals enrolled in Medicaid and the Children’s Health Insurance Program (“CHIP”) is expected to increase from 76.6 million in 2016 to 85.2 million in 2025, with expenditures over the same period expected to increase from $593.3 billion to $999.5 billion. As a result, we currently anticipate continued demand for our cost containment services by states and the managed care organizations with whom they contract with. We believe that our strong history of successful contracting with Medicaid agencies and Medicaid managed care organizations will enable us to continue providing value-added services to help control the escalating costs for this expanded population.

 

Payment Integrity: The ACA contained a number of provisions for combating fraud, waste and abuse throughout the healthcare system, including in Medicaid and Medicare. These initiatives include: (i) requiring state Medicaid agencies to contract with state Medicaid RACs and deploy programs modeled on the Medicare RAC Program administered by CMS, (ii) expanding the Medicare RAC Program to include Medicare Part C and D, (iii) establishing a national healthcare fraud, waste and abuse data collection program and (iv) increasing scrutiny of providers and suppliers who want to participate in Medicare, Medicaid and other federally-funded programs. The ACA further required that each state establish a Medicaid RAC program by January 1, 2012. In addition, the ACA allowed for significant increases in funding for these and other fraud, waste and abuse efforts. We continue to seek opportunities to expand our current partnerships with CMS, states and health plans and to provide innovative ideas to support their payment integrity initiatives.

 

Employer-Sponsored Health Coverage: The ACA largely preserves and builds upon the existing employer-sponsored health coverage model. Though not all employers will be required to provide healthcare coverage, large employers (i.e. those with 50 or more full time equivalents) are penalized starting in 2016 if (i) they do not offer coverage (or if they offer coverage that does not meet certain requirements) and (ii) one or more of their full time employees receives a federal tax credit or cost sharing subsidy through a health insurance exchange. Employers will also be prohibited from imposing waiting periods for enrollment of more than 90 days. We expect that we will be able to offer a range of audit services to employers of all sizes, which will be valuable as these employers extend coverage to their employees.

 

Customers

 

We provide products and services under contracts (or sub-contracts) that contain various revenue structures, including contingent revenue and fixed fee arrangements. Most of our state government contracts have terms of three to five years, including optional renewal terms. In many instances, we provide our services pursuant to agreements that are subject to periodic reprocurements. Several of our contracts, including those with some of our largest customers, may be terminated for convenience. Because we provide our services pursuant to agreements that are open to competition from various businesses in the U.S. healthcare insurance benefit cost containment marketplace, we cannot provide assurance that our contracts, including those with our largest customers, will not be terminated for convenience, awarded to other parties, or renewed, and, if renewed, that the fee structures will be equal to those currently in effect.

 

For example, our third party liability (“TPL”) services contract with the New Jersey Department of Human Services was originally awarded in January 2008. In July 2015, we received notice from the State of New Jersey Division of Purchase and Property (the “Division”) of its intent to award the new TPL contract to another bidder following a competitive reprocurement. In February 2016, we filed a protest challenging the award. The bidder withdrew its bid in May 2016. On September 1, 2016, the Division awarded the new TPL contract to our wholly owned subsidiary, Health Management Systems, Inc. The new contract has an initial term of four years through September 20, 2020, with an option to extend the term for two additional one-year periods.

 

We are also involved in the procurement process for the new Medicare RAC contract awards. In November 2015, CMS released a new RFP for recovery audit services that replaces the procurement activities begun in February 2013. After a delay in the procurement of the new Medicare RAC contract awards, CMS resumed the procurement in April 2016 and we submitted a proposal. On October 31, 2016, CMS announced the award of RAC Region 4 to our wholly owned subsidiary HMS Federal Solutions. The timeline to finalize the new Medicare RAC contracts and their implementation remains uncertain. Our current Medicare RAC contract requires we provide support services in connection with the appeal process through January 31, 2018.

