News Column

HMS Holdings Corp. Reports Second Quarter 2014 Results

August 8, 2014

  • GAAP EPS of $0.07 and Adjusted EPS of $0.14 per share
  • Medicaid Coordination of Benefits Revenue Up 9% y/y
  • Commercial Market Revenue Up 14% y/y
  • State Government Market Revenue Up 4% y/y
  • Operating Expenses Declined 5% y/y
  • Non-Medicare RAC Revenue Growth and Margin Expansion on Track to Meet Previously Announced Full-Year Projections

    IRVING, Texas--(BUSINESS WIRE)-- HMS Holdings Corp. (NASDAQ:HMSY) today announced financial results for its second quarter ended June 30, 2014. Net income for the quarter was $6.0 million or $0.07 per fully diluted share, compared to net income of $3.4 million or $0.04 per fully diluted share in the prior quarter and $10.4 million or $0.12 per fully diluted share in the prior year second quarter. Adjusted EPS was $0.14, compared to $0.11 in the prior quarter and $0.20 in the prior year second quarter. Revenue increased 8% to$112.6 million compared to revenue of $104.7 million in the prior quarter. Revenue for the same period one year ago was $125.8 million.

    “Our solid second quarter results reflect the positive effects of Medicaid expansion, increasing demand for our cost containment services and further operating expense savings,” said Bill Lucia, President and CEO. “A strong first half of 2014 reinforces our belief that we can achieve the previously announced margin expansion of 5-6% and revenue growth of 10-11% in our non-Medicare RAC business.”

    The Company saw an increase of 1.5 million new Medicaid lives in its client eligibility data this quarter, a direct result of the expansion attributable to the Affordable Care Act. This increase generated revenue growth both in the state government and commercial markets and also in the Medicaid Coordination of Benefits product line, which increased 9% over the same period a year ago and 16% over the prior quarter.

    “Strong sales performance, together with the growth in Medicaid lives in the quarter, resulted in a 14% increase in commercial market revenue over the same period last year and 20% over the prior quarter,” said Doug Williams, President of Commercial Markets. Revenue in the Company’s state government market grew 4% year over year and 6% over the prior quarter, despite the continued shift of lives into managed care.

    “The prolonged re-procurement of the Medicare RAC contract continues to negatively impact total revenue, but we are increasingly enthusiastic about the growth opportunities in front of us in our state government and commercial markets during the balance of this year and beyond,” said Lucia. “We are executing on our strategic plan in order to achieve our 2014 revenue growth and margin expansion targets, and we remain hopeful that the new Medicare RAC contracts will be awarded by CMS in the near future,” concluded Lucia.

    Q2 2014 Conference Call

    HMS will report its second quarter 2014 financial and operating results at 9:00 a.m. EDT on Friday, August 8, 2014. Individuals can access the webcast at http://investor.hms.com/events.cfm or listen to the call at (877) 303-7208. International participants can listen to the call at (224) 357-2389.

    The webcast will be archived on the website at http://investor.hms.com/events.cfm. Individuals can listen to the replay at (855) 859-2056. International participants can listen to the replay at (404) 537-3406. The passcode is 74624741. The replay will be available at noon Eastern on August 8, 2014 through 11:59 p.m. Eastern on August 15, 2014.

    The HMS Form 10-Q for the quarter ended June 30, 2014 will be filed and available on our website at http://investor.hms.com on or about August 11, 2014, and will contain additional information about our results of operations for the fiscal year to date. This press release and the interim financial statements herein will be available at http://investor.hms.com for at least a 12-month period. Shareholders and interested investors are welcome to contact Investor Relations at 212-857-5442.

    About HMS Holdings Corp.

    HMS Holdings Corp., through its subsidiaries, is the nation's leader in coordination of benefits and program integrity services for healthcare payers. HMS’s clients include health and human services programs in more than 40 states; commercial payers, including group health plans, Medicare Advantage Plans, more than 160 Medicaid managed care plans, and employers; the Centers for Medicare and Medicaid Services (CMS); and Veterans Administration facilities. As a result of the Company’s services, clients recovered over $3 billion in 2013, and saved billions more through the prevention of erroneous payments.

