Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - MEDASSETS INC | Financial_Report.xls |
EX-31.2 - EX-31.2 - MEDASSETS INC | g23680exv31w2.htm |
EX-31.1 - EX-31.1 - MEDASSETS INC | g23680exv31w1.htm |
EX-32.1 - EX-32.1 - MEDASSETS INC | g23680exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | 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: 001-33881
MEDASSETS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 51-0391128 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
100 North Point Center East, Suite 200 | ||
Alpharetta, Georgia | 30022 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (678) 323-2500
(Former name, former address and former fiscal year, if changed since last report)
N/A
N/A
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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ
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 þ | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of
August 4, 2010, the registrant had 57,720,984 shares of common stock, par value $0.01 per
share, outstanding.
MEDASSETS, INC.
FORM 10-Q
FORM 10-Q
INDEX
PAGE | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
21 | ||||||||
40 | ||||||||
41 | ||||||||
41 | ||||||||
41 | ||||||||
42 | ||||||||
42 | ||||||||
42 | ||||||||
42 | ||||||||
42 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
MedAssets, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current |
||||||||
Cash and cash equivalents |
$ | | $ | 5,498 | ||||
Accounts receivable, net of allowances of $3,275 and $4,189 as of June 30, 2010 and
December 31, 2009, respectively |
70,916 | 67,617 | ||||||
Deferred tax asset, current |
14,742 | 14,423 | ||||||
Prepaid expenses and other current assets |
12,608 | 8,442 | ||||||
Total current assets |
98,266 | 95,980 | ||||||
Property and equipment, net |
61,245 | 54,960 | ||||||
Other long term assets |
||||||||
Goodwill |
512,866 | 511,861 | ||||||
Intangible assets, net |
85,264 | 95,589 | ||||||
Other |
18,721 | 20,154 | ||||||
Other long term assets |
616,851 | 627,604 | ||||||
Total assets |
$ | 776,362 | $ | 778,544 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 8,201 | $ | 8,680 | ||||
Accrued revenue share obligation and rebates |
31,588 | 31,948 | ||||||
Accrued payroll and benefits |
12,108 | 12,874 | ||||||
Other accrued expenses |
10,518 | 7,410 | ||||||
Deferred revenue, current portion |
26,435 | 24,498 | ||||||
Current portion of notes payable |
2,499 | 13,771 | ||||||
Current portion of finance obligation |
170 | 163 | ||||||
Total current liabilities |
91,519 | 99,344 | ||||||
Notes payable, less current portion |
181,641 | 201,390 | ||||||
Finance obligation, less current portion |
9,606 | 9,694 | ||||||
Deferred revenue, less current portion |
9,035 | 7,380 | ||||||
Deferred tax liability |
19,640 | 19,239 | ||||||
Other long term liabilities |
2,711 | 4,125 | ||||||
Total liabilities |
314,152 | 341,172 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity |
||||||||
Common stock, $0.01 par value, 150,000,000 shares authorized; 57,522,000 and 56,715,000
shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively |
575 | 567 | ||||||
Additional paid-in capital |
654,786 | 639,315 | ||||||
Accumulated other comprehensive loss |
(1,060 | ) | (1,605 | ) | ||||
Accumulated deficit |
(192,091 | ) | (200,905 | ) | ||||
Total stockholders equity |
462,210 | 437,372 | ||||||
Total liabilities and stockholders equity |
$ | 776,362 | $ | 778,544 | ||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
3
Table of Contents
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Revenue: |
||||||||||||||||
Administrative fees, net |
$ | 27,964 | $ | 25,378 | $ | 56,554 | $ | 52,864 | ||||||||
Other service fees |
67,163 | 58,831 | 131,979 | 110,329 | ||||||||||||
Total net revenue |
95,127 | 84,209 | 188,533 | 163,193 | ||||||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue (inclusive of certain depreciation and amortization expense) |
22,757 | 17,613 | 44,479 | 34,358 | ||||||||||||
Product development expenses |
4,823 | 5,250 | 10,193 | 11,268 | ||||||||||||
Selling and marketing expenses |
16,009 | 15,595 | 26,677 | 26,491 | ||||||||||||
General and administrative expenses |
31,947 | 27,481 | 64,098 | 54,932 | ||||||||||||
Depreciation |
4,540 | 2,985 | 8,833 | 5,895 | ||||||||||||
Amortization of intangibles |
6,026 | 7,000 | 12,110 | 14,011 | ||||||||||||
Total operating expenses |
86,102 | 75,924 | 166,390 | 146,955 | ||||||||||||
Operating income |
9,025 | 8,285 | 22,143 | 16,238 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest (expense) |
(3,807 | ) | (4,763 | ) | (7,739 | ) | (9,756 | ) | ||||||||
Other income (expense) |
135 | (33 | ) | 202 | 181 | |||||||||||
Income before income taxes |
5,353 | 3,489 | 14,606 | 6,663 | ||||||||||||
Income tax expense |
2,059 | 1,314 | 5,792 | 2,583 | ||||||||||||
Net income |
$ | 3,294 | $ | 2,175 | $ | 8,814 | $ | 4,080 | ||||||||
Basic and diluted income per share: |
||||||||||||||||
Basic net income |
$ | 0.06 | $ | 0.04 | $ | 0.16 | $ | 0.08 | ||||||||
Diluted net income |
$ | 0.06 | $ | 0.04 | $ | 0.15 | $ | 0.07 | ||||||||
Weighted average shares basic |
56,169 | 54,527 | 55,994 | 54,316 | ||||||||||||
Weighted average shares diluted |
59,456 | 56,968 | 59,148 | 56,699 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
4
Table of Contents
MedAssets, Inc.
Condensed Consolidated Statement of Stockholders Equity (Unaudited)
Six Months Ended June 30, 2010
Condensed Consolidated Statement of Stockholders Equity (Unaudited)
Six Months Ended June 30, 2010
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-In | Comprehensive | Accumulated | Stockholders | ||||||||||||||||||||
Shares | Par Value | Capital | Income (Loss) | Deficit | Equity | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Balances at December 31, 2009 |
56,715 | $ | 567 | $ | 639,315 | $ | (1,605 | ) | $ | (200,905 | ) | $ | 437,372 | |||||||||||
Issuance of common stock from
equity award exercises |
736 | 7 | 5,900 | | | 5,907 | ||||||||||||||||||
Issuance of common restricted stock (net of forfeitures) |
71 | 1 | (1 | ) | | | | |||||||||||||||||
Stock compensation expense |
| | 6,511 | | | 6,511 | ||||||||||||||||||
Excess tax benefit from equity award
exercises |
| | 3,061 | | | 3,061 | ||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Unrealized gain from hedging activities
(net of a tax expense of $330) |
| | | 545 | | 545 | ||||||||||||||||||
Net income |
| | | | 8,814 | 8,814 | ||||||||||||||||||
Comprehensive income |
| | | 545 | 8,814 | 9,359 | ||||||||||||||||||
Balances at June 30, 2010 |
57,522 | $ | 575 | $ | 654,786 | $ | (1,060 | ) | $ | (192,091 | ) | $ | 462,210 | |||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
5
Table of Contents
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Operating activities |
||||||||
Net income |
$ | 8,814 | $ | 4,080 | ||||
Adjustments to reconcile income from continuing operations to net cash provided by
operating activities: |
||||||||
Bad debt expense |
437 | 2,524 | ||||||
Depreciation |
10,274 | 7,115 | ||||||
Amortization of intangibles |
12,480 | 14,382 | ||||||
Loss on sale of assets |
1 | 193 | ||||||
Noncash stock compensation expense |
6,511 | 8,960 | ||||||
Excess tax benefit from exercise of equity awards |
(3,061 | ) | (3,313 | ) | ||||
Amortization of debt issuance costs |
915 | 922 | ||||||
Noncash interest expense, net |
267 | 913 | ||||||
Deferred income tax (benefit) |
(247 | ) | (57 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(3,736 | ) | (3,872 | ) | ||||
Prepaid expenses and other assets |
(4,166 | ) | (1,155 | ) | ||||
Other long-term assets |
(239 | ) | (1,895 | ) | ||||
Accounts payable |
2,583 | 1,966 | ||||||
Accrued revenue share obligations and rebates |
(361 | ) | 909 | |||||
Accrued payroll and benefits |
(766 | ) | (6,483 | ) | ||||
Other accrued expenses |
2,486 | (2,725 | ) | |||||
Deferred revenue |
3,592 | 453 | ||||||
Cash provided by operating activities |
35,784 | 22,917 | ||||||
Investing activities |
||||||||
Purchases of property, equipment and software |
(8,021 | ) | (6,186 | ) | ||||
Capitalized software development costs |
(7,719 | ) | (7,071 | ) | ||||
Acquisitions, net of cash acquired |
(3,160 | ) | (18,275 | ) | ||||
Cash used in investing activities |
(18,900 | ) | (31,532 | ) | ||||
Financing activities |
||||||||
Proceeds from notes payable |
| 60,932 | ||||||
Repayment of notes payable |
(31,021 | ) | (65,206 | ) | ||||
Repayment of finance obligations |
(329 | ) | (329 | ) | ||||
Excess tax benefit from exercise of equity awards |
3,061 | 3,313 | ||||||
Issuance of common stock |
5,907 | 4,476 | ||||||
Cash (used in) provided by financing activities |
(22,382 | ) | 3,186 | |||||
Net decrease in cash and cash equivalents |
(5,498 | ) | (5,429 | ) | ||||
Cash and cash equivalents, beginning of period |
5,498 | 5,429 | ||||||
Cash and cash equivalents, end of period |
$ | | $ | | ||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
6
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
Unless the context indicates otherwise, references in this Quarterly Report to MedAssets, the
Company, we, our and us mean MedAssets, Inc., and its subsidiaries and predecessor
entities.