 

In addition, in August 2014, CMS announced it would settle with hospitals willing to withdraw inpatient status claims currently pending in the RAC appeals process by offering to pay hospitals 68% for all eligible claims they had billed to Medicare. In June 2015, CMS notified HDI that based on the initial lists of finalized settlements, HDI owed CMS approximately $28.6 million due to adjustments in contingency fees pursuant to HDI’s Medicare RAC contract with CMS. HDI previously advised CMS that it disagrees with CMS’ interpretation of the contract and that CMS does not have the contractual right, among other things, to require repayment of fees already paid. In response to the inaccurate and incomplete data in certain backup documentation initially provided by CMS regarding settled claims, HDI provided CMS with data which it believes more accurately reflects the number of claims which were apparently settled. The amount ultimately payable to CMS by HDI remains uncertain as HDI continues to evaluate additional data provided by CMS in connection with its completion of the settlement process. A portion of our reserve for estimated liability for appeals recorded as of September 30, 2016 may apply to this population, and there could be a material negative impact on our future revenue in future periods to the extent that (i) any final determination of amounts owed by HDI to CMS under the current Medicare RAC contract materially exceeds our accrued reserves for such appeals, (ii) HDI is required to return certain fees which have been paid or (iii) HDI’s ability to collect fees for audits already performed is affected.

 

Critical Accounting Policies

 

Since the date of our 2015 Form 10-K for the year ended December 31, 2015, there have been no material changes to our critical accounting policies. Refer to the items disclosed as our Critical Accounting Policies in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2015 Form 10-K.

 

SUMMARY OF OPERATING RESULTS

 

Selected Operating Performance and Other Significant Items for the Three Months Ended September 30, 2016

 

·

Revenue increased $6.2 million, or 5.2% from the same quarter in 2015.

·

Operating income decreased $0.4 million, or 2.8% from the same quarter in 2015.

·

Net income increased $6.6 million, or 96.9% from the same quarter in 2015.

·

Diluted earnings per share increased $0.08 or 103.7% from the same quarter in 2015.

·

Shareholders’ equity increased $17.8 million since June 30, 2016.

·

Third quarter 2016 cash flow from operations was $8.6 million.

 

 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

 

The following table sets forth, for the periods indicated, certain items in our unaudited Consolidated Statements of Income expressed as a percentage of revenue:

 

		Three Months Ended September 30,
		2016				2015
Revenue			100	%			100	%
Cost of services:
Compensation			38.8				36.8
Data processing			7.7				8.5
Occupancy			2.7				3.5
Direct project expenses			8.8				10.7
Other operating expenses			6.8				5.5
Amortization of acquisition related software and intangible assets			5.1				5.9
Total cost of services			69.9				70.9
Selling, general and administrative expenses			20.0				18.0
Total operating expenses			89.9				88.9
Operating income			10.1				11.1
Interest expense			(1.7	)			(1.6	)
Interest income			0.1				0.0
Income before income taxes			8.5				9.5
Income tax (benefit) expense			(2.3	)			3.6
Net income			10.8	%			5.9	%

 

Revenue

 

During the three months ended September 30, 2016, revenue was $124.6 million, an increase of $6.2 million, or 5.2% compared to $118.4 million for the three months ended September 30, 2015. This increase was primarily due to commercial health plan growth of $7.2 million or 13.9% and higher Medicare RAC revenue of $1.3 million or 28.9% partially offset by a decrease in state government revenue of $1.6 million or 2.9%.

 

Cost of Services

 

During the three months ended September 30, 2016, total cost of services as a percentage of revenue was 69.9% compared to 70.9% for the three months ended September 30, 2015. Total cost of services for the three months ended September 30, 2016 was $87.1 million, an increase of $2.9 million compared to $84.1 million for the three months ended September 30, 2015. This change resulted primarily from increases in certain compensation expense which includes fringe benefits, salaries and temporary work. These increases were partially offset by a decrease in direct project costs, which includes, subcontractor and chart fees, as well as a decrease in stock compensation expense.

 

Selling, General and Administrative Expense (“SG&A”)

 

During the three months ended September 30, 2016, SG&A expense as a percentage of revenue was 20.0% compared to 18.0% for the three months ended September 30, 2015. SG&A expense for the three months ended September 30, 2016 was $24.9 million, an increase of $3.6 million, or 16.8% compared to $21.3 million for the three months ended September 30, 2015. This change resulted from a $3.0 million increase in compensation related expenses. The increase was also attributable to a $0.4 million increase in the provision for bad debt expense.

 

Operating Income

 

During the three months ended September 30, 2016 operating income was $12.7 million, a decrease of $0.4 million, or 2.8%, compared to operating income of $13.0 million for the three months ended September 30, 2015.

 

Interest Expense

 

During the three months ended September 30, 2016, interest expense was $2.1 million, an increase of $0.2 million, compared to $1.9 million for the three months ended September 30, 2015. Interest expense represents borrowings under our revolving credit facility, interest on debt, commitment fees, letter of credit fees and amortization of deferred financing costs.