    Use of Non-GAAP Financials

    This press release includes presentations of earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted EBITDA. Adjusted EBITDA represents EBITDA adjusted for stock-based compensation expense. EBITDA is a measure commonly used by the capital markets to value enterprises. EBITDA is a non-GAAP financial measure and is reconciled to income before income taxes, which the Company's management believes to be the most comparable generally accepted accounting principles (“GAAP”) measure. Adjusted EBITDA results are calculated by adjusting GAAP income before income taxes to exclude the effects of depreciation, amortization of intangible assets, stock-based compensation expense, and net interest expense.

    This press release also includes presentations of adjusted EPS. Adjusted EPS represents EPS adjusted for stock-based compensation expense and amortization of intangibles and for the related taxes for these adjustments. Adjusted EPS is a non-GAAP financial measure and is reconciled to EPS, which the Company’s management believes to be the most comparable GAAP measure.

    The Company uses these non-GAAP financial measures for internal management purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. The Company's management believes that these non-GAAP financial measures are a common measure used by investors and analysts to evaluate its performance. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and reflect an additional way of viewing aspects of the Company's operations that, when viewed with GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provides a more complete understanding of the results of operations and trends affecting the Company's business. These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, income before income taxes in accordance with GAAP.

    Safe Harbor Statement

    This press release contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such statements give our expectations or forecasts of future events; they do not relate strictly to historical or current facts. Forward-looking statements can be identified by words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” “will,” “target,” “seeks,” “forecast” and similar expressions and references to guidance. In particular, these include statements relating to future actions, business plans, objectives and prospects, and future operating or financial performance. 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.

    Factors that could cause or contribute to such differences include, but are not limited to: variations in our results of operations; changes in the U.S. healthcare environment and steps we take in anticipation of such changes; regulatory, budgetary or political actions that affect procurement practices; our ability to retain clients or the loss of one or more major clients, including through our failure to reprocure a contract or the reduction in scope or early termination of one or more of our significant contracts; our ability to effectively manage our growth to execute on our business plans; the risk that guidance may not be achieved including but not limited to the risk that we may not achieve non-Medicare margin expansion; the risk that HMS will not receive a contract award for any current or future procurement or reprocurement or that either or both may be delayed; the risk of negative or reduced growth rate of spending on Medicaid/Medicare, simplification of the healthcare payment process or programmatic changes that diminish the scope of benefits; the risk that CMS may not support the RAC program; our ability to retain clients or the loss of one or more major clients; client dissatisfaction or early termination of contracts triggering significant costs or liabilities; the development by competitors of new or superior products or services; the emergence of new competitors, or the development by our clients of in-house capacity to perform the services we offer; all the risks inherent in the development, introduction, and implementation of new products and services; our failure to comply with laws and regulations governing health data or to protect such data from theft and misuse; our ability to maintain effective information systems and protect them from damage or interruption; restrictions on our ability to bid on/perform certain work due to other work we currently perform; our ability to successfully integrate our acquisitions; our ability to continue to secure contracts through the competitive bidding process and to accurately predict the cost and time to complete such contracts; our compliance with the covenants and obligations under the terms of our credit facility and our ability to generate sufficient cash to cover our interest and principal payments thereunder; and negative results of government or client reviews, audits or investigations to verify our compliance with contracts and applicable laws and regulations. A further description of these and other risks, uncertainties, and related matters can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which is available at www.hms.com under the “Investor Relations” tab. 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. Any forward-looking statements are made as of the date of this press release and we do not undertake an 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.

               
    HMS HOLDINGS CORP. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

    (in thousands, except per share amounts)

    (unaudited)

     
    Three months ended June 30,Six months ended June 30,
    2014201320142013
     
    Revenue $ 112,561   $ 125,809   $ 217,268   $ 242,416  
     
    Cost of services:
    Compensation 44,245 46,032 91,166 90,016
    Data processing 10,174 9,188 19,398 18,286
    Occupancy 4,688 4,781 8,648 9,403
    Direct project costs 9,913 12,269 17,586 25,539
    Other operating costs 5,915 7,653 11,398 14,290
    Amortization of acquisition related software and intangibles 7,160     8,759     14,320     16,688  
    Total cost of services 82,095 88,682

     

    162,516

     

    174,222
     
    Selling, general & administrative expenses   17,908     16,761     34,397     32,560  
    Total operating expenses   100,003     105,443  

     

      196,913  

     

      206,782  
     
    Operating income 12,558 20,366

     

    20,355

     