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
We provide technology-enabled products and services which together deliver solutions designed
to improve operating margin and cash flow for hospitals, health systems and other ancillary
healthcare providers. Our customer-specific solutions are designed to efficiently analyze detailed
information across the spectrum of revenue cycle and spend management processes. Our solutions
integrate with existing operations and enterprise software systems of our customers and provide
financial improvement with minimal upfront costs or capital expenditures. Our operations and
customers are primarily located throughout the United States and to a lesser extent, Canada.
The accompanying unaudited Condensed Consolidated Financial Statements, and Condensed
Consolidated Balance Sheet as of December 31, 2009, derived from audited financial statements, have
been prepared in accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial reporting and as required by Regulation S-X, Rule 10-01 of the U.S.
Securities and Exchange Commission (SEC). Accordingly, certain information and footnote
disclosures required for complete financial statements are not included herein. In the opinion of
management, all adjustments, consisting of normal recurring adjustments, considered necessary for a
fair presentation of the interim financial information have been included. When preparing financial
statements in conformity with GAAP, we must make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the
financial statements. Actual results could differ materially from those estimates. Operating
results for the three and six months ended June 30, 2010 are not necessarily indicative of the
results that may be expected for any other interim period or for the fiscal year ending
December 31, 2010.
The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto
should be read in conjunction with the audited Consolidated Financial Statements for the year ended
December 31, 2009 included in our Form 10-K as filed with the SEC on March 1, 2010. These financial
statements include the accounts of MedAssets, Inc. and our wholly owned subsidiaries. All
significant intercompany accounts have been eliminated in consolidation.
Cash and Cash Equivalents
All of our highly liquid investments with original maturities of three months or less at the
date of purchase are carried at cost which approximates fair value and are considered to be cash
equivalents. Currently, our excess cash is voluntarily used to repay our swing-line credit
facility, if any, on a daily basis and applied against our revolving credit facility on a routine
basis when our swing-line credit facility is undrawn. In addition, we may periodically make
voluntary repayments on our term loan. Cash and cash equivalents were zero and $5,498 as of
June 30, 2010 and December 31, 2009, respectively, and our revolver and swing-line balances were
zero during those reporting periods.
In the event our cash balance is zero at the end of a period, any
outstanding checks are recorded as accrued expenses.
See Note 5 for immediately available cash under our revolving
credit facility.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Revenue Recognition
In October 2009, the Financial Accounting Standards Board (FASB) issued an accounting
standards update for multiple-deliverable revenue arrangements. The
update addresses the accounting
for multiple-deliverable arrangements to enable vendors to account for products or services
separately rather than as a combined unit. The update also addresses how to separate deliverables
and how to measure and allocate arrangement consideration to one or more units of accounting. The
amendments in the update significantly expand the disclosures related to a vendors
multiple-deliverable revenue arrangements with the objective of providing information about the
significant judgments made and changes to those judgments and how the application of the relative
selling-price method of determining stand-alone value affects the timing or amount of revenue
recognition. The accounting standards update is applicable for annual periods beginning after
June 15, 2010, however, early adoption is permitted. We are currently assessing the impact of the
adoption of this update on our Condensed Consolidated Financial Statements.
In October 2009, the FASB issued an accounting standards update relating to certain revenue
arrangements that include software elements. The update will change the accounting model for
revenue arrangements that include both tangible products and software elements. Among other things,
tangible products containing software and non-software components that function together to deliver
the tangible products essential functionality are no longer within the scope of software revenue
guidance. In addition, the update also provides guidance on how a vendor should allocate
arrangement consideration to deliverables in an arrangement that includes tangible
7
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
products and
software. The accounting standards update is applicable for annual periods beginning after
June 15, 2010, however,
early adoption is permitted. The adoption of this update is not
expected to have a material impact on our Condensed Consolidated Financial Statements.
In April 2010, the FASB issued new standards for vendors who apply the milestone method of
revenue recognition to research and development arrangements. These new standards apply to
arrangements with payments that are contingent, at inception, upon achieving substantively
uncertain future events or circumstances. The guidance is applicable for milestones achieved
in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early
adoption is permitted. The adoption of this guidance will impact our
arrangements with one-time or nonrecurring performance
fees that are contingent upon achieving certain results. Historically, we have recognized those
types of performance fees in the period the respective performance
target has been met.
Upon adoption of this guidance on January 1, 2011, these performance
fees will be recognized ratably over the contract term.
We are continuing to assess the impact of the adoption of this update on our
Condensed Consolidated Financial Statements.
Subsequent Events
In February 2010, the FASB issued amended guidance on subsequent events. Under this amended
guidance, SEC filers are no longer required to disclose the date through which subsequent events
have been evaluated in originally issued and revised financial statements. This guidance was
effective immediately and we adopted these new requirements for the period ended March 31,
2010.
3. ACQUISITION AND RESTRUCTURING ACTIVITIES
Business Combination
During
the quarter, our Spend Management segment acquired certain assets
for $3,160. The acquired assets consist of certain customer relationships
valued at $2,155 with a ten year weighted-average useful life and goodwill
of $1,005.
Accuro Restructuring Plan
In connection with the Accuro Healthcare Solutions, Inc. acquisition (Accuro or Accuro
Acquisition) in June 2008, our management approved, committed and initiated a plan to restructure
our operations resulting in certain management, system and organizational changes within our
Revenue Cycle Management segment. Any increases or decreases to the estimates of executing the
restructuring plan subsequent to June 2009 have been recorded as adjustments to operating expense.
There were no such adjustments made during the three and six months ended June 30, 2010.
The remaining balance relating to the Accuro restructuring plan pertains to a lease
termination penalty we incurred for which we made cash payments of approximately $664 for the six
months ended June 30, 2010. We expect that $1,103 of the remaining lease termination penalty will
be paid ratably from July 2010 through January 2011 and $1,046 will be paid in February 2011. The
balance of the accrual was $2,149 as of June 30, 2010.
Other Acquisition-Related Activities
During
the three-months ended June 30, 2010, we incurred $1,869 related to certain due
diligence and acquisition-related activities. We expensed these costs as incurred in accordance
with GAAP.
4. DEFERRED REVENUE
Deferred
revenue consists of unrecognized revenue related to advanced customer
billing or
customer payments received prior to revenue being realized and earned. Substantially all of our
deferred revenue consists of: (i) deferred administrative fees, net; (ii) deferred service fees;
(iii) deferred software and implementation fees; and (iv) other deferred fees, including receipts
for our annual customer and
8
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
vendor meeting received prior to the event.
The following table summarizes the deferred revenue categories and balances as of:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Software and implementation fees |
$ | 15,888 | $ | 14,080 | ||||
Service fees |
18,774 | 15,786 | ||||||
Administrative fees |
743 | 924 | ||||||
Other fees |
65 | 1,088 | ||||||
Deferred revenue, total |
35,470 | 31,878 | ||||||
Less: Deferred revenue, current portion |
(26,435 | ) | (24,498 | ) | ||||
Deferred revenue, non-current portion |
$ | 9,035 | $ | 7,380 | ||||
As of June 30, 2010 and December 31, 2009, deferred revenue included in our Condensed
Consolidated Balance Sheets that was contingent upon meeting performance targets was $3,879 and
$686, respectively.
Advance billings on arrangements that include contingent performance
targets are recorded in accounts receivable and deferred revenue when
billed.
5. NOTES PAYABLE
The balances of our notes payable are summarized as follows as of:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Notes payable senior |
$ | 184,140 | $ | 215,161 | ||||
Less: current portion |
(2,499 | ) | (13,771 | ) | ||||
Total long-term notes payable |
$ | 181,641 | $ | 201,390 | ||||
The principal amount of our long-term notes payable consists of our senior term loan facility
which had an outstanding balance of $184,140 as of June 30, 2010. We had zero dollars drawn on our
revolving credit facility, and zero dollars drawn on our swing-line component, resulting in
approximately $124,000 of availability under our credit facility inclusive of the swing-line as of
June 30, 2010 and December 31, 2009 (after giving effect to $1,000 of outstanding but undrawn
letters of credit on each date). During the six months ended June 30, 2010, we made payments on our
term loan balance which included a voluntary prepayment on our term
loan of $18,500, an annual excess cash flow payment (based on 2009 results) to our
lender in accordance with our credit facility of approximately
$11,272 that was paid in March 2010 and scheduled principal
payments on our senior term loan facility of $1,249. The applicable weighted-average interest rate
(inclusive of the applicable bank margin and impact of our interest rate collar) on our senior term
loan facility at June 30, 2010 was 6.2%. Total interest paid during the six months ended June 30,
2010 and 2009 was approximately $6,338 and $7,711, respectively.