 

Income Taxes

 

We recorded an income tax benefit of $2.9 million for the three months ended September 30, 2016, compared to income tax expense of $4.2 million for the three months ended September 30, 2015, a decrease of $7.1 million. Income before taxes decreased $0.4 million for the current quarter over income before taxes in the same period in the prior year, which contributed to the decrease in our tax expense. The decrease in tax expense is primarily due to our recognition during the third quarter of 2016 of a tax benefit for the Research and Development tax credits (the “R&D Credits”) and the U.S. production activities deduction (the “Section 199 Deduction”) as discussed in Note 6 of the unaudited Consolidated Financial Statements. Additionally, our effective tax rate decreased to 27% for the three months ended September 30, 2016 compared to 38.1% for the three months ended September 30, 2015 primarily due to our recognition during the third quarter of 2016 of a tax benefit for the R&D Credits and the Section 199 Deduction. The principal differences between the statutory rate and our effective rate include the R&D Credits, the Section 199 Deduction, other permanent items, interest on unrecognized tax benefits, and changes in state taxes.

 

Net Income

 

During the three months ended September 30, 2016, net income was $13.5 million which represents an increase of $6.6 million compared to net income for the three months ended September 30, 2015 of $6.9 million.

 

SUMMARY OF OPERATING RESULTS

 

Selected Operating Performance and Other Significant Items for the Nine Months Ended September 30, 2016

 

·

Revenue increased $22.2 million, or 6.4% compared to the first nine months of 2015.

·

Operating income increased $6.2 million, or 18.8% compared to the first nine months of 2015.

·

Net income increased $10.8 million, or 68.5% compared to the first nine months of 2015.

·

Diluted earnings per share increased $0.13 or 73.3% compared to the first nine months of 2015.

·

Shareholders’ equity increased $40.2 million since December 31, 2015.

·

Cash flow from operations was $54.4 million.

 

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

 

The following table sets forth, for the periods indicated, certain items in our unaudited Consolidated Statements of Income expressed as a percentage of revenue:

 

		Nine Months Ended September 30,
		2016				2015
Revenue			100	%			100	%
Cost of services:
Compensation			38.6				38.1
Data processing			7.7				8.8
Occupancy			2.9				3.5
Direct project expenses			10.0				10.6
Other operating expenses			5.6				5.9
Amortization of acquisition related software and intangible assets			5.5				6.1
Total cost of services			70.3				73.0
Selling, general and administrative expenses			19.0				17.5
Total operating expenses			89.3				90.5
Operating income			10.7				9.5
Interest expense			(1.7	)			(1.7	)
Interest income			0.1				0.0
Income before income taxes			9.1				7.8
Income tax expense			1.7				3.2
Net income			7.4	%			4.6	%

 

Revenue

 

During the nine months ended September 30, 2016, revenue was $367.9 million, an increase of $22.2 million, or 6.4% compared to $345.7 million for the nine months ended September 30, 2015. This increase was primarily due to commercial health plan growth of $25.8 million or 17.9% and higher Medicare RAC revenue of $7.5 million or 70.0%, partially offset by a decrease in state government revenue of $10.3 million or 6.0%.

 

Cost of Services

 

During the nine months ended September 30, 2016, total cost of services as a percentage of revenue was 70.3% compared to 73.0% for the nine months ended September 30, 2015. Total cost of services for the nine months ended September 30, 2016 was $259.0 million, an increase of $6.6 million, or 2.6% compared to $252.4 million for the nine months ended September 30, 2015. This change resulted primarily from increases in certain compensation expense which includes fringe benefits, salaries and temporary work. These increases were partially offset by a decrease in data processing costs and occupancy costs which includes depreciation and rental expense as well as a decrease in stock based compensation.

 

Selling, General and Administrative Expense (“SG&A”)

 

During the nine months ended September 30, 2016, SG&A expense as a percentage of revenue was 19.0% compared to 17.5% for the nine months ended September 30, 2015. SG&A expense for the nine months ended September 30, 2016 was $70.0 million, an increase of $9.5 million, or 15.7% compared to $60.5 million for the nine months ended September 30, 2015. This change resulted from a $2.0 million increase in compensation related expenses. SG&A expense also increased $7.0 million due to an increase in the provision for bad debt expense.

 

Operating Income

 

During the nine months ended September 30, 2016, operating income was $38.9 million, an increase of $6.2 million, or 18.8%, compared to operating income of $32.7 million for the nine months ended September 30, 2015.

