e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-50194
HMS HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
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New York
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11-3656261 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer)
Identification No.) |
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401 Park Avenue South, New York, New York
(Address of principal executive offices)
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10016
(Zip Code) |
(212) 725-7965
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares common stock, $.01 par value, outstanding as of May 5, 2009 was
25,864,066.
HMS HOLDINGS CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2009
TABLE OF CONTENTS
2
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
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March 31, |
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December 31, |
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2009 |
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2008 |
|
Assets
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
53,134 |
|
|
$ |
49,216 |
|
Accounts receivable, net of allowance of $664 at March 31, 2009
and December 31, 2008 |
|
|
46,547 |
|
|
|
45,155 |
|
Prepaid expenses |
|
|
3,092 |
|
|
|
3,825 |
|
Other current assets, including deferred tax assets of $1,495 and
$1,697 at March 31, 2009 and December 31, 2008, respectively |
|
|
2,227 |
|
|
|
1,716 |
|
|
|
|
|
|
|
|
Total current assets |
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|
105,000 |
|
|
|
99,912 |
|
|
|
|
|
|
|
|
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Property and equipment, net |
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17,502 |
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|
17,757 |
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Goodwill, net |
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|
82,342 |
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|
82,342 |
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Deferred income taxes, net |
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|
1,971 |
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|
|
2,040 |
|
Intangible assets, net |
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|
18,759 |
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|
19,823 |
|
Other assets |
|
|
593 |
|
|
|
639 |
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|
|
|
|
|
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Total assets |
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$ |
226,167 |
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|
$ |
222,513 |
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|
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|
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Liabilities and Shareholders Equity
|
Current liabilities: |
|
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|
|
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Accounts payable, accrued expenses and other liabilities |
|
$ |
15,718 |
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|
$ |
22,859 |
|
Current portion of long-term debt |
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|
6,300 |
|
|
|
6,300 |
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|
|
|
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|
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Total current liabilities |
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|
22,018 |
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|
|
29,159 |
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|
|
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|
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Long-term liabilities: |
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Long-term debt |
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|
9,450 |
|
|
|
11,025 |
|
Accrued deferred rent |
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|
3,140 |
|
|
|
3,257 |
|
Other liabilities |
|
|
690 |
|
|
|
710 |
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|
|
|
|
|
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Total long-term liabilities |
|
|
13,280 |
|
|
|
14,992 |
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|
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|
|
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|
|
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Total liabilities |
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35,298 |
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44,151 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock $.01 par value; 5,000,000 shares authorized; none issued |
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|
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Common stock $.01 par value; 45,000,000 shares authorized;
27,510,912 shares issued and 25,848,066
shares outstanding at March 31, 2009;
27,174,875 shares issued and 25,512,029
shares outstanding at December 31, 2008 |
|
|
275 |
|
|
|
272 |
|
Capital in excess of par value |
|
|
152,875 |
|
|
|
146,145 |
|
Retained earnings |
|
|
47,267 |
|
|
|
41,562 |
|
Treasury stock, at cost; 1,662,846 shares at March 31, 2009
and December 31, 2008 |
|
|
(9,397 |
) |
|
|
(9,397 |
) |
Accumulated other comprehensive loss |
|
|
(151 |
) |
|
|
(220 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
190,869 |
|
|
|
178,362 |
|
|
|
|
|
|
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Total liabilities and shareholders equity |
|
$ |
226,167 |
|
|
$ |
222,513 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Month Periods Ended March 31, 2009 and 2008
(in thousands, except per share amounts)
(unaudited)
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Three months ended March 31, |
|
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2009 |
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2008 |
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Revenue |
|
$ |
49,941 |
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|
$ |
38,943 |
|
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|
|
|
|
|
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|
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Cost of services: |
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|
|
|
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Compensation |
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|
17,531 |
|
|
|
13,724 |
|
Data processing |
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|
3,146 |
|
|
|
2,717 |
|
Occupancy |
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|
2,734 |
|
|
|
2,361 |
|
Direct project costs |
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|
6,325 |
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|
6,044 |
|
Other operating costs |
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|
2,998 |
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|
|
2,145 |
|
Amortization of acquisition related software and intangibles |
|
|
1,216 |
|
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|
1,163 |
|
|
|
|
|
|
|
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Total cost of services |
|
|
33,950 |
|
|
|
28,154 |
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
6,131 |
|
|
|
5,100 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
40,081 |
|
|
|
33,254 |
|
|
|
|
|
|
|
|
Operating income |
|
|
9,860 |
|
|
|
5,689 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(287 |
) |
|
|
(415 |
) |
Interest income |
|
|
97 |
|
|
|
197 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
9,670 |
|
|
|
5,471 |
|
Income taxes |
|
|
3,965 |
|
|
|
2,298 |
|
|
|
|
|
|
|
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Net income |
|
$ |
5,705 |
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|
$ |
3,173 |
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|
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|
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Basic income per share data: |
|
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Net income per basic share |
|
$ |
0.22 |
|
|
$ |
0.13 |
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
Weighted average common shares outstanding, basic |
|
|
25,614 |
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|
24,826 |
|
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|
|
|
|
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|
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|
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Diluted income per share data: |
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Net income per diluted share |
|
$ |
0.21 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average common shares, diluted |
|
|
27,205 |
|
|
|
26,834 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
For the Three Month Period Ended March 31, 2009
(In thousands, except share amounts)
(unaudited)
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|
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|
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|
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|
|
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|
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|
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|
Retained |
|
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Accumulated |
|
|
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|
|
|
|
|
|
|
|