As of June 30, 2010, we had approximately $5,015 of debt issuance costs related to our credit
agreement which will be amortized into interest expense using the effective interest method until
the maturity date. Our revolving credit facility matures on October 23, 2011 and our term loan
matures on October 23, 2013. For the six months ended June 30, 2010 and 2009, we recognized
approximately $915 and $922, respectively in interest expense related to the amortization of debt issuance costs.
Our credit agreement contains certain provisions that require us to pay a portion of our
outstanding obligations one quarter subsequent to the end of each fiscal year in the form of an
excess cash flow payment on the term loan. The amount is determined based on defined percentages of
excess cash flow required in the credit agreement which is based on
total leverage relative to adjusted EBITDA. Our current portion of notes payable does not
include an amount with respect to any 2010 excess cash flow payment (payable in 2011). We will
reclassify a portion of our long-term notes payable to a current classification at such time that
any 2010 excess cash flow payment becomes probable and estimable.
9
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Future maturities of principal of notes payable as of June 30, 2010 are as follows:
Amount | ||||
2010 |
$ | 1,249 | (1) | |
2011 |
2,499 | |||
2012 |
2,499 | |||
2013 |
177,893 | |||
Total notes payable |
$ | 184,140 | ||
(1) | Represents remaining quarterly principal payments due during the fiscal year ending December 31, 2010. |
6. COMMITMENTS AND CONTINGENCIES
Performance Targets
In the ordinary course of contracting with our customers, we may agree to make some or all of
our fees contingent upon the achievement of certain financial improvement targets from the use of
our services and software. These contingent fees are not recognized
as revenue until we receive customer
acceptance on the achievement of the performance targets. We generally receive customer acceptance as and
when the performance targets are achieved. Prior to customer acceptance that a performance target
has been achieved, we record billed contingent fees as deferred revenue on our Condensed
Consolidated Balance Sheet. Often, recognition of this revenue occurs in periods subsequent to the
recognition of the associated costs.
Legal Proceedings
In August 2007, Jacqueline Hodges, the former owner of Med-Data Management, Inc. (Med-Data)
disputed our earn-out calculation made under the Med-Data Asset Purchase Agreement and alleged that
we failed to fulfill our obligations with respect to the earn-out. In November 2007, Ms. Hodges
filed a complaint in the Federal District Court for the Northern District of Georgia, alleging that
we failed to act in good faith with respect to the operation of Med-Data subsequent to the
acquisition which affected the earn-out calculation. On March 21, 2008, we filed an answer denying
the plaintiffs allegations and also filed a counterclaim alleging that the plaintiffs fraudulently
induced us to enter into the purchase agreement by intentionally concealing the status of their
relationship with their largest customer.
On March 31, 2010, the Court entered summary judgment in favor of the Company and dismissed
Ms. Hodges claims. Ms. Hodges filed a motion for summary judgment as well to dismiss the Companys
counterclaim, but the Court denied this motion. The Company and Ms. Hodges have reached a
settlement, and all claims and counterclaims have been dismissed with prejudice.
As of June 30, 2010, we are not presently involved in any legal proceedings, the outcome of
which, if determined adversely to us, would have a material adverse affect on our business,
operating results or financial condition.
7. STOCKHOLDERS EQUITY AND SHARE-BASED COMPENSATION
Common Stock
During the six months ended June 30, 2010, we issued approximately 736,000 shares of common
stock in connection with employee stock option and stock-settled stock appreciation right (or
SSAR) exercises for aggregate exercise proceeds of $5,907.
Share-Based Compensation
As of June 30, 2010, we had restricted common stock, SSARs and common stock option equity
awards outstanding under three share-based compensation plans. As of June 30, 2010, we had
approximately 1,413,000 shares reserved under our 2008 equity incentive plan available for grant.
The share-based compensation expense related to equity awards charged against income was
$3,039 and $4,574 for the three months ended June 30, 2010 and 2009, respectively. The total income
tax benefit recognized in the Condensed Consolidated Statement of Operations for share-based
compensation arrangements related to equity awards was $1,153 and $1,729 for the three months ended
10
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
June 30, 2010 and 2009, respectively.
The share-based compensation expense related to equity awards charged against income was
$6,511 and $8,960 for the six months ended June 30, 2010 and 2009, respectively. The total income
tax benefit recognized in the Condensed Consolidated Statement of Operations for share-based
compensation arrangements related to equity awards was $2,470 and $3,386 for the six months ended
June 30, 2010 and 2009, respectively. There were no capitalized share-based compensation expenses
at June 30, 2010.
Total share-based compensation expense (inclusive of restricted common stock, SSARs and common
stock options) for the three and six months ended June 30, 2010 and 2009 as reflected in our
Condensed Consolidated Statements of Operations is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of revenue |
$ | 661 | $ | 769 | $ | 1,227 | $ | 1,629 | ||||||||
Product development |
136 | 296 | 333 | 605 | ||||||||||||
Selling and marketing |
802 | 764 | 1,416 | 1,562 | ||||||||||||
General and administrative |
1,440 | 2,745 | 3,535 | 5,164 | ||||||||||||
Total share-based compensation expense |
$ | 3,039 | $ | 4,574 | $ | 6,511 | $ | 8,960 | ||||||||
Equity Award Grants
During the six months ended June 30, 2010, we granted the following equity awards to certain
of our employees and our board of directors.
Common Stock Option Awards
During the six months ended June 30, 2010, we granted stock options for the purchase of
approximately 102,000 underlying shares. The stock options granted during the six months ended
June 30, 2010 have a weighted-average exercise price of $21.50 and have a service vesting period of
five years. The weighted-average grant date fair value of each stock option granted during the six
months ended June 30, 2010 was $6.84.
As of June 30, 2010, there was approximately $5,869 of total unrecognized compensation expense
related to all outstanding stock option awards that will be recognized over a weighted-average
period of 1.5 years.
Restricted Common Stock Awards
During
the six months ended June 30, 2010, we granted approximately 108,000 shares of
restricted common stock. The weighted-average grant date fair value of each restricted common stock
share was $22.12. Approximately 57,000 restricted shares will vest on December 31, 2012 provided
certain performance criteria are achieved. Approximately 37,000 restricted shares vest over four
years; 12,000 shares vest ratably each month through December 31, 2010; and 2,000 restricted shares
fully vested at the date of grant.
During
the six months ended June 30, 2010, approximately 37,000 shares of restricted common
stock were forfeited.
As of June 30, 2010, there was approximately $9,904 of total unrecognized compensation expense
related to all unvested restricted common stock awards that will be recognized over a
weighted-average period of 1.7 years.
SSARs Awards
During
the six months ended June 30, 2010, we granted approximately
674,000 SSARs. The
weighted-average grant date base price of each SSAR was $22.77 and the weighted-average grant date
fair value of each SSAR granted during the six months ended
June 30, 2010 was $7.96. Approximately
153,000 SSARs will vest on December 31, 2012 provided certain performance criteria are achieved.
Approximately 100,000 SSARs will vest on December 31, 2014 provided certain performance criteria
are achieved. Approximately 77,000 SSARs vest over four years; 238,000 SSARs vest over five years
and 106,000 SSARs vest ratably each month through December 31, 2010.
11
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
As of June 30, 2010, there was approximately $10,176 of total unrecognized compensation
expense related to all unvested SSARs that will be recognized over a weighted-average period of
1.7 years.
8. INCOME TAXES
Income tax expense recorded during the six months ended June 30, 2010 and 2009 reflected an
effective income tax rate of 39.7% and 38.8%, respectively. There was no significant change in the
Companys liabilities related to accounting for uncertainty in income taxes for the three and six
months ended June 30, 2010 and 2009, respectively.
9. INCOME PER SHARE
We calculate earnings per share (EPS) in accordance with GAAP. Basic EPS is calculated by
dividing reported net income available to common shareholders by the weighted-average number of
common shares outstanding for the reporting period. Diluted EPS reflects the potential dilution
that could occur if our stock options, stock warrants, SSARs and unvested restricted stock were
included in our common shares outstanding during the reporting period.
A
reconciliation of basic and diluted weighted average shares
outstanding for basic and diluted EPS is as follows:
Three Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Numerator for Basic and Diluted Income Per Share: |
||||||||
Net income |
$ | 3,294 | $ | 2,175 | ||||
Denominator for basic income per share
weighted average shares |
56,169,000 | 54,527,000 | ||||||
Effect of dilutive securities: |
||||||||
Stock options |
2,243,000 | 2,181,000 | ||||||
Stock settled stock appreciation rights |
511,000 | 12,000 | ||||||
Restricted stock and stock warrants |
533,000 | 248,000 | ||||||
Denominator for diluted income per share adjusted weighted
average shares and assumed conversions |
59,456,000 | 56,968,000 | ||||||
Basic income per share: |
||||||||
Basic net income per common share |
$ | 0.06 | $ | 0.04 | ||||
Diluted net income per share: |
||||||||
Diluted net income per common share |
$ | 0.06 | $ | 0.04 | ||||
12
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Numerator for Basic and Diluted Income Per Share: |
||||||||
Net income |
$ | 8,814 | $ | 4,080 | ||||
Denominator for basic income per share
weighted average shares |
55,994,000 | 54,316,000 | ||||||
Effect of dilutive securities: |
||||||||
Stock options |
2,166,000 | 2,157,000 | ||||||
Stock settled stock appreciation rights |
465,000 | 8,000 | ||||||
Restricted stock and stock warrants |
523,000 | 218,000 | ||||||
Denominator for diluted income per share adjusted weighted
average shares and assumed conversions |
59,148,000 | 56,699,000 | ||||||
Basic income per share: |
||||||||
Basic net income per common share |
$ | 0.16 | $ | 0.08 | ||||
Diluted net income per share: |
||||||||
Diluted net income per common share |
$ | 0.15 | $ | 0.07 | ||||
The effect of certain dilutive securities has been excluded for the three and six months ended
June 30, 2010 and 2009 because the impact is anti-dilutive as a result of the strike price of
certain securities being greater than the average market price (or out of the money) during the
periods presented. The following table provides a summary of those potentially dilutive securities
that have been excluded from the above calculation of basic and diluted EPS:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Stock options |
28,000 | 89,000 | 34,000 | 177,000 | ||||||||||||
SSARs |
118,000 | 144,000 | 135,000 | 257,000 | ||||||||||||
Total |
146,000 | 233,000 | 169,000 | 434,000 |
10. SEGMENT INFORMATION
We deliver our solutions and manage our business through two reportable business segments,
Revenue Cycle Management (or RCM) and Spend Management (or SM):
| Revenue Cycle Management. Our Revenue Cycle Management segment provides a comprehensive suite of software and services spanning the hospital, health system and other ancillary healthcare provider revenue cycle workflow from patient admission and financial responsibility, patient financial liability estimation, charge capture, case management, contract management and health information management through claims processing and accounts receivable management. Our workflow solutions, together with our data management and business intelligence tools, increase revenue capture and cash collections, reduce accounts receivable balances and increase regulatory compliance. | ||
| Spend Management. Our Spend Management segment provides a comprehensive suite of technology-enabled services that help our customers manage their non-labor expense categories. Our solutions lower supply and medical device pricing and utilization by managing the procurement process through our group purchasing organization portfolio of contracts, consulting services and business intelligence tools. |
GAAP relating to segment reporting defines reportable segments as components of an enterprise
about which separate financial information is available and evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing financial
performance. The accounting guidance indicates that financial information about segments should be
reported on the same basis as that used
13
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
by the chief operating decision maker in the analysis of
performance and allocation of resources. Management of the Company, including our chief operating
decision maker, uses what we refer to as Segment Adjusted EBITDA as its primary measure of profit
or loss to assess segment performance and to determine the allocation of resources. We define
Segment Adjusted EBITDA as segment net income (loss) before net interest expense, income tax
expense (benefit), depreciation and amortization (EBITDA) as adjusted for other non-recurring,
non-cash or non-operating items. Our chief operating decision maker uses Segment Adjusted EBITDA to
facilitate a comparison of our operating performance on a consistent basis from period to period.
Segment Adjusted EBITDA includes expenses associated with sales and marketing, general and
administrative and product development activities specific to the operation of the segment. General
and administrative corporate expenses that are not specific to the segments are not included in the
calculation of Segment Adjusted EBITDA. These expenses include the
costs to staff and manage our corporate
offices, interest expense on our credit facilities and expenses related to being a publicly-held
company. All reportable segment revenues are presented net of inter-segment eliminations and
represent revenues from external customers.
The following tables present Segment Adjusted EBITDA and financial position information as
utilized by our chief operating decision maker. A reconciliation of Segment Adjusted EBITDA to
consolidated net income is included. General corporate expenses are included in the Corporate
column. In addition, accounts receivable and accounts payable intra-company eliminations are
included in the Corporate column. Other assets and liabilities are included to provide a
reconciliation to total assets and total liabilities.
The following tables represent our results of operations, by segment, for the three and six
months ended June 30, 2010 and 2009:
Three Months Ended June 30, 2010 | ||||||||||||||||
RCM | SM | Corporate | Total | |||||||||||||
Results of Operations: |
||||||||||||||||
Revenue: |
||||||||||||||||
Gross administrative fees(1) |
$ | | $ | 42,873 | $ | | $ | 42,873 | ||||||||
Revenue share obligation(1) |
| (14,909 | ) | | (14,909 | ) | ||||||||||
Other service fees |
57,206 | 9,957 | | 67,163 | ||||||||||||
Total net revenue |
57,206 | 37,921 | | 95,127 | ||||||||||||
Total operating expenses |
50,350 | 24,995 | 10,757 | 86,102 | ||||||||||||
Operating income (loss) |
6,856 | 12,926 | (10,757 | ) | 9,025 | |||||||||||
Interest (expense) |
| | (3,807 | ) | (3,807 | ) | ||||||||||
Other (expense) income |
(12 | ) | 21 | 126 | 135 | |||||||||||
Income (loss) before income taxes |
$ | 6,844 | $ | 12,947 | $ | (14,438 | ) | $ | 5,353 | |||||||
Income tax (benefit) |
2,677 | 5,054 | (5,672 | ) | 2,059 | |||||||||||
Net income (loss) |
4,167 | 7,893 | (8,766 | ) | 3,294 | |||||||||||
Segment Adjusted EBITDA |
$ | 17,057 | $ | 14,985 | $ | (6,648 | ) | $ | 25,394 |
(1) | These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. |
As of June 30, 2010 | ||||||||||||||||
RCM | SM | Corporate | Total | |||||||||||||
Financial Position: |
||||||||||||||||
Accounts receivable, net |
$ | 56,059 | $ | 39,148 | $ | (24,291 | ) | $ | 70,916 | |||||||
Other assets |
557,318 | 97,131 | 50,997 | 705,446 | ||||||||||||
Total assets |
613,377 | 136,279 | 26,706 | 776,362 | ||||||||||||
Accrued revenue share obligation |
| 31,588 | | 31,588 | ||||||||||||
Deferred revenue |
29,963 | 5,507 | | 35,470 | ||||||||||||
Other liabilities |
34,822 | 28,429 | 183,843 | 247,094 | ||||||||||||
Total liabilities |
$ | 64,785 | $ | 65,524 | $ | 183,843 | $ | 314,152 |
14
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Three Months Ended June 30, 2009 | ||||||||||||||||
RCM | SM | Corporate | Total | |||||||||||||
Results of Operations: |
||||||||||||||||
Revenue: |
||||||||||||||||
Gross administrative fees(1) |
$ | | $ | 39,344 | $ | | $ | 39,344 | ||||||||
Revenue share obligation(1) |
| (13,966 | ) | | (13,966 | ) | ||||||||||
Other service fees |
50,770 | 8,061 | | 58,831 | ||||||||||||
Total net revenue |
50,770 | 33,439 | | 84,209 | ||||||||||||
Total operating expenses |
46,615 | 21,742 | 7,567 | 75,924 | ||||||||||||
Operating income (loss) |
4,155 | 11,697 | (7,567 | ) | 8,285 | |||||||||||
Interest (expense) |
| | (4,763 | ) | (4,763 | ) | ||||||||||
Other (expense) income |
(181 | ) | 33 | 115 | (33 | ) | ||||||||||
Income (loss) before income taxes |
$ | 3,974 | $ | 11,730 | $ | (12,215 | ) | $ | 3,489 | |||||||
Income tax (benefit) |
1,522 | 4,381 | (4,589 | ) | 1,314 | |||||||||||
Net income (loss) |
2,452 | 7,349 | (7,626 | ) | 2,175 | |||||||||||
Segment Adjusted EBITDA |
$ | 14,495 | $ | 14,173 | $ | (5,154 | ) | $ | 23,514 |
(1) | These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. |
Six Months Ended June 30, 2010 | ||||||||||||||||
RCM | SM | Corporate | Total | |||||||||||||
Results of Operations: |
||||||||||||||||
Revenue: |
||||||||||||||||
Gross administrative fees(1) |
$ | | $ | 85,902 | $ | | $ | 85,902 | ||||||||
Revenue share obligation(1) |
| (29,348 | ) | | (29,348 | ) | ||||||||||
Other service fees |
115,890 | 16,089 | | 131,979 | ||||||||||||
Total net revenue |
115,890 | 72,643 | | 188,533 | ||||||||||||
Total operating expenses |
101,938 | 44,595 | 19,857 | 166,390 | ||||||||||||
Operating income (loss) |
13,952 | 28,048 | (19,857 | ) | 22,143 | |||||||||||
Interest (expense) |
| | (7,739 | ) | (7,739 | ) | ||||||||||
Other (expense) income |
(45 | ) | 11 | 236 | 202 | |||||||||||
Income (loss) before income taxes |
$ | 13,907 | $ | 28,059 | $ | (27,360 | ) | $ | 14,606 | |||||||
Income tax (benefit) |
5,526 | 11,150 | (10,884 | ) | 5,792 | |||||||||||
Net income (loss) |
8,381 | 16,909 | (16,476 | ) | 8,814 | |||||||||||
Segment Adjusted EBITDA |
$ | 34,539 | $ | 31,942 | $ | (13,275 | ) | $ | 53,206 |
(1) | These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. |
15
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Six Months Ended June 30, 2009 | ||||||||||||||||
RCM | SM | Corporate | Total | |||||||||||||
Results of Operations: |
||||||||||||||||
Revenue: |
||||||||||||||||
Gross administrative fees(1) |
$ | | $ | 80,276 | $ | | $ | 80,276 | ||||||||
Revenue share obligation(1) |
| (27,412 | ) | | (27,412 | ) | ||||||||||
Other service fees |
97,790 | 12,539 | | 110,329 | ||||||||||||
Total net revenue |
97,790 | 65,403 | | 163,193 | ||||||||||||
Total operating expenses |
92,138 | 39,943 | 14,874 | 146,955 | ||||||||||||
Operating income (loss) |
5,652 | 25,460 | (14,874 | ) | 16,238 | |||||||||||
Interest (expense) |
(1 | ) | | (9,755 | ) | (9,756 | ) | |||||||||
Other (expense) income |
(145 | ) | 85 | 241 | 181 | |||||||||||
Income (loss) before income taxes |
$ | 5,506 | $ | 25,545 | $ | (24,388 | ) | $ | 6,663 | |||||||
Income tax (benefit) |
2,134 | 9,904 | (9,455 | ) | 2,583 | |||||||||||
Net income (loss) |
3,372 | 15,641 | (14,933 | ) | 4,080 | |||||||||||
Segment Adjusted EBITDA |
$ | 26,821 | $ | 30,425 | $ | (10,403 | ) | $ | 46,843 |
(1) | These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. |
GAAP for segment reporting requires that the total of the reportable segments measures of
profit or loss be reconciled to the Companys consolidated operating results. The following table
reconciles Segment Adjusted EBITDA to consolidated net income for each of the three and six months
ended June 30, 2010 and 2009:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
RCM Adjusted EBITDA |
$ | 17,057 | $ | 14,495 | $ | 34,539 | $ | 26,821 | ||||||||
SM Adjusted EBITDA |
14,985 | 14,173 | 31,942 | 30,425 | ||||||||||||
Total reportable Segment Adjusted EBITDA |
32,042 | 28,668 | 66,481 | 57,246 | ||||||||||||
Depreciation |
(3,661 | ) | (2,465 | ) | (7,131 | ) | (4,903 | ) | ||||||||
Depreciation (included in cost of revenue) |
(719 | ) | (616 | ) | (1,441 | ) | (1,219 | ) | ||||||||
Amortization of intangibles |
(6,026 | ) | (7,000 | ) | (12,110 | ) | (14,011 | ) | ||||||||
Amortization of intangibles (included in cost of revenue) |
(185 | ) | (186 | ) | (370 | ) | (371 | ) | ||||||||
Interest expense, net of interest income(1) |
36 | 3 | 54 | 12 | ||||||||||||
Income tax |
(7,730 | ) | (5,903 | ) | (16,675 | ) | (12,038 | ) | ||||||||
Share-based compensation expense(2) |
(1,697 | ) | (2,685 | ) | (3,518 | ) | (5,499 | ) | ||||||||
Accuro purchase accounting adjustment(3) |
| (15 | ) | | (204 | ) | ||||||||||
Total reportable segment net income |
12,060 | 9,801 | 25,290 | 19,013 | ||||||||||||
Corporate net loss |
(8,766 | ) | (7,626 | ) | (16,476 | ) | (14,933 | ) | ||||||||
Consolidated net income |
$ | 3,294 | $ | 2,175 | $ | 8,814 | $ | 4,080 |
(1) | Interest income is included in other income (expense) and is not netted against interest expense in our Condensed Consolidated Statement of Operations. | |
(2) | Represents non-cash share-based compensation to both employees and directors. We believe excluding this non-cash expense allows us to compare our operating performance without regard to the impact of share-based compensation, which varies from period to period based on amount and timing of equity grants. | |
(3) | These adjustments include the effect on revenue of adjusting acquired deferred revenue balances, net of any reduction in associated deferred costs, to fair value as of the acquisition date for Accuro. The reduction of the deferred revenue balances materially affects period-to-period financial performance comparability and revenue and earnings growth in periods subsequent to the acquisition and is not indicative of changes in the underlying results of operations. In 2010, these adjustments are no longer reconciling items related to acquired deferred revenue balances as the amounts were fully amortized in 2009. We may have this adjustment in future periods as required by GAAP. |
16
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
11. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2009, we adopted GAAP for derivatives and hedging which requires
companies to provide enhanced qualitative and quantitative disclosures about how and why an entity
uses derivative instruments and how derivative instruments and related hedged items are accounted.
The Company has established policies and procedures for risk assessment and the approval, reporting
and monitoring of derivative financial instruments. Our interest rate risk management policy
permits the use of derivative instruments, such as interest rate swaps, to reduce volatility in our
results of operations and/or cash flows resulting from interest rate fluctuations. Our derivative
instruments are utilized for risk management purposes and we do not use derivatives for speculative
trading purposes.
As of June 30, 2010, we had an interest rate swap which was highly effective and, as a result,
we did not record any gain or loss from ineffectiveness in our Condensed Consolidated Statements of
Operations for the three and six months ended June 30, 2010 and 2009.
Interest rate swap
On May 21, 2009, we entered into a forward starting London Inter-bank Offered Rate (LIBOR)
interest rate swap with a notional amount of $138,276 beginning June 30, 2010, which effectively
converts a portion of our variable rate term loan credit facility to a fixed rate debt. The
notional amount subject to the swap has pre-set quarterly step downs corresponding to our
anticipated principal reduction schedule.
The interest rate swap converts the three-month LIBOR rate on the corresponding notional
amount of debt to an effective fixed rate of 1.99% (exclusive of the applicable bank margin charged
by our lender). The interest rate swap terminates on March 31, 2012 and qualifies as a highly
effective cash flow hedge under GAAP.
As
such, the fair value of the derivative is recorded in our Condensed Consolidated
Balance Sheets. Accordingly, as of June 30, 2010, we recorded the fair value of the swap on our
balance sheet as a liability of approximately $1,708 in other long-term liabilities, and the
offsetting loss ($1,060 net of tax) was recorded in Accumulated Other Comprehensive Loss (AOCI)
in our stockholders equity. If we assess any portion of this to be ineffective (none in this
case), we will reclassify the ineffective portion to current period earnings or loss accordingly.
We determined the fair value of the swap using Level 2 inputs as defined under GAAP for fair
value measurements and disclosures because our valuation techniques included inputs that are
considered significantly observable in the market, either directly or indirectly. Our valuation
technique assessed the swap by comparing each fixed interest payment, or cash flow, to a
hypothetical cash flow utilizing an observable market three-month floating LIBOR rate as of
June 30, 2010. Future hypothetical cash flows utilize projected market-based LIBOR rates. Each
fixed cash flow and hypothetical cash flow is then discounted to present value utilizing a market
observable discount factor for each cash flow. The discount factor fluctuates based on the timing
of each future cash flow. The fair value of the swap represents a cumulative total of the
differences between the discounted cash flows that are fixed from those that are hypothetical using
floating rates.
We considered the credit worthiness of the counterparty of the hedged instrument. We believe
the swap is probable given the size, international presence and track record of the
counterparty to perform under the obligations of the contract and
that the counterparty is not at
risk of default which would change the highly effective status of the hedged instrument.
We
expect to recognize additional interest expense of approximately
$1,434 over the next twelve months related to the interest rate swap.
Interest rate collar
On June 24, 2008 (effective June 30, 2008), we entered into an interest rate collar to hedge
our interest rate exposure on a notional $155,000 of our outstanding term loan credit facility
($184,140 as of June 30, 2010). The collar set a maximum interest rate of 6.00% and a minimum
interest rate of 2.85% on the three-month LIBOR applicable to a notional $155,000 of term loan
debt. This collar effectively limited our LIBOR interest exposure on this portion of our term loan
debt to within that range (2.85% to 6.00%). The collar did not hedge the applicable margin payable
to our lenders on our indebtedness. Settlement payments were made between the hedge counterparty
and us on a quarterly basis, coinciding with our term loan installment payment dates, for any rate
overage on the maximum rate and any rate deficiency on the minimum rate on the notional amount
outstanding. During the three months ended June 30, 2010 and 2009, we
recorded additional interest expense of $1,003 and $639,
respectively, related to the interest rate collar. During the six
months ended June 30, 2010 and 2009, we recorded additional interest
expense of $2,010 and $1,178, respectively, related to the interest
rate collar.
The collar expired on June 30, 2010.
17
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Par forward contracts
Historically,
we had a series of par forward contracts to lock in the rate of exchange in U.S. dollar terms
at a specific par forward exchange rate of Canadian dollars to one U.S. dollar, with respect to one
specific Canadian customer contract. This three-year customer contract expired on April 30, 2010.
The
following table presents the fair value of our outstanding derivative instruments as of
June 30, 2010 and December 31, 2009:
Fair Value of Financial | ||||||||||
Balance Sheet Location | Instruments | |||||||||
As of | ||||||||||
As of June 30, | December 31, | |||||||||
2010 | 2009 | |||||||||
Derivative Liabilities |
||||||||||
Derivatives designated as hedging instruments: |
||||||||||
Interest rate contracts |
Other long term liabilities | 1,708 | 2,575 | |||||||
Foreign exchange contracts |
Other long term liabilities | | 8 | |||||||
Total |
$ | 1,708 | $ | 2,583 | ||||||
The effects of derivative instruments designated as cash flow hedges on income and AOCI
are summarized below:
Amount of Gain or | ||||||||
(Loss) Recognized in | ||||||||
OCI on Derivative | ||||||||
(Effective Portion) | ||||||||
Three Months Ended | ||||||||
Derivatives designated as | June 30, | |||||||
cash flow hedges | 2010 | 2009 | ||||||
Interest rate contracts |
$ | 469 | $ | 337 | ||||
Foreign exchange contracts |
8 | (99 | ) | |||||
Total gain recognized in
other comprehensive
income |
$ | 477 | $ | 238 | ||||
18
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Amount of Gain or | ||||||||
(Loss) Recognized in | ||||||||
OCI on Derivative | ||||||||
(Effective Portion) | ||||||||
Six Months Ended | ||||||||
Derivatives designated as | June 30, | |||||||
cash flow hedges | 2010 | 2009 | ||||||
Interest rate contracts |
$ | 540 | $ | 598 | ||||
Foreign exchange contracts |
5 | (115 | ) | |||||
Total gain recognized in
other comprehensive
income |
$ | 545 | $ | 483 | ||||
12. FAIR VALUE MEASUREMENTS
We measure fair value for financial instruments, such as derivatives and non-financial assets,
when a valuation is necessary, such as for impairment of long-lived and indefinite-lived assets
when indicators of impairment exist in accordance with GAAP for fair value measurements and
disclosures. This defines fair value, establishes a framework for measuring fair value and enhances
disclosures about fair value measures required under accounting pronouncements.
Refer to Note 11 for information and fair values of our derivative instruments measured on a
recurring basis under GAAP for fair value measurements and disclosures.
In estimating our fair value disclosures for financial instruments, we use the following
methods and assumptions:
| Cash and cash equivalents: The carrying value reported in the Condensed Consolidated Balance Sheets for these items approximates fair value due to the high credit standing of the financial institutions holding these items and their liquid nature; | ||
| Accounts receivable, net: The carrying value reported in the Condensed Consolidated Balance Sheets is net of allowances for doubtful accounts which includes a degree of counterparty non-performance risk; | ||
| Accounts payable and current liabilities: The carrying value reported in the Condensed Consolidated Balance Sheets for these items approximates fair value, which is the likely amount for which the liability with short settlement periods would be transferred to a market participant with a similar credit standing as the Company; | ||
| Finance obligation: The carrying value of our finance obligation reported in the Condensed Consolidated Balance Sheets approximates fair value based on current interest rates; and | ||
| Notes payable: The carrying value of our long-term notes payable reported in the Condensed Consolidated Balance Sheets approximates fair value since they bear interest at variable rates. Refer to Note 5. |
13. RELATED PARTY TRANSACTION
We have an agreement with John Bardis, our chief executive officer, for the use of an
airplane owned by JJB Aviation, LLC, a limited liability company, owned by Mr. Bardis. We pay
Mr. Bardis at market-based rates for the use of the airplane for business purposes. The audit
committee of our board of directors (the Board) reviews such usage of the airplane annually. During the six months ended
June 30, 2010 and 2009, we incurred charges of $917 and $695, respectively, related to transactions
with Mr. Bardis.
19
Table of Contents
MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)
(In thousands, except share and per share amounts)
14. SUBSEQUENT EVENTS
We have evaluated subsequent events for recognition or disclosure in the Condensed
Consolidated Financial Statements filed on Form 10-Q with the SEC and no events have occurred that
require disclosure.
20
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
NOTE ON FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements (as defined
in Section 27A of the U.S. Securities Act of 1933, as amended (the Securities Act) and Section
21E of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act)) that reflect our
expectations regarding our future growth, results of operations, performance and business prospects
and opportunities. Words such as anticipates, believes, plans, expects, intends,
estimates, projects, targets, can, could, may, should, will, would, and similar
expressions have been used to identify these forward-looking statements, but are not the exclusive
means of identifying these statements. For purposes of this Quarterly Report on Form 10-Q, any
statements contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. These statements reflect our current beliefs and expectations and are
based on information currently available to us. As such, no assurance can be given that our future
growth, results of operations, performance and business prospects and opportunities covered by such
forward-looking statements will be achieved. We have no intention or obligation to update or revise
these forward-looking statements to reflect new events, information or circumstances.
A number of important factors could cause our actual results to differ materially from those
indicated by such forward-looking statements, including those described in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009, as filed with the SEC on March 1, 2010.
Overview
We provide technology-enabled products and services which together deliver solutions designed
to improve operating margin and cash flow for hospitals, health systems and other ancillary
healthcare providers. Our customer-specific solutions are designed to efficiently analyze detailed
information across the spectrum of revenue cycle and spend management processes. Our solutions
integrate with existing operations and enterprise software systems of our customers and provide
financial improvement with minimal upfront costs or capital expenditures. Our operations and
customers are primarily located throughout the United States and to a lesser extent, Canada.
Managements primary metrics to measure the consolidated financial performance of the business
are net revenue, non-GAAP gross fees, non-GAAP revenue share obligation, non-GAAP adjusted EBITDA,
non-GAAP adjusted EBITDA margin and non-GAAP diluted cash EPS.
The table below highlights our primary results of operations for the three and six months
ended June 30, 2010 and 2009 (unaudited):
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||
June 30, | June 30, | ||||||||||||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||||||||||||
Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||
(In millions) | (In millions) | ||||||||||||||||||||||||||||||||
Gross fees(1) |
$ | 110.0 | $ | 98.2 | $ | 11.8 | 12.0 | % | $ | 217.9 | $ | 190.6 | $ | 27.3 | 14.3 | % | |||||||||||||||||
Revenue share obligation(1) |
(14.9 | ) | (14.0 | ) | (0.9 | ) | 6.4 | (29.4 | ) | (27.4 | ) | (2.0 | ) | 7.3 | |||||||||||||||||||
Total net revenue |
95.1 | 84.2 | 10.9 | 12.9 | 188.5 | 163.2 | 25.3 | 15.5 | |||||||||||||||||||||||||
Operating income |
9.0 | 8.3 | 0.7 | 8.4 | 22.1 | 16.2 | 5.9 | 36.4 | |||||||||||||||||||||||||
Net income |
$ | 3.3 | $ | 2.2 | $ | 1.1 | 50.0 | % | $ | 8.8 | $ | 4.1 | $ | 4.7 | 114.6 | % | |||||||||||||||||
Adjusted EBITDA(1) |
$ | 25.4 | $ | 23.5 | $ | 1.9 | 8.1 | % | $ | 53.2 | $ | 46.8 | $ | 6.4 | 13.7 | % | |||||||||||||||||
Adjusted EBITDA margin(1) |
26.7 | % | 27.9 | % | 28.2 | % | 28.7 | % | |||||||||||||||||||||||||
Diluted Cash EPS(1) |
$ | 0.17 | $ | 0.17 | $ | | 0.0 | % | $ | 0.36 | $ | 0.32 | $ | 0.04 | 12.5 | % |
(1) | These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. |
The increases in non-GAAP gross fees and total net revenue during the three and six months
ended June 30, 2010 compared to the three and six months ended June 30, 2009 were primarily
attributable to:
| growth in our Revenue Cycle Management segment from our comprehensive revenue cycle services and technology solutions; and |
21
Table of Contents
| growth in our Spend Management segment from our medical device consulting and strategic sourcing services and our vendor administrative fees. |
The increase in operating income during the three and six months ended June 30, 2010
compared to the three and six months ended June 30, 2009 was
primarily attributable to the growth in net
revenue discussed above partially offset by the following:
| increased cost of revenue attributable to: (i) a higher percentage of net revenue being derived from service-based engagements within our Revenue Cycle Management and Spend Management segments; (ii) direct costs relating to certain new and existing customer arrangements whereby the related revenue associated with these arrangements is contingent upon meeting financial performance targets. The related revenue will be recorded once the performance targets are achieved. The increase in these types of arrangements is concentrated within our Spend Management segment; | ||
| higher expenses related to certain due diligence and acquisition-related activities; and | ||
| higher operating expenses related to new and existing salary-related compensation expense primarily associated with our expanding services-based business. |
For the three and six months ended June 30, 2010, increases in consolidated non-GAAP adjusted
EBITDA compared to the three and six months ended June 30, 2009
were primarily attributable to: (i)
the net revenue growth discussed above; (ii) our continued focus on cost control initiatives and
lower performance-based compensation expense; and (iii) a decrease in our bad debt expense due to
significantly lower uncollectable customer receivables. This increase was partially offset
by: (i) higher cost of revenue resulting from
a shift to more service-based revenue; and (ii) an increase in our expenses primarily for
salary-related compensation expense.
For the three and six months ended June 30, 2010, decreases in consolidated non-GAAP adjusted
EBITDA margin compared to the three and six months ended June 30, 2009 were primarily attributable
to the revenue shift to more service-based revenue, which resulted in a higher cost of revenue in
both segments.
Segment Structure and Revenue Streams
We deliver our solutions through two business segments, Revenue Cycle Management and Spend
Management. Managements primary metrics to measure segment financial performance are net revenue,
non-GAAP gross fees and Segment Adjusted EBITDA. All of our revenues are from external customers
and inter-segment revenues have been eliminated. See Note 10 of the Notes to our Condensed
Consolidated Financial Statements herein for discussion on Segment Adjusted EBITDA and certain
items of our segment results of operations and financial position.
Revenue Cycle Management
Our Revenue Cycle Management segment provides a comprehensive suite of software as a service
(SaaS)-based solutions spanning the hospital revenue cycle workflow from patient
admission, charge capture, case management and health information management through claims
processing and accounts receivable management. Our workflow solutions, together with our data
management and business intelligence tools, increase revenue capture and cash collections, reduce
accounts receivable balances and improve regulatory compliance. Our Revenue Cycle Management
segment revenue is listed under the caption Other service fees on our Condensed Consolidated
Statements of Operations and consists of the following components:
| Subscription and implementation fees. We earn fixed subscription fees on a monthly or annual basis on multi-year contracts for customer access to our SaaS-based solutions. We also charge our customers non-refundable upfront fees for implementation of our SaaS-based services. These non-refundable upfront fees are earned over the subscription period or estimated customer relationship period, whichever is longer. | ||
We defer costs related to implementation services and expense these costs in proportion to the revenue earned over the subscription period or customer relationship period, as applicable. | |||
In addition, we defer upfront sales commissions related to subscription and implementation fees and expense these costs ratably over the related contract term. | |||
| Transaction fees. For certain of our revenue cycle management solutions, we earn fees that vary based on the volume of customer transactions or enrolled members. | ||
| Licensed-software fees. We earn license, implementation, maintenance and other software-related service fees for our |
22
Table of Contents
business intelligence, decision support and other software products. These software revenues are typically recognized ratably over the contract period as these are effectively annual licenses. We have certain Revenue Cycle Management contracts that are sold in multiple-element arrangements and include software products. We have considered Rule 5-03 of Regulation S-X for these types of multiple-element arrangements that include software products and determined the amount is below the threshold that would require separate disclosure on our consolidated statement of operations. |
| Service fees. For certain of our revenue cycle management solutions, we earn fees based on a percentage of cash remittances collected, fixed-fee and cost-plus consulting arrangements. The related revenues are earned as services are rendered. |
Spend Management
Our Spend Management segment provides a suite of technology-enabled services that help our
customers manage their non-labor expense categories. Our solutions lower supply and medical device
pricing and supply utilization by managing the procurement process through our group purchasing
organizations portfolio of contracts, consulting services and analytical tool sets. Our Spend
Management segment revenue consists of the following components:
| Administrative fees and revenue share obligation. We earn administrative fees from manufacturers, distributors and other vendors (collectively referred to as vendors) of products and services with whom we have contracts under which our group purchasing organization customers may purchase products and services. Administrative fees represent a percentage, which we refer to as our administrative fee ratio, typically ranging from 0.25% to 3.00% of the purchases made by our group purchasing organization customers through contracts with our vendors. | ||
Our group purchasing organization customers make purchases, and receive shipments, directly from the vendors. Generally on a monthly or quarterly basis, vendors provide us with a report describing the purchases made by our customers through our group purchasing organization vendor contracts, including associated administrative fees. We recognize revenue upon the receipt of these reports from vendors. | |||
Some customer contracts require that a portion of our administrative fees are contingent upon achieving certain financial improvements, such as lower supply costs, which we refer to as performance targets. Contingent administrative fees are not recognized as revenue until we receive customer acceptance on the achievement of those contractual performance targets. Prior to customer acceptance that a performance target has been achieved, we record contingent administrative fees as deferred revenue on our consolidated balance sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs. Should we fail to meet a performance target, we may be contractually obligated to refund some or all of the contingent fees. | |||
Additionally, in many cases, we are contractually obligated to pay a portion of the administrative fees to our hospital and health system customers. Typically this amount, which we refer to as our revenue share obligation, is calculated as a percentage of administrative fees earned on a particular customers purchases from our vendors. Our total net revenue on our Condensed Consolidated Statements of Operations is shown net of the revenue share obligation. | |||
| Other service fees. The following items are included as Other service fees in our Condensed Consolidated Statement of Operations: |
| Consulting fees. We consult with our customers regarding the costs and utilization of medical devices and implantable physician preference items (PPI) and the efficiency and quality of their key clinical service lines. Our consulting projects are typically fixed fee projects with an average duration of six to nine months, and the related revenues are earned as services are rendered. | ||
| Subscription fees. We also offer technology-enabled services that provide spend management analytics and data services to improve operational efficiency, reduce supply costs, and increase transparency across spend management processes. We earn fixed subscription fees on a monthly basis for these Company-hosted SaaS-based solutions. |
Operating Expenses
We classify our operating expenses as follows:
| Cost of revenue. Cost of revenue primarily consists of the direct labor costs incurred to generate our revenue. Direct labor |
23
Table of Contents
costs consist primarily of salaries, benefits, and other direct costs and share-based compensation expenses related to personnel who provide services to implement our solutions for our customers (indirect labor costs for these personnel are included in general and administrative expenses). As the majority of our services are generated internally, our costs to provide these services are primarily labor-driven. A less significant portion of our cost of revenue consists of costs of third-party products and services and client reimbursed out-of-pocket costs. Cost of revenue does not include certain expenses relating to hosting our services and providing support and related data center capacity (which is included in general and administrative expenses), and allocated amounts for rent, depreciation, amortization or other indirect operating costs because we do not consider the inclusion of these items in cost of revenue relevant to our business. However, cost of revenue does include the amortization for the cost of software to be sold, leased, or otherwise marketed. As a result of the Accuro Acquisition and related integration, there may be some re-allocation of expenses primarily between cost of revenue and general and administrative expense resulting from the implementation of our accounting expense allocation policies that could affect period over period comparability. In addition, any changes in revenue mix between our Revenue Cycle Management and Spend Management segments, including changes in revenue mix towards SaaS-based revenue and consulting services, may cause significant fluctuations in our cost of revenue and have a favorable or unfavorable impact on operating income. |
| Product development expenses. Product development expenses primarily consist of the salaries, benefits, incentive compensation and share-based compensation expense of the technology professionals who develop, support and maintain our software-related products and services. Product development expenses are net of capitalized software development costs for both internal and external use. | ||
| Selling and marketing expenses. Selling and marketing expenses consist primarily of costs related to marketing programs (including trade shows and brand messaging), personnel-related expenses for sales and marketing employees (including salaries, benefits, incentive compensation and share-based compensation expense), certain meeting costs and travel-related expenses. | ||
| General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses for administrative employees and indirect time related to operational service-based employees (including salaries, benefits, incentive compensation and share-based compensation expense) and travel-related expenses, occupancy and other indirect costs, insurance costs, professional fees, and other general overhead expenses. | ||
| Depreciation. Depreciation expense consists primarily of depreciation of fixed assets and the amortization of software, including capitalized costs of software developed for internal use. | ||
| Amortization of intangibles. Amortization of intangibles includes the amortization of all identified intangible assets (with the exception of software), primarily resulting from acquisitions. |
24
Table of Contents
Results of Operations
Consolidated Tables
The following table sets forth our consolidated results of operations grouped by segment for
the periods shown:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Unaudited, in thousands) | ||||||||||||||||
Net revenue: |
||||||||||||||||
Revenue Cycle Management |
$ | 57,206 | $ | 50,770 | $ | 115,890 | $ | 97,790 | ||||||||
Spend Management |
||||||||||||||||
Gross administrative fees(1) |
42,873 | 39,344 | 85,902 | 80,276 | ||||||||||||
Revenue share obligation(1) |
(14,909 | ) | (13,966 | ) | (29,348 | ) | (27,412 | ) | ||||||||
Other service fees |
9,957 | 8,061 | 16,089 | 12,539 | ||||||||||||
Total Spend Management |
37,921 | 33,439 | 72,643 | 65,403 | ||||||||||||
Total net revenue |
95,127 | 84,209 | 188,533 | 163,193 | ||||||||||||
Operating expenses: |
||||||||||||||||
Revenue Cycle Management |
50,350 | 46,615 | 101,938 | 92,138 | ||||||||||||
Spend Management |
24,995 | 21,742 | 44,595 | 39,943 | ||||||||||||
Total segment operating expenses |
75,345 | 68,357 | 146,533 | 132,081 | ||||||||||||
Operating income |
||||||||||||||||
Revenue Cycle Management |
6,856 | 4,155 | 13,952 | 5,652 | ||||||||||||
Spend Management |
12,926 | 11,697 | 28,048 | 25,460 | ||||||||||||
Total segment operating income |
19,782 | 15,852 | 42,000 | 31,112 | ||||||||||||
Corporate expenses(2) |
10,757 | 7,567 | 19,857 | 14,874 | ||||||||||||
Operating income |
9,025 | 8,285 | 22,143 | 16,238 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(3,807 | ) | (4,763 | ) | (7,739 | ) | (9,756 | ) | ||||||||
Other income (expense) |
135 | (33 | ) | 202 | 181 | |||||||||||
Income before income taxes |
5,353 | 3,489 | 14,606 | 6,663 | ||||||||||||
Income tax expense |
2,059 | 1,314 | 5,792 | 2,583 | ||||||||||||
Net income |
3,294 | 2,175 | 8,814 | 4,080 | ||||||||||||
Reportable segment adjusted EBITDA(3): |
||||||||||||||||
Revenue Cycle Management |
17,057 | 14,495 | 34,539 | 26,821 | ||||||||||||
Spend Management |
$ | 14,985 | $ | 14,173 | $ | 31,942 | $ | 30,425 | ||||||||
Reportable segment adjusted EBITDA
margin(4): |
||||||||||||||||
Revenue Cycle Management |
29.8 | % | 28.6 | % | 29.8 | % | 27.4 | % | ||||||||
Spend Management |
39.5 | % | 42.4 | % | 44.0 | % | 46.5 | % |
(1) | These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. | |
(2) | Represents the expenses of corporate office operations. | |
(3) | Managements primary metric of segment profit or loss is segment adjusted EBITDA. See Note 10 of the Notes to Condensed Consolidated Financial Statements. | |
(4) | Reportable segment adjusted EBITDA margin represents each reportable segments adjusted EBITDA as a percentage of each segments respective net revenue. |
25
Table of Contents
Comparison of the Three Months Ended June 30, 2010 and June 30, 2009
Three Months Ended June 30, | ||||||||||||||||||||||||
2010 | 2009 | Change | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
(Unaudited, in thousands) | ||||||||||||||||||||||||
Net revenue: |
||||||||||||||||||||||||
Revenue Cycle Management |
$ | 57,206 | 60.1 | % | $ | 50,770 | 60.3 | % | $ | 6,436 | 12.7 | % | ||||||||||||
Spend Management |
||||||||||||||||||||||||
Gross administrative fees(1) |
42,873 | 45.1 | 39,344 | 46.7 | 3,529 | 9.0 | ||||||||||||||||||
Revenue share obligation(1) |
(14,909 | ) | (15.7 | ) | (13,966 | ) | (16.6 | ) | (943 | ) | 6.8 | |||||||||||||
Other service fees |
9,957 | 10.5 | 8,061 | 9.6 | 1,896 | 23.5 | ||||||||||||||||||
Total Spend Management |
37,921 | 39.9 | 33,439 | 39.7 | 4,482 | 13.4 | ||||||||||||||||||
Total net revenue |
$ | 95,127 | 100.0 | % | $ | 84,209 | 100.0 | % | $ | 10,918 | 13.0 | % |
(1) | These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. |
Total net revenue. Total net revenue for the three months ended June 30, 2010 was
$95.1 million, an increase of $10.9 million, or 13.0%, from total net revenue of $84.2 million for
the three months ended June 30, 2009. The increase in total net revenue was comprised of a $6.4
million increase in Revenue Cycle Management revenue and an increase of $4.5 million in Spend
Management revenue.
Revenue Cycle Management net revenue. Revenue Cycle Management net revenue for the
three months ended June 30, 2010 was $57.2 million, an increase of $6.4 million, or 12.7%, from net
revenue of $50.8 million for the three months ended June 30, 2009. The increase was attributable to
a $4.5 million increase in our revenue cycle technology tools and a
$4.3 million increase in revenue for our comprehensive revenue cycle service engagements.
The increase was partially offset by a $2.4
million decrease in revenue relating to our decision support business
primarily due to a scheduled and planned step down in
license fees from a large business intelligence
customer.
Spend Management net revenue. Spend Management net revenue for the three months ended
June 30, 2010 was $37.9 million, an increase of $4.5 million, or 13.4%, from net revenue of $33.4
million for the three months ended June 30, 2009. The increase was the result of a $3.5 million, or
9.0%, increase in non-GAAP gross administrative fees and a $1.9 million, or 23.5%, increase in other service
fees. This was partially offset by a $0.9 million increase in
revenue share obligation, as
discussed further below:
| Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $3.5 million, or 9.0%, as compared to the prior period, primarily due to increased customer purchasing volume in certain supply categories as well as an increase in the average administrative fee percentage realized from our manufacturer and distributor contracts. This net increase in non-GAAP gross administrative fee revenue was comprised of $3.7 million, or a 9.2%, increase in non-GAAP gross administrative fee revenue not associated with performance targets. This increase was partially offset by an approximate $0.2 million increase from the prior period in the deferral of contingent revenue, which will be recognized upon acceptance from certain customers that respective performance targets are achieved. We may have fluctuations in our non-GAAP gross administrative fee revenue in future periods as the timing of vendor reporting and customer acknowledgement of achieved performance targets varies and may not result in discernible trends. | ||
| Revenue share obligation. Non-GAAP revenue share obligation increased $0.9 million, or 6.8%, as compared to the prior period. We analyze the impact of our non-GAAP revenue share obligation on our results of operations by calculating the ratio of non-GAAP revenue share obligation to non-GAAP gross administrative fees (or the revenue share ratio). Our revenue share ratio was 34.8% and 35.5% for the three months ended June 30, 2010 and 2009, respectively. Excluding the impact of contingent revenue mentioned above and the related revenue share obligation, our revenue share ratio was 33.3% and 34.1% for the three months ended June 30, 2010 and 2009, respectively. We have not had any significant changes in our customer revenue mix during the year that would result in a material impact on our revenue share ratio. We may experience fluctuations in our revenue share ratio in the future because of the timing of vendor reporting and the timing of revenue recognition based on performance target achievement for certain customers. | ||
| Other service fees. The $1.9 million, or 23.5%, increase in other service fees primarily related to higher revenues from medical device consulting and strategic sourcing services. The growth in supply chain consulting was mainly due to an increased number of engagements from new and existing customers. In addition, we recorded $3.4 million in revenue associated with our annual customer and vendor meeting for the three months ended June 30, 2010 compared to $3.0 million for the three months ended June 30, 2009. |
26
Table of Contents
Total Operating Expenses
Three Months Ended June 30, | ||||||||||||||||||||||||
2010 | 2009 | Change | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
(Unaudited, in thousands) | ||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Cost of revenue |
$ | 22,757 | 23.9 | % | $ | 17,613 | 20.9 | % | $ | 5,144 | 29.2 | % | ||||||||||||
Product development expenses |
4,823 | 5.1 | 5,250 | 6.2 | (427 | ) | (8.1 | ) | ||||||||||||||||
Selling and marketing expenses |
16,009 | 16.8 | 15,595 | 18.5 | 414 | 2.7 | ||||||||||||||||||
General and administrative expenses |
31,947 | 33.6 | 27,481 | 32.6 | 4,466 | 16.3 | ||||||||||||||||||
Depreciation |
4,540 | 4.8 | 2,985 | 3.5 | 1,555 | 52.1 | ||||||||||||||||||
Amortization of intangibles |
6,026 | 6.3 | 7,000 | 8.3 | (974 | ) | (13.9 | ) | ||||||||||||||||
Total operating expenses |
86,102 | 90.5 | 75,924 | 90.2 | 10,178 | 13.4 | ||||||||||||||||||
Operating expenses by segment: |
||||||||||||||||||||||||
Revenue Cycle Management |
50,350 | 52.9 | 46,615 | 55.4 | 3,735 | 8.0 | ||||||||||||||||||
Spend Management |
24,995 | 26.3 | 21,742 | 25.8 | 3,253 | 15.0 | ||||||||||||||||||
Total segment operating expenses |
75,345 | 79.2 | 68,357 | 81.2 | 6,988 | 10.2 | ||||||||||||||||||
Corporate expenses |
10,757 | 11.3 | 7,567 | 9.0 | 3,190 | 42.2 | ||||||||||||||||||
Total operating expenses |
$ | 86,102 | 90.5 | % | $ | 75,924 | 90.2 | % | $ | 10,178 | 13.4 | % |
Cost of revenue. Cost of revenue for the three months ended June 30, 2010 was
$22.8 million, or 23.9% of total net revenue, an increase of $5.1 million, or 29.2%, from cost of
revenue of $17.6 million, or 20.9% of total net revenue, for the three months ended June 30, 2009.
The increase was primarily attributable to an increase in service-related engagements in both our
Revenue Cycle Management and Spend Management segments, which result in a higher cost of revenue as
these activities are more labor intensive. In addition, our Spend
Management segment incurs
direct costs relating to certain new and existing arrangements whereby the related revenue
associated with these arrangements is deferred until certain financial performance targets
are achieved. The related revenue will be recorded once the
performance targets are achieved and accepted by our customers.
Revenue Cycle Management SaaS-based revenue results in a higher cost of revenue than net
administrative fee revenue included in our Spend Management revenue.
As such, we may experience higher cost
of revenue if: (i) the revenue mix continues to shift towards Revenue Cycle Management segment
products and services and more specifically if the revenue mix within the Revenue Cycle Management
segment shifts towards more service-related engagements; and (ii) we continue to experience growth
in our consulting services within the Spend Management segment.
Product development expenses. Product development expenses for the three months ended
June 30, 2010 were $4.8 million, or 5.1% of total net revenue, a decrease of $0.4 million, or 8.1%,
from product development expenses of $5.3 million, or 6.2% of total net revenue, for the three
months ended June 30, 2009.
The decrease during the three months ended June 30, 2010 was primarily attributable to a $0.2
million decrease in compensation expense to new and existing employees and a $0.2 million decrease
in share-based compensation expense resulting from the use of the accelerated method of expense
attribution used for our service-based equity awards that are subject to graded vesting, which
comprises a majority of our total equity awards. This method results in a continual decrease in
annual share-based compensation expense over the requisite service period of each grant. We expect
the utilization of this expense attribution method for our service-based equity awards to impact
share-based compensation expense in future periods.
Our
product development capitalization rate for the three months ended
June 30, 2010 and 2009, was 44.8% and 42.3%, respectively.
We
plan to continue to focus on development efforts designed to integrate, enhance and standardize our
products. We plan to also continue to develop a number of new Revenue Cycle Management products and
services and enhance our existing products in both segments. We expect to maintain or increase our
product development spending for the remainder of 2010.
27
Table of Contents
Selling and marketing expenses. Selling and marketing expenses for