 

Interest Expense

 

During the nine months ended September 30, 2016, interest expense was $6.3 million, a decrease of $0.5 million, compared to $5.8 million for the nine months ended September 30, 2015. Interest expense represents borrowings under our revolving credit facility, interest on debt, commitment fees, letter of credit fees and amortization of deferred financing costs.

 

Income Taxes

 

We recorded income tax expense of $6.2 million for the nine months ended September 30, 2016, compared to income tax expense of $11.1 million for the nine months ended September 30, 2015, a decrease of $4.9 million. Income before taxes increased $5.9 million for the nine months ended September 30, 2016 over income before taxes in the same period in the prior year, but tax expense decreased primarily due to our recognition during the third quarter of 2016 of a tax benefit for the R&D Credits and the Section 199 Deduction as discussed in Note 6 of the unaudited Consolidated Financial Statements. Additionally, our effective tax rate decreased to 18.8% for the nine months ended September 30, 2016 compared to 41.3% for the nine months ended September 30, 2015 primarily due to our recognition during the third quarter of 2016 of a tax benefit for the R&D Credits and the Section 199 Deduction. The principal differences between the statutory rate and our effective rate include R&D Credits, the Section 199 Deduction, other permanent items, interest on unrecognized tax benefits, and changes in state taxes.

 

Net Income

 

During the nine months ended September 30, 2016, net income was $26.6 million which represents an increase of $10.8 million compared to net income for the nine months ended September 30, 2015 of $15.8 million.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Liquidity and Capital Resources

 

We believe our ability to generate cash from operating activities is one of our fundamental financial strengths. The near-term outlook for our business remains strong, and we currently expect to generate substantial cash flows from operations throughout the remainder of 2016. We believe that expected cash flows from operations, available cash and cash equivalents and funds available under our revolving credit facility under the Credit Agreement will be sufficient to meet our financial commitments for the next year, which include:

 

·

the working capital requirements of our operations;

·

investments in our business;

·

repurchases of treasury stock; and

·

business development activities.

 

We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to fund acquisitions or to repay indebtedness under the Credit Agreement, which matures in May 2018. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions as well as our financial condition and results of operations at the time we seek additional financing.

 

Our cash and cash equivalents, working capital and available borrowings under our credit facility (based upon the borrowing base and financial covenants in our Credit Agreement) were as follows:

 

(In thousands)		September 30, 2016				December 31, 2015
Cash and cash equivalents		$	171,519			$	145,610
Working capital		$	291,860			$	247,916
Available borrowings under credit facility		$	180,134			$	121,204

 

A summary of our cash flows is as follows:

 

		Nine Months Ended September 30,
(In thousands)		2016				2015
Net cash provided by operating activities		$	54,371			$	40,453
Net cash used in investing activities			(32,120	)			(7,888	)
Net cash provided by (used in) financing activities			3,658				(20,877	)
Net increase in cash and cash equivalents		$	25,909			$	11,688

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities for the nine months ended September 30, 2016 was $54.4 million, an increase of $13.9 million as compared to net cash provided by operating activities of $40.5 million for the nine months ended September 30, 2015. The increase in operating cash flow is primarily attributable to collections of accounts receivable offset primarily by the change in income tax receivable/payable. Additionally, the number of Days Sales Outstanding decreased from the prior year period by 16 days from 132 days for the nine months ended September 30, 2015 to 117 days for the nine months ended September 30, 2016 as a result of stronger cash collections.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities for the nine months ended September 30, 2016 was $32.1 million, a $24.2 million increase compared to net cash used in investing activities of $7.9 million for the nine months ended September 30, 2015. The increase primarily related to a $20.9 million increase due to the Essette acquisition and an increase in purchases of property and equipment and investment in capitalized software, partially offset by receipt of proceeds from the sale of a cost basis investment of approximately $2.5 million.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2016 was $3.7 million, a $24.5 million increase compared to net cash used in financing activities of $20.9 million for the nine months ended September 30, 2015. This decrease was primarily attributable to the purchase of treasury stock for $25.0 million during same period in the prior year.

 

Contractual Obligations

 

There have been no material changes in our contractual obligations as presented in our 2015 Form 10-K.

 

Recently Issued Accounting Pronouncements

 

See “Recently Issued Accounting Pronouncements” in Note 2 of the unaudited Consolidated Financial Statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes to the market risks discussed in Item 7A to Part II of our Form 10-K for the fiscal year ended December 31, 2015.