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|
Common Stock |
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Capital In |
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|
Earnings/ |
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Other |
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|
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|
|
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Total |
|
|
|
# of Shares |
|
|
Par |
|
|
Excess Of |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
Shareholders |
|
|
|
Issued |
|
|
Value |
|
|
Par Value |
|
|
Deficit |
|
|
Income/(Loss) |
|
|
# of Shares |
|
|
Amount |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
27,174,875 |
|
|
$ |
272 |
|
|
$ |
146,145 |
|
|
$ |
41,562 |
|
|
$ |
(220 |
) |
|
|
1,662,846 |
|
|
$ |
(9,397 |
) |
|
$ |
178,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period net changes in hedging
transactions,
net of tax of $46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation cost |
|
|
|
|
|
|
|
|
|
|
1,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,308 |
|
Exercise of stock options |
|
|
336,037 |
|
|
|
3 |
|
|
|
2,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,317 |
|
Income tax benefit from stock transactions |
|
|
|
|
|
|
|
|
|
|
3,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009 |
|
|
27,510,912 |
|
|
$ |
275 |
|
|
$ |
152,875 |
|
|
$ |
47,267 |
|
|
$ |
(151 |
) |
|
|
1,662,846 |
|
|
$ |
(9,397 |
) |
|
$ |
190,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three-Month Periods Ended March 31, 2009 and 2008
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,705 |
|
|
$ |
3,173 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Loss on disposal of fixed assets |
|
|
1 |
|
|
|
|
|
Depreciation and amortization |
|
|
3,359 |
|
|
|
2,911 |
|
Share-based compensation expense |
|
|
1,308 |
|
|
|
798 |
|
Decrease in deferred tax asset |
|
|
271 |
|
|
|
47 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in accounts receivable |
|
|
(1,392 |
) |
|
|
(2,252 |
) |
Decrease in prepaid expenses and
other current assets |
|
|
751 |
|
|
|
677 |
|
Increase/(decrease) in other assets |
|
|
1 |
|
|
|
(4 |
) |
Decrease in accounts payable, accrued expenses
and other liabilities |
|
|
(5,845 |
) |
|
|
(8,855 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
|
4,159 |
|
|
|
(3,505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(3,005 |
) |
|
|
(2,044 |
) |
Investment in software |
|
|
(355 |
) |
|
|
(180 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,360 |
) |
|
|
(2,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
1,586 |
|
|
|
754 |
|
Repayment of long-term debt |
|
|
(1,575 |
) |
|
|
(1,575 |
) |
Income tax benefit from stock transactions |
|
|
3,108 |
|
|
|
1,979 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,119 |
|
|
|
1,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents |
|
|
3,918 |
|
|
|
(4,571 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
49,216 |
|
|
|
21,275 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
53,134 |
|
|
$ |
16,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
75 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
232 |
|
|
$ |
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
|
|
Accrued property and equipment purchases |
|
$ |
534 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
1. Unaudited Interim Financial Information
The management of HMS Holdings Corp. (Holdings or the Company) is responsible for the
accompanying unaudited interim consolidated financial statements and the related information
included in the notes to the unaudited interim consolidated financial statements. In the opinion
of management, the unaudited interim consolidated financial statements reflect all adjustments,
including normal recurring adjustments necessary for the fair presentation of the Companys
financial position and results of operations and cash flows for the periods presented. Results of
operations for interim periods are not necessarily indicative of the results to be expected for the
entire year.
The Company is managed and operated as one business, with a single management team that
reports to the chief executive officer. The Company does not operate separate lines of business
with respect to any of its product lines. Accordingly, the Company does not prepare discrete
financial information with respect to separate product lines or by location and does not have
separately reportable segments.
These unaudited interim consolidated financial statements should be read in conjunction with
the audited consolidated financial statements of the Company as of and for the year ended December
31, 2008 included in the Companys Annual Report on Form 10-K for such year, as filed with the
Securities and Exchange Commission (SEC).
2. Basis of Presentation and Principles of Consolidation
(a) Organization and Business
The Company provides a variety of cost containment and payment accuracy services relating to
government healthcare programs. These services are generally designed to help our clients recover
amounts due from liable third parties, reduce their costs, and ensure regulatory compliance.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
(c) Recent Accounting Pronouncement
In September 2006, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 does not require any new fair value measurements, but rather
eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157
is effective for fiscal years beginning after November 15, 2007, with the exception of the
application of the statement to the determination of fair value of nonfinancial assets and
liabilities that are recognized or disclosed on a nonrecurring basis, which is effective for the
Company as of January 1, 2009.
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the
7
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
financial instrument. Level 3 inputs are unobservable inputs based on the Companys own
assumptions used to measure assets and liabilities at fair value. A financial asset or liabilitys
classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.
Effective January 1, 2008, we partially adopted SFAS No. 157 and have applied its provisions
to financial assets and liabilities that are recognized or disclosed at fair value on a recurring
basis (at least annually). We have also adopted SFAS 157 for non-financial assets and liabilities,
in accordance with FASB staff position 157-2, which is effective for the Company as of January 1,
2009. FASB staff position 157-2 does not presently have an impact on the Companys financial
position, operations or cash flows.
At March 31, 2009, the Companys interest rate swap contract (see note 8) was being carried at
fair value and measured on a recurring basis. Fair value is determined through the use of models
that consider various assumptions, including time value, yield curves, as well as other relevant
economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy.
During the period ending March 31, 2009, no such non-financial assets and liabilities requiring
fair value determination under SFAS No. 157 were recognized or disclosed on a non-recurring basis.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities including an amendment of FASB Statement No. 115 (SFAS 159), which is
effective for fiscal years beginning after November 15, 2007. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair value. This statement
also establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types of assets and
liabilities. Unrealized gains and losses on items for which the fair value option is elected would
be reported in earnings. The Company has adopted SFAS 159 and has elected not to measure any
additional financial instruments and other items at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)), which replaces SFAS No. 141, Business Combinations. SFAS 141(R) retains the underlying
concepts of SFAS 141 in that all business combinations are still required to be accounted for at
fair value under the acquisition method of accounting but SFAS 141(R) changed the method of
applying the acquisition method in a number of significant aspects. Acquisition costs will
generally be expensed as incurred; noncontrolling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the
exception of the accounting for valuation allowances on deferred taxes and acquired tax
contingencies. SFAS 141(R) amends SFAS 109 such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the
effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R). Early adoption is
prohibited. Therefore, the impact of the implementation of this pronouncement cannot be determined
until the transactions occur.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires
enhanced disclosures about an entitys derivative and hedging activities. Entities will be required
to provide enhanced disclosures about how and why an entity uses derivative instruments, how these
instruments are accounted for, and how they affect the entitys financial position, financial
performance
8
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
and cash flows. The Company adopted Statement 161 as of the required effective date of January 1,
2009 and applied its provisions prospectively by providing the additional disclosures in its
consolidated financial statements. The Company provided single period Statement 161 disclosures for
the March 31, 2009 period of adoption, on Note 8, as allowed by Statement 161. Periods in years
after initial adoption will include comparative disclosures.