    35,634
     
    Interest expense (1,939 ) (4,047 ) (4,018 ) (7,779 )
    Other income, net - 776 - 799
    Interest income   12     17     36     18  
    Income before income taxes 10,631 17,112

     

    16,373

     

    28,672
    Income taxes   4,593     6,692     6,982     11,276  
     
    Net income and comprehensive income $ 6,038   $ 10,420   $ 9,391   $ 17,396  
     
    Basic income per common share:
    Net income per share -basic $ 0.07   $ 0.12   $ 0.11   $ 0.20  
     
    Diluted income per share:
    Net income per share- diluted $ 0.07   $ 0.12   $ 0.11   $ 0.20  
     
    Weighted average shares:
    Basic   87,691     87,674     87,564     87,408  
    Diluted   88,092     89,023     88,033     88,919  
     
           
    HMS HOLDINGS CORP. AND SUBSIDIARIES
    CONSOLIDATED BALANCE SHEETS

    (in thousands, except per share and per share amounts)

     
    June 30,December 31,
    20142013

    (unaudited)

    Assets
    Current assets:
    Cash and cash equivalents $ 95,879 $ 93,366
    Accounts receivable, net of allowance for doubtful accounts of $1,232 and $916,
    and estimated allowance for appeals of $7,161 and $13,939
    at June 30, 2014 and December 31, 2013, respectively 164,543 171,726
    Prepaid expenses 10,910 12,942
    Prepaid income taxes 335 6,792
    Other current assets   470     489  
    Total current assets 272,137 285,315
     
    Property and equipment, net 118,300 123,006
    Goodwill 361,468 361,468
    Intangible assets, net 84,931 95,312
    Deferred financing costs, net 7,999 9,041
    Other assets   4,505     4,460  
    Total assets $ 849,340   $ 878,602  
     
     
    Liabilities and Shareholders' Equity
    Current liabilities:
    Accounts payable, accrued expenses and other liabilities $ 34,065 $ 37,123
    Acquisition related contingent consideration 528 945
    Deferred tax liabilities 5,910 6,326
    Estimated liability for appeals   35,720     41,852  
    Total current liabilities   76,223     86,246  
     
    Long-term liabilities:
    Revolving credit facility 197,796 232,796
    Deferred rent 2,208 724
    Deferred tax liabilities 49,338 52,523
    Other liabilities   3,268     3,874  
    Total long-term liabilities   252,610     289,917  
    Total liabilities   328,833     376,163  
     
    Commitments and Contingencies
     
    Shareholders' equity:
    Preferred stock - $0.01 par value; 5,000,000 shares authorized; none issued - -
    Common stock - $0.01 par value; 125,000,000 shares authorized;
    94,249,982 shares issued and 87,723,677 shares outstanding at June 30, 2014;
    93,826,453 shares issued and 87,300,148 shares outstanding at December 31, 2013 940 936
    Capital in excess of par value 305,190 296,517
    Retained earnings 259,391 250,000
    Treasury stock, at cost: 6,526,305 shares at June 30, 2014 and December 31, 2013   (45,014 )   (45,014 )
    Total shareholders' equity   520,507     502,439  
    Total liabilities and shareholders' equity $ 849,340   $ 878,602  
     
           
    HMS HOLDINGS CORP. AND SUBSIDIARIES
    CONSOLIDATED STATEMENT OF CASH FLOWS

    (in thousands)

    (unaudited)

     

    Six months ended June 30,

    20142013
    Operating activities:
    Net income and comprehensive income $ 9,391 $ 17,396
    Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation expense 16,253 15,228
    Amortization expense 11,335 14,934
    Stock-based compensation expense 6,230 6,122
    Excess tax benefit from exercised stock options (854 ) (4,244 )
    Deferred income taxes (3,996 ) (2,531 )
    Allowance for doubtful accounts (6,462 ) 6,314
    Change in fair value of contingent consideration 11 20
    Loss on disposal of fixed assets 4 184
    Changes in operating assets and liabilities:
    Accounts receivable 13,645 (16,772 )
    Prepaid expenses 2,032 1,878
    Prepaid income taxes 7,311 (2,742 )
    Other current assets 19 (73 )
    Other assets (45 ) 7
    Accounts payable, accrued expenses and other liabilities (1,193 ) (7,011 )
    Estimated liability for appeals   (6,132 )   7,161  
    Net cash provided by operating activities   47,549     35,871  
     