 

Item 4. Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As required by Rule 13a-15(b) under the Exchange Act, management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2016. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that their objectives were met as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the three months ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The information set forth under the caption “Commitments and Contingencies” in Note 11 included in Item 1. Notes to the Consolidated Financial Statements is incorporated by reference.

 

Item 1A. Risk Factors

 

In addition to the information set forth in this Quarterly Report on Form 10-Q, the risks that are discussed in the Company’s 2015 Form 10-K, under the headings “Part I, Item 1. Business,” “Part I, Item 1A. Risk Factors” and “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk,” should be carefully considered as such risks could materially affect the Company’s business, financial conditions or future results. There has been no material change in the Company’s risk factors from those described in the 2015 Form 10-K.

 

These risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may have a material adverse effect on the Company’s business, financial condition or future results.

 

 

 

Item 6. Exhibits

 

Exhibit Number		Description
3.1		Conformed copy of Certificate of Incorporation of the Company, as amended through July 9, 2015 (incorporated by reference to Exhibit 3.1 to Company’s Quarterly Report on Form 10-Q (File No. 000-50194) as filed with the SEC on August 10, 2015)
3.2		Amended and Restated Bylaws of the Company dated May 4, 2016 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 000- 50194) as filed with the SEC on May 5, 2016)
10.1†*		Form of 2016 Non-Qualified Stock Option Award Agreement for Employees under the HMS Holdings Corp. 2016 Omnibus Incentive Plan
10.2†*		Form of 2016 Restricted Stock Unit Award Agreement for Employees under the HMS Holdings Corp. 2016 Omnibus Incentive Plan
10.3†*		Form of 2016 Non-Qualified Stock Option Award Agreement for Non-Employee Directors under the HMS Holdings Corp. 2016 Omnibus Incentive Plan
10.4†*		Form of 2016 Restricted Stock Unit Award Agreement for Non-Employee Directors under the HMS Holdings Corp. 2016 Omnibus Incentive Plan
31.1*		Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer of HMS Holdings Corp., as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer of HMS Holdings Corp., as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
32.1‡		Section 1350 Certification of the Principal Executive Officer of HMS Holdings Corp., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2‡		Section 1350 Certification of the Principal Financial Officer of HMS Holdings Corp., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

_____________________

† Indicates a management contract or compensatory plan, contract or arrangement

* Filed herewith

‡ Furnished herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:	November 9, 2016		HMS HOLDINGS CORP.
			By:	/s/ WILLIAM C. LUCIA
				William C. Lucia
				President and Chief Executive Officer and Duly
				Authorized Officer
				(Principal Executive Officer)
			By:	/s/ JEFFREY S. SHERMAN
				Jeffrey S. Sherman
				Executive Vice President, Chief Financial Officer and Treasurer
				(Principal Financial Officer)

 

 

 

 

 

HMS Holdings Corp. and Subsidiaries

Exhibit Index

 

Exhibit Number		Description
3.1		Conformed copy of Certificate of Incorporation of the Company, as amended through July 9, 2015 (incorporated by reference to Exhibit 3.1 to Company’s Quarterly Report on Form 10-Q (File No. 000-50194) as filed with the SEC on August 10, 2015)
3.2		Amended and Restated Bylaws of the Company dated May 4, 2016 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 000- 50194) as filed with the SEC on May 5, 2016)
10.1†*		Form of 2016 Non-Qualified Stock Option Award Agreement for Employees under the HMS Holdings Corp. 2016 Omnibus Incentive Plan
10.2†*		Form of 2016 Restricted Stock Unit Award Agreement for Employees under the HMS Holdings Corp. 2016 Omnibus Incentive Plan
10.3†*		Form of 2016 Non-Qualified Stock Option Award Agreement for Non-Employee Directors under the HMS Holdings Corp. 2016 Omnibus Incentive Plan
10.4†*		Form of 2016 Restricted Stock Unit Award Agreement for Non-Employee Directors under the HMS Holdings Corp. 2016 Omnibus Incentive Plan
31.1*		Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer of HMS Holdings Corp., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer of HMS Holdings Corp., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1‡		Section 1350 Certification of the Principal Executive Officer of HMS Holdings Corp., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2‡		Section 1350 Certification of the Principal Financial Officer of HMS Holdings Corp., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

_____________________

†Indicates a management contract or compensatory plan, contract or arrangement

*Filed herewith

‡Furnished herewith

 

32

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