In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the
Useful Life of Intangible Assets. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). The
objective of this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141(R), and other generally accepted accounting principles (GAAP).
This FSP applies prospectively to all intangible assets acquired after the effective date in fiscal
2009, whether acquired in a business combination or otherwise. Early adoption is prohibited.
Therefore, the impact of the implementation of this pronouncement cannot be determined until the
transactions occur.
In April 2009, the FASB issued FSP FAS 107-1, Interim Disclosures about Fair Value of
Financial Instruments to require, on an interim basis, disclosures about the fair value of all
financial instruments within the scope of SFAS 107 Disclosures about Fair Value of Financial
Instruments and to include disclosures related to the methods and significant assumptions used in
estimating those instruments. This FSP is effective for interim and annual periods ending after
June 15, 2009. The Company is currently evaluating the impact the adoption of this FSP will have on
its consolidated financial statements and related disclosures.
(d) Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reported period.
The actual results could differ from those estimates.
(e) Reclassifications and Immaterial Adjustments
Certain reclassifications were made to the prior quarter amounts to conform to the current
presentation. Non-material reclassifications were made between other operating cost and direct
project cost to properly classify temporary staffing-related expenses. In conjunction with these
reclassifications, there was no impact on total cost of services, operating income and net income
for the period adjusted.
9
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
Additionally, in 2008 the Company modified its presentation of operating expenses to
separately present selling, general and administrative expenses for each of the periods presented
to conform to SEC regulations. These immaterial modifications had no impact on total operating
expenses, operating income, net income and cash flows for the period adjusted. The following table
presents the previously reported and the revised balances:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
Previously |
|
|
|
|
|
|
Reported |
|
|
Revised |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
$ |
16,556 |
|
|
$ |
13,724 |
|
Data processing |
|
|
2,966 |
|
|
|
2,717 |
|
Occupancy |
|
|
2,590 |
|
|
|
2,361 |
|
Direct project cost |
|
|
5,492 |
|
|
|
6,044 |
|
Other operating cost |
|
|
4,487 |
|
|
|
2,145 |
|
Amortization of intangibles |
|
|
1,163 |
|
|
|
1,163 |
|
|
|
|
|
|
|
|
Total cost of services |
|
|
33,254 |
|
|
|
28,154 |
|
|
|
|
|
|
|
|
|
|
Selling general & administrative expenses |
|
|
|
|
|
|
5,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
33,254 |
|
|
|
33,254 |
|
|
|
|
|
|
|
|
The consolidated balance sheet as of March 31, 2008 and the statement of cash flows for the
three months ended March 31, 2008 reflect revisions as compared to the previously reported amounts.
These revisions were to correct immaterial errors in the manner in which excess tax benefits from
stock based compensation were recognized in our interim financial statements. The revisions reduce
previously reported income tax payable and increased capital in excess of par value on the consolidated
interim balance sheet at March 31, 2008, and increased net cash used in operating activities and
net cash provided by financing activities during the period ending March 31, 2008 by $0.9 million.
These amounts had no impact on previously reported income tax expense, net income and net changes
in cash and cash equivalents.
(f) Revenue Recognition
The Company recognizes revenue for its contingency fee based services when third party payors
remit payments to the Companys customers and consequently the contingency is deemed to have been
satisfied. This revenue recognition policy is specifically addressed in the SECs Frequently
Asked Questions and Answers bulletin pertaining to Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements. Transaction-related revenue is recognized based upon the
completion of those transactions or services rendered during a given period.
10
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple
Deliverables, requires contracts with multiple deliverables to be divided into separate units of
accounting if certain criteria are met. Arrangements including both implementation and transaction
related revenue are accounted for as a single unit of accounting. Since implementation services do
not carry a standalone value, the revenue relating to these services is recognized over the term of
the customer contract to which it relates.
3. Stock-based Compensation
Presented below is a summary of the Companys option activity for the three months ended March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
average |
|
|
contractual |
|
|
intrinsic |
|
|
|
Shares |
|
|
exercise |
|
|
terms |
|
|
value |
|
|
|
(in thousands) |
|
|
price |
|
|
(in years) |
|
|
(in thousands) |
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2009 |
|
|
4,066 |
|
|
$ |
12.26 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(336 |
) |
|
$ |
6.89 |
|
|
|
|
|
|
|
|
|
Forfeitures |
|
|
(21 |
) |
|
$ |
19.74 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
3,709 |
|
|
$ |
12.70 |
|
|
|
5.16 |
|
|
$ |
75,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
3,586 |
|
|
$ |
12.38 |
|
|
|
0.63 |
|
|
$ |
73,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009 |
|
|
2,002 |
|
|
$ |
6.28 |
|
|
|
4.30 |
|
|
$ |
53,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant was estimated using the Black-Scholes option pricing model
and the related compensation expense is recognized ratably over the contractual service period,
which is typically the vesting period. This model uses the expected term of the option, the
expected volatility of the price of the Companys common stock, risk free interest rates and
expected dividend yield of its common stock. Expected volatilities are calculated based on the
historical volatility of the Companys stock. Management monitors share option exercise and
employee termination patterns to estimate forfeiture rates within the valuation model. Separate
groups of employees that have similar historical exercise behavior are considered separately for
valuation purposes. The expected holding period of options represents the period of time that
options granted are expected to be outstanding. The risk-free interest rate for periods within the
contractual life of the option is based on the interest rate of a 5-year U.S. Treasury note in
effect on the date of the grant.
11
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
In February 2009, we granted 127,918 restricted stock awards to certain of our executives.
These restricted stock awards were assigned a price of $31.27 and will vest 25%, as of each
applicable vesting date of February 19, 2011, February 19, 2012, February 19, 2013 and February 19,
2014 subject to the executives continued employment with the Company.
As of March 31, 2009, there was approximately $15.5 million of total unrecognized compensation
cost related to stock options outstanding. That cost is expected to be recognized over a
weighted-average period of 2.4 years. No compensation cost related to stock options was capitalized
for the three months ended March 31, 2009.
The following table summarizes the weighted average assumptions utilized in developing the
Black-Scholes pricing model:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
Expected dividend yield |
|
|
|
|
|
|
0 |
% |
Risk-free interest rate |
|
|
|
|
|
|
2.48 |
% |
Expected volatility |
|
|
|
|
|
|
38.0 |
% |
Expected life |
|
|
|
|
|
5.0 years |
No stock options were granted during the three month period ended March 31, 2009.
The total intrinsic value of options exercised during the periods ended March 31, 2009 and
2008 was $7.7 million and $5.0 million, respectively.
Total compensation cost for shared-based payments arrangements charged against income was $1.3
million and $0.8 million for the periods ended March 31, 2009 and 2008, respectively. The total
income tax benefit recognized in the income statement for shared-based arrangements was $0.5
million and $0.3 million for the periods ended March 31, 2009 and 2008, respectively.
4. Acquisition
On September 16, 2008, the Company purchased the net assets of Prudent Rx, Inc., an
independent pharmacy audit and cost containment company based in Culver City, California. With
this acquisition, the Company further expanded its portfolio of program integrity service offerings
for government healthcare programs and managed care organizations, particularly in the pharmacy
arena. Prudent Rxs key products and services include audit programs, program design and benefit
management, as well as general and pharmacy systems consulting.
The purchase price of Prudent Rxs net assets, inclusive of the acquisition cost, was
approximately $4.5 million and was accounted for under the asset purchase accounting model.
Additional future payments of $2.3 million ($1.15 million for each of the years ending December 31,
2009 and 2010) will be made contingent upon Prudent Rx meeting certain financial performance
milestones and will be recorded as additional goodwill upon meeting the milestones.
The acquisition of Prudent Rx did not have a material effect on the Companys earnings for the
three month period ended March 31, 2009.
12
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
The allocation of the purchase price was based upon estimates of the assets and liabilities
acquired in accordance with SFAS No. 141 Business Combinations. The acquisition of Prudent Rx
was based on managements consideration of past and expected future performance as well as the
potential strategic fit with the long-term goals of the Company. The expected long-term growth,
market position and expected synergies to be generated by Prudent Rx were the primary factors which
gave rise to an acquisition price which resulted in the recognition of goodwill.
The allocation of the aggregate purchase price of this acquisition is as follows:
|
|
|
|
|
Goodwill |
|
$ |
2,100 |
|
Identifiable intangible assets |
|
|
1,432 |
|
Net assets acquired |
|
|
964 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
|
$ |
4,496 |
|
|
|
|
|
Identifiable intangible assets principally include customer relationships and Prudent Rxs
trade name.
5. Income Taxes
The Company and its subsidiaries file income tax returns with the U.S. federal government and
various state jurisdictions. The Company is no longer subject to U.S. federal income tax
examinations for years before 2005. The Company operates in a number of state and local
jurisdictions, substantially all of which have never audited the Company. Accordingly, the Company is subject to state and local income
tax examinations based upon the various statutes of limitations in each jurisdiction.
At March 31, 2009, the Company had net operating loss carry-forwards (NOLs) of $0.3 million
which are subject to limitation set forth in the Internal Revenue Code of 1986 as amended (Code)
and are available to offset future federal and state and local taxable income.
During the period ended March 31, 2009, the Company recorded a tax benefit of $3.1 million
related to the utilization of the income tax benefit from stock transactions by reducing income tax
payable and crediting capital. The Company utilized $7.7 million of excess tax benefit generated
from 2009 stock option transactions to recognize this tax benefit.
There was no change in the Companys valuation allowance from December 31, 2008. At March 31,
2009, the Company had a valuation allowance of $2.7 million. The sale of the Companys Accordis
Inc. (Accordis) subsidiary in 2005 resulted in a capital loss of $6.0 million, which can be carried
forward for five years and produced a deferred tax asset of $2.5 million. The Company believes the
available objective evidence, principally the capital loss carryforward being utilizable to offset
only future capital gains, creates sufficient uncertainty regarding the realizability of its
capital loss carryforward that it is more likely than not, that substantially all of the capital
loss carryforward is not realizable.
The remaining valuation allowance of $0.2 million relates to certain state NOLs where the
Company doesnt currently operate and there is sufficient doubt about the Companys ability to
utilize these NOLs that it is more likely than not that this portion of the state NOLs are not
realizable.
At March 31, 2009, the Company had approximately $0.2 million of tax positions for which there
is uncertainty about the allocation and apportionment of state tax deductions. If recognized, all
of this balance would impact the effective tax rate; however the Company does not expect any
significant change in unrecognized tax benefits during the next twelve months. The Company
recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties
in operating expense. The accrued liabilities related to uncertain tax positions of approximately
$92,000 have not changed since December 31, 2008.
13
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
6. Earnings Per Share
Basic income per share is calculated by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted income per share is calculated by dividing
net income by the weighted average number of common shares and dilutive common share equivalents
outstanding during the period. The Companys common share equivalents consist of stock options and
restricted stock awards.
The following reconciles the basic to diluted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Three months ending |
|
|
March 31, |
|
|
(Shares in thousands) |
|
|
2009 |
|
2008 |
Weighted average shares outstanding basic |
|
|
25,614 |
|
|
|
24,826 |
|
Potential shares exercisable under stock option plans |
|
|
1,587 |
|
|
|
2,008 |
|
Potential issuable restricted stock awards |
|
|
4 |
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
27,205 |
|
|
|
26,834 |
|
For the three-month period ended March 31, 2009, 41,028 stock options were not included in the
diluted earnings per share calculation because the effect would have been antidilutive. For the
three-month period ended March 31, 2008, 520,775 stock options were not included in the diluted
earnings per share calculation because the effect would have been antidilutive.
7. Debt
The Company has a credit agreement (the Credit Agreement) among the Company, the several
banks and other financial institutions or entities from time to time parties thereto, and JPMorgan
Chase Bank, N.A. (JPMCB), as administrative agent, which was utilized to fund a portion of the
purchase price for the Companys 2006 acquisition of the Benefits Solutions Practice Area (BSPA)
assets from Public Consulting Group, Inc. The Credit Agreement provides for a term loan of $40
million (the Term Loan) and revolving credit loans of up to $25 million (the Revolving Loan).
Borrowings under the Credit Agreement mature on September 13, 2011. The loans are secured by a
security interest in favor of the lenders covering the assets of the Company and its subsidiaries.
Interest on borrowings under the Credit Agreement is calculated, at the Companys option, at either
(i) LIBOR, including statutory reserves, plus a variable margin based on the Companys leverage
ratio, or (ii) the higher of (a) the prime lending rate of JPMCB, and (b) the Federal Funds
Effective Rate plus 0.50%, in each case plus a variable margin based on the Companys leverage
ratio. In connection with the Revolving Loan, the Company agreed to pay a commitment fee, payable
quarterly in arrears, at a variable rate based on the Companys leverage ratio, on the unused
portion of the Revolving Loan.
Commitments under the Credit Agreement will be reduced and borrowings are required to be
repaid with the net proceeds of, among other things, sales or issuances of equity (excluding equity
issued under employee benefit plans and equity issued to sellers as consideration in acquisitions),
sales of assets by the Company and any incurrence of indebtedness by the Company, subject, in each
case, to limited exceptions. The obligations of the Company under the Credit Agreement may be
accelerated upon the
14
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
occurrence of an event of default under the Credit Agreement, which encompasses customary
events of default including, without limitation, payment defaults, defaults in the performance of
affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and
insolvency related defaults, defaults relating to such matters as ERISA, uninsured judgments and
the failure to pay certain indebtedness, and a change of control default.
In addition, the Credit Agreement contains affirmative, negative and financial covenants
customary for financings of this type. The negative covenants include restrictions on indebtedness,
liens, fundamental changes, dispositions of property, investments, dividends and other restricted
payments. The financial covenants include a consolidated fixed charge coverage ratio, as defined,
of not less than 1.75 to 1.0 and a consolidated leverage ratio as defined not to exceed 3.0 to 1.0,
through March 31, 2009. The Company is in full compliance with these covenants.
The Term Loan requires quarterly repayments of approximately $1.6 million. There have been no
borrowings under the Revolving Loan, however, we had outstanding a $4.6 million irrevocable standby
letter of credit which relates to contingent, default payment obligations required by a contractual
arrangement with a client. As a result of the letter of credit issued, the amount available under
the Revolving Loan was reduced by $4.6 million at March 31, 2009. Fees and expenses incurred in
2006 related to the Credit Agreement of $0.9 million have been recorded as Deferred Financing Costs
(included in other assets, non-current) and are amortized to interest expense over the five-year
life of the credit facilities using the effective interest method.
Long-term debt consists of the following at March 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Borrowings under the Credit Agreement: |
|
|
|
|
|
|
|
|
$40 million Term Loan, interest at 2.25% |
|
$ |
15,750 |
|
|
$ |
17,325 |
|
$25 million Revolving Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
15,750 |
|
|
|
17,325 |
|
Less current portion of long-term debt |
|
|
6,300 |
|
|
|
6,300 |
|
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
9,450 |
|
|
$ |
11,025 |
|
|
|
|
|
|
|
|
8. Derivative Contract
The Company has an interest rate swap agreement to hedge the fluctuations in variable interest
rates and does not use derivative instruments for speculative purposes.
In December 2006, the Company entered into a three-year interest rate swap agreement, maturing
on September 30, 2009, which is accounted for as a cash flow hedge. This agreement effectively
converted $12.0 million of the Companys variable rate debt to fixed-rate debt, reducing the
Companys exposure to changes in interest rates. Under this swap agreement, the Company received
an average LIBOR variable rate of 1.50% and paid an average LIBOR fixed rate of 5.295% for the
period from December 31, 2008 to March 31, 2009. The LIBOR interest rates exclude the Companys
applicable interest rate spread under the Companys Credit Agreement. The Company has recognized,
net of tax, a reduction to accumulated comprehensive loss of $69,000 for the period ended March 31,
2009 from hedging transactions which result in a cumulative unrealized loss, net of tax, of
$151,000 at March 31, 2009. The reduction in accumulated loss for the period relates to the change
in the derivatives fair value
15
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
and reclassification of such derivative gain and losses to interest expense as a yield
adjustment of the hedged interest payouts in the same period in which the related interest affect
earnings. The amount reclassified into earnings during the period ended March 31, 2009 amounted to
approximately $114,000.
The fair value of this swap, a liability of $0.3 million and $0.5 million for the periods
ended March 31, 2009 and 2008, respectively, is recorded in the consolidated balance sheets as
other current liability, with changes in its fair value included in other comprehensive income.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. For this purpose any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing,
the words believes, anticipates, plans, expects and similar expressions are intended to
identify forward-looking statements. These statements involve unknown risks, uncertainties and
other factors, which may cause our actual results to differ materially from those implied by the
forward looking statements. Among the important factors that could cause actual results to differ
materially from those indicated by such forward-looking statements include those risks identified
in Item 1A-Risk Factors and other risks identified in our Form 10-K for the year ended December
31, 2008 and presented elsewhere by management from time to time. There have been no material
changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31,
2008. Such forward-looking statements represent managements current expectations and are
inherently uncertain. Readers are cautioned that actual results may differ from managements
expectations.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based on
our consolidated financial statements, which have been prepared in accordance with United States
generally accepted accounting principles, or U.S. GAAP.
In addition to the information provided below, you should refer to the items disclosed as our
critical accounting policies in Part II, Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended
December 31, 2008.
Revenue Recognition. We principally recognize revenue for our service offerings when third
party payors remit payment to our customers and consequently the contingency is deemed to have been
satisfied. Arrangements including both implementation and transaction related revenue are accounted
for as a single unit of accounting. Since implementation services do not carry a standalone value,
the revenue relating to these services is recognized over the term of the customer contract to
which it relates. Due to this revenue recognition policy, our operating results may vary
significantly from quarter to quarter because of the timing of such collections by our customers
and the fact that a significant portion of our operating expenses are fixed.
Expense Classifications: The Companys cost of services in its statement of income is
presented in the seven categories noted below. Each category of cost excludes costs relating to
selling, general and administrative functions which are presented separately as a component of
total operating expenses. All
16
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
revenue and cost are reported under one operating segment. A description of the primary costs
included in each category is provided below:
|
|
|
Compensation: Salary, fringe benefit, bonus and stock based compensation costs. |
|
|
|
|
Data processing: Hardware, software and data communication cost. |
|
|
|
|
Occupancy: Rent, utilities, depreciation, office equipment, repair and maintenance
costs. |
|
|
|
|
Direct project costs: Variable costs incurred from third party providers that are
directly associated with specific revenue generating projects. |
|
|
|
|
Other operating costs: Professional fees, temporary staffing, travel and entertainment,
insurance and local and property tax costs. |
|
|
|
|
Amortization of intangibles: Amortization cost of acquisition-related software and
intangible assets. |
|
|
|
|
Selling, general and administrative: Consists of costs related to general management,
marketing and administration activities. |
Current Overview
We provide a variety of cost management services for government-sponsored health and human
services programs. These services help customers recover amounts due from third parties, avoid and
reduce costs, and ensure regulatory compliance.
Our customers are State Medicaid agencies, government-sponsored managed care plans, child
support agencies, the Veterans Health Administration, the Centers for Medicare & Medicaid Services
and other public programs. We help these programs contain healthcare costs by identifying third
party insurance coverage and recovering expenditures that were the responsibility of the third
party, or that were paid in error. The identification of other insurance coverage also helps these
programs avoid future expenditures.
Our revenue, most of which is derived from contingent fees, grew at an average compounded rate
of approximately 33.9% per year for the last five years. Our growth has been attributable to
acquisitions as well as the growth in Medicaid costs, which has historically averaged approximately
8% annually. State governments also have increased their use of vendors for coordination of
benefits and other cost containment functions, and we have been able to increase our revenue
through these initiatives. Leveraging our work on behalf of state Medicaid fee for service
programs, we have begun to penetrate the Medicaid managed care market, into which more Medicaid
lives are being shifted. As of March 31, 2009, the Company served 40 state Medicaid agencies and
96 Medicaid health plans including several of the largest Medicaid health plans in the nation as
our clients.
It should be noted that the nature of our business sometimes leads to significant variations
in revenue flow. For example, since we receive contingency fees for nearly all our services, we
recognize revenue only after our clients have received payment from a third party. In addition,
much of our work occurs on an annual or project-specific basis, and does not necessarily recur
monthly or quarterly, as do our operating expenses.
17
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
The following table sets forth, for the periods indicated, certain items in our consolidated
statements of income expressed as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
2008 |
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of services: |
|
|
|
|
|
|
|
|
Compensation |
|
|
35.1 |
% |
|
|
35.2 |
% |
Data processing |
|
|
6.3 |
% |
|
|
7.0 |
% |
Occupancy |
|
|
5.5 |
% |
|
|
6.1 |
% |
Direct project costs |
|
|
12.7 |
% |
|
|
15.5 |
% |
Other operating costs |
|
|
6.0 |
% |
|
|
5.5 |
% |
Amortization of acquisition related intangibles |
|
|
2.4 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
Total cost of services |
|
|
68.0 |
% |
|
|
72.3 |
% |
Selling, general & administrative expenses |
|
|
12.3 |
% |
|
|
13.1 |
% |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
80.3 |
% |
|
|
85.4 |
% |
Operating income |
|
|
19.7 |
% |
|
|
14.6 |
% |
Interest expense |
|
|
-0.6 |
% |
|
|
-1.1 |
% |
Interest income |
|
|
0.2 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
19.3 |
% |
|
|
14.0 |
% |
Income taxes |
|
|
7.9 |
% |
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
Net income |
|
|
11.4 |
% |
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
Revenue for the three months ended March 31, 2009 was $49.9 million, an increase of $11.0
million or 28.2% compared to revenue of $38.9 million in the same quarter for the prior year. The
revenue increase reflects the organic growth in existing client accounts, the addition of new
clients, including those gained through the acquisition of other companies, changes in the yields
and scope of client projects, and differences in the timing of when client projects were completed
in the current year compared to the prior year.
Compensation expense as a percentage of revenue was 35.1% for the three months ended March 31,
2009 compared to 35.2% for the three months ended March 31, 2008 and for the current quarter was
$17.5 million, a $3.8 million or 27.7% increase over the same quarter for the prior year expense of
$13.7 million. This increase reflected $3.0 million in additional salary expense and $0.8 million
of additional expense related to employee benefits. During the quarter ended March 31, 2009, we averaged 874
employees, a 19.4% increase over our average of 732 employees during the quarter ended March 31,
2008. The increase in compensation resulted from increases in headcount, variable compensation,
and fringe benefits.
Data processing expense as a percentage of revenue was 6.3% for the three months ended March
31, 2009 compared to 7.0% for the three months ended March 31, 2008 and for the current quarter was
$3.1 million, an increase of $0.4 million or 15.8% over the same quarter for the prior year expense
of $2.7 million. The increase resulted from a $0.3 million increase in software expense associated
with mainframe and network upgrades and a $0.1 million increase in hardware costs.
18
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
Occupancy expense as a percentage of revenue was 5.5% for the three months ended March 31,
2009 compared to 6.1% for the three months ended March 31, 2008 and for the current quarter was
$2.7 million, a $0.3 million or 15.8% increase compared to the same quarter for the prior year
expense of $2.4 million. This increase reflected approximately $0.2 million of additional rent
expense and $0.1 million of additional common area maintenance, utilities, and building service
expense.
Direct project expense as a percentage of revenue was 12.7% for the three months ended March
31, 2009 compared to 15.5% for the three months ended March 31, 2008 and for the current quarter
was $6.3 million, a $0.3 million or 4.6% increase compared to same quarter for the prior year
expense of $6.0 million. This increase resulted from higher transaction volumes during the current
quarter, although the overall cost for professional fees directly related to projects decreased as
a percentage of revenue.
Other operating costs as a percentage of revenue were 6.0% for the three months ended March
31, 2009 compared to 5.5% for the three months ended March 31, 2008 and for the current quarter
were $3.0 million, an increase of $0.9 million or 39.7% compared to the same quarter for the prior
year expense of $2.1 million. This increase resulted primarily from $0.3 million of additional
travel expenses related to business expansion, $0.3 million for additional temporary help and
consulting fees, and $0.3 million in incremental for legal expenses, postage and training expenses.
Amortization of acquisition-related software and intangibles as a percentage of revenue was
2.4% for the three months ended March 31, 2009 compared to 3.0% for the three months ended March
31, 2008 and for the current quarter was $1.22 million, a $0.06 million or 4.6% increase compared
to the same quarter for the prior year expense of $1.16 million. The $0.06 increase compared to
last year resulted from our acquisition of Prudent Rx in 2008.
Selling, general, and administrative expense as a percentage of revenue was 12.3% for the
three months ended March 31, 2009 compared to 13.1% for the three months ended March 31, 2008 and
for the current quarter was $6.1 million, a $1.0 million or 20.2% increase compared to the same
quarter for the prior year expense of $5.1 million. The $1.0 million increase reflects a $0.9
million increase in compensation cost and a $0.1 million aggregate increase in consulting fees and
local taxes.
Operating income for the three months ended March 31, 2009 was $9.9 million, an increase of
$4.2 million or 73.3%, compared to $5.7 million for the three months ended March 31, 2008 primarily
due to increased revenue partially offset by incremental operating cost incurred during the quarter
ended March 31, 2009.
Interest expense was $0.3 million for the three months ended March 31, 2009 compared to $0.4
million for the same quarter for the prior year. In both periods, interest expense was
attributable to borrowings under the Term Loan and amortization of deferred financing costs. The
decrease in interest expense is due to both lower variable interest rates and a reduction in the
principal balance in the current period compared to the prior period. Interest income was $0.1
million for the three months ended March 31, 2009, $0.1 million lower than the amount earned in the
same quarter for the prior year, due to low interest rates in the current year.
Income tax expense of $4.0 million was recorded in the quarter ended March 31, 2009 compared
to $2.3 million for the three months ended March 31, 2008, an increase of $1.7 million. . Our
effective tax rate decreased to 41.0% in 2009 from 42.0% for the quarter ended March 31, 2008
primarily due to a change in state apportionments. The principal difference between the statutory
rate and the Companys effective rate is state taxes.
19
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
Net income of $5.7 million in the current quarter represents an increase of $2.5 million, or
79.8%, compared to net income of $3.2 million in the same quarter for the prior year.
Off-Balance Sheet Financing Arrangements
We do not have any off-balance sheet financing arrangements, other than our irrevocable
standby letter of credit previously discussed, and the operating leases discussed below.
Liquidity and Capital Resources
Historically, our principal source of funds has been operations and we have sufficient cash
and cash equivalents to support our operating needs. At March 31, 2009, our cash and cash
equivalents and net working capital were $53.1 million and $83.0 million, respectively. Although we
expect that operating cash flows will continue to be a primary source of liquidity for our
operating needs, we also have a $25.0 million Revolving Credit facility available for future cash
flow needs. There have been no borrowings under the Revolving Loan, however, we have outstanding a
$4.6 million irrevocable standby letter of credit which relates to contingent, default payment
obligations required by a contractual arrangement with a client. In addition, at March 31, 2009,
we had $15.8 million of debt outstanding from the $40.0 million Term Loan originally borrowed to
fund the acquisition of BSPA in September 2006. The Term Loan requires us to make quarterly
repayments of approximately $1.6 million.
Operating cash flows could be adversely affected by a decrease in demand for our services.
The majority of our client relationships have been in place for several years, and as a result, we
do not expect any decrease in the demand for our services in the near term.
The number of days sales outstanding (DSO) at March 31, 2009 increased to 84 days compared to
78 days at December 31, 2008. First quarter DSO has historically increased by several days over
year-end. A substantial portion of the increase in the current quarters DSO levels resulted
administrative delays in payment processing, together with the timing of the monthly distribution
of revenue during the quarter.
20
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
At March 31, 2009, our primary contractual obligations, which consist of principal maturities
of long-term debt and amounts due under future lease payments, principally of facility lease
obligations, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Contractual Payments due by period |
Contractual obligations |
|
Total |
|
Less than 1 year |
|
2-3 years |
|
4-5 years |
|
More than 5 years |
Operating leases |
|
$ |
25,625 |
|
|
$ |
7,952 |
|
|
$ |
12,204 |
|
|
$ |
5,469 |
|
|
$ |
|
|
Long-term debt |
|
|
15,750 |
|
|
|
6,300 |
|
|
|
9,450 |
|
|
|
|
|
|
|
|
|
Interest expense (1) |
|
|
1,232 |
|
|
|
797 |
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
42,607 |
|
|
$ |
15,049 |
|
|
$ |
22,089 |
|
|
$ |
5,469 |
|
|
$ |
|
|
|
|
|
|
|
|
(1) |
|
Future interest payments are estimates of amounts due on long-term debt at
current interest rates and based on scheduled repayments of principal. |
We have entered into sublease arrangements for some of our facility obligations and expect to
receive the following rental receipts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
More than |
Total |
|
1 Year |
|
2-3 Years |
|
4-5 Years |
|
5 years |
$5,268
|
|
$1,186
|
|
$2,505
|
|
$1,577
|
|
$ |
On May 28, 1997, the Board of Directors authorized us to repurchase such number of shares of
our common stock that have an aggregate purchase price not in excess of $10 million. On February
24, 2006, the Board of Directors increased the authorized aggregate purchase price by $10 million
to an amount not to exceed $20 million. During the three months ended March 31, 2009, no purchases
were made. Since the inception of the repurchase program, we have repurchased 1,662,846 shares
having an aggregate purchase price of $9.4 million.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 does not require any new fair value measurements, but rather
eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157
is effective for fiscal years beginning after November 15, 2007, with the exception of the
application of the statement to the determination of fair value of nonfinancial assets and
liabilities that are recognized or disclosed on a nonrecurring basis, which is effective for the
Company as of January 1, 2009.
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial instrument. Level 3 inputs are
unobservable inputs based on the Companys own assumptions used to measure assets and liabilities
at fair value. A financial asset or liabilitys classification within the hierarchy is determined
based on the lowest level input that is significant to the fair value measurement.
21
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
Effective January 1, 2008, we partially adopted SFAS No. 157 and have applied its provisions
to financial assets and liabilities that are recognized or disclosed at fair value on a recurring
basis (at least annually). The Company has not yet adopted SFAS 157 for non-financial assets and
liabilities, in accordance with FASB staff position 157-2, which is effective for the Company as of
January 1, 2009. The impact of FASB staff position 157-2 does not presently have an impact on the
Companys financial position, operations or cash flows.
At March 31, 2009, the Companys interest rate swap contract (see note 8) was being carried at
fair value and measured on a recurring basis. Fair value is determined through the use of models
that consider various assumptions, including time value, yield curves, as well as other relevant
economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy.
During the period ending March 31, 2009, no such non-financial assets and liabilities requiring
fair value determination under this Standard were recognized or disclosed on a non-recurring basis.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS 159), which is
effective for fiscal years beginning after November 15, 2007. This statement permits entities to
choose to measure many financial instruments and certain other items at fair value. This statement
also establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types of assets and
liabilities. Unrealized gains and losses on items for which the fair value option is elected would
be reported in earnings. The Company has adopted SFAS 159 and has elected not to measure any
additional financial instruments and other items at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)), which replaces SFAS No. 141, Business Combinations. SFAS 141(R) retains the underlying
concepts of SFAS 141 in that all business combinations are still required to be accounted for at
fair value under the acquisition method of accounting but SFAS 141(R) changed the method of
applying the acquisition method in a number of significant aspects. Acquisition costs will
generally be expensed as incurred; noncontrolling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the beginning of the first
annual period subsequent to December 15, 2008, with the exception of the accounting for valuation
allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS 109 such that
adjustments made to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also
apply the provisions of SFAS 141(R). Early adoption is prohibited. Therefore, the impact of the
implementation of this pronouncement cannot be determined until the transactions occur.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No.
133 (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about an entitys derivative and
hedging activities. Entities will be required to provide enhanced disclosures about how and why an
entity uses derivative instruments, how these instruments are accounted for, and how they affect
the entitys financial position, financial performance and cash flows. The Company adopted
Statement 161 as of the required effective date of January 1, 2009 and applied its provisions
prospectively by providing the additional disclosures in its consolidated financial statements. The
Company provided single period Statement 161 disclosures for the March 31, 2009 period of adoption,
on Note 8, as allowed by Statement 161. Periods in years after initial adoption will include
comparative disclosures.
22
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets. This FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142). The objective of this FSP is to
improve
the
consistency between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and
other GAAP. This FSP applies prospectively to all intangible assets acquired after the effective
date in fiscal 2009, whether acquired in a business combination or otherwise. Early adoption is
prohibited. Therefore, the impact of the implementation of this pronouncement cannot be determined
until the transactions occur.
In April 2009, the FASB issued FSP FAS 107-1, Interim Disclosures about Fair Value of
Financial Instruments to require, on an interim basis, disclosures about the fair value of all
financial instruments within the scope of SFAS 107 Disclosures about Fair Value of Financial
Instruments and to include disclosures related to the methods and significant assumptions used in
estimating those instruments. This FSP is effective for interim and annual periods ending after
June 15, 2009. The Company is currently evaluating the impact the adoption of this FSP will have on
its consolidated financial statements and related disclosures.
23
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
Item 3. Quantitative and Qualitative Disclosures About Market Risks
We are exposed to changes in interest rates, primarily from our Term Loan, and use an interest
rate swap agreement to fix the interest rate on a portion of this variable debt and reduce certain
exposures to interest rate fluctuations. Since entering into this swap agreement, interest rates
have declined and the required payments exceed those based on current market rates on the long-term
debt. Our risk management objective in entering into such contracts and agreements is only to
reduce our exposure to the effects of interest rate fluctuations and not for speculative
investment. At March 31, 2009, we had total bank debt of $15.8 million. The Companys interest rate
swap effectively converted $12.0 million of this variable rate debt to fixed rate debt, leaving
approximately $3.8 million of the total long-term debt exposed to interest rate risk. If the
effective interest rate for all of our variable rate debt were to increase by 100 basis points
(1%), our annual interest expense would increase by a maximum of $38,000 based on the balances
outstanding at March 31, 2009.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that
information required to be disclosed by us in reports that we file under the Exchange Act is
recorded, processed, summarized and reported as specified in the SECs rules and forms and that
such information required to be disclosed by us in reports that we file under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and
our Chief Financial Officer, or CFO, to allow timely decisions regarding required disclosure.
Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness
of our disclosure controls and procedures as of March 31, 2009. Based on that evaluation, our CEO
and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2009.
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation of our controls performed during the quarter ended March 31, 2009
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
24
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
PART II OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008. In addition to the other information set
forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A.
Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008, which could
materially affect our business, financial condition or future results. The risks described in our
Annual Report on Form 10-K, are not the only risks facing our Company. Additional risks and
uncertainties not currently known to us, or that we currently deem to be immaterial, may also
materially adversely affect our business, financial condition and/or operating results.
25
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
Item 6. Exhibits
The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed on the Exhibit
Index immediately following the Signatures.
26
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
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: May 8, 2009 |
HMS HOLDINGS CORP.
(Registrant)
|
|
|
By: |
/s/ William C. Lucia
|
|
|
|
William C. Lucia |
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
By: |
/s/ Walter D. Hosp
|
|
|
|
Walter D. Hosp |
|
|
|
Chief Financial Officer (Principal
Financial Officer and Accounting Officer) |
|
27
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2009 and 2008
Exhibit Index
|
|
|
Exhibit No. |
|
Description |
|
|
|
31.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Section 906 Principal Executive Officer Certification. |
|
|
|
32.2
|
|
Section 906 Principal Executive Officer Certification. |
28