    Investing activities:
    Purchases of property and equipment (10,315 ) (12,734 )
    Investment in common stock - (500 )
    Investment in capitalized software   (1,309 )   (1,996 )
    Net cash used in investing activities   (11,624 )   (15,230 )
     
    Financing activities:
    Repayment of term loan - (8,750 )
    Proceeds from revolving credit facility - 4,046
    Payment of financing fees related to revolving debt - (2,915 )
    Repayment of revolving credit facility (35,000 ) (25,000 )
    Payments on contingent consideration (428 ) -
    Payments on capital lease obligations (826 ) (838 )
    Proceeds from exercise of stock options 3,076 6,309
    Payments of tax withholdings on behalf of employees
    for net-share settlement for stock-based compensation (1,088 ) (1,498 )
    Excess tax benefit from exercised stock options   854     4,244  
    Net cash used in financing activities   (33,412 )   (24,402 )
    Net (decrease)/increase in cash and cash equivalents 2,513 (3,761 )
    Cash and cash equivalents at beginning of period   93,366     135,227  
    Cash and cash equivalents at the end of period $ 95,879   $ 131,466  
     
    Supplemental disclosure of cash flow information:
    Cash paid for income taxes $ 3,503   $ 19,881  
    Cash paid for interest $ 2,538   $ 4,308  
    Supplemental disclosure of noncash investing activities:
    Accrued property and equipment purchases $ 1,633   $ 1,655  
    Equipment purchased through capital leases $ 20   $ 2,196  
     

    HMS HOLDINGS CORP. AND SUBSIDIARIES

    (in thousands, except per share amounts)

    (unaudited)

    Reconciliation of Net income to EBITDA and adjusted EBITDA

    As summarized in the following table, earnings before interest, taxes, depreciation and amortization, and stock-based compensation expense (adjusted EBITDA) was $29.2 million for the second quarter of 2014, a decrease of $9.6 million or 24.6% over the same period a year ago. Adjusted EBITDA for the first half of 2014 was $53.1 million, a decrease of $17.3 million or 24.5% year over year.

             
    Three Months Ended

    June 30,

      Six Months Ended

    June 30,

    2014

     

    2013

    2014

     

    2013

    Net income $ 6,038 $ 10,420 $ 9,391 $ 17,396
    Net interest expense 1,927 4,031 3,982 7,762
    Income taxes 4,593 6,692 6,982 11,276
    Depreciation and amortization, net of deferred

    financing costs, included in net interest expense

      13,396   14,547   26,546   27,842

    Earnings before interest, taxes, depreciation and

    amortization ( EBITDA)

    $ 25,954 $ 35,690 $ 46,901 $ 64,276
     
    Stock-based compensation expense   3,290   3,094   6,230   6,122
    Adjusted EBITDA $ 29,244 $ 38,784 $ 53,131 $ 70,398
     


    Reconciliation of Net income to GAAP EPS and Adjusted EPS

    As summarized in the following table, earnings per share adjusted for stock-based compensation expense and amortization of intangibles and for the related taxes (adjusted EPS) was $0.14 for the second quarter of 2014, an increase of 27.3% over $0.11 for the first quarter of 2014 and a decrease of 30.0% over the same period a year ago. Adjusted EPS for the first half of 2014 was $0.24, a decrease of 31.4% over the first half of 2013.

             
    Three Months Ended

    June 30,

      Six Months Ended

    June 30,

    2014

     

    2013

    2014

     

    2013

    Net income $ 6,038 $ 10,420 $ 9,391 $ 17,396
    Stock-based compensation expense, net of tax 1,868 1,884 3,585 3,714
    Amortization of intangibles, net of tax   4,066   5,333   8,247   10,125
    Subtotal $ 11,972 $ 17,637 $ 21,223 $ 31,235
     
    Weighted average common shares, diluted   88,092   89,023   88,033   88,919
     
    Diluted GAAP EPS $ 0.07 $ 0.12 $ 0.11 $ 0.20
    Diluted adjusted EPS $ 0.14 $ 0.20 $ 0.24 $ 0.35
     





    Media Relations

    HMS Holdings Corp.

    Francesca Marraro, 212-857-5442

    fmarraro@hms.com

    Source: HMS Holdings Corp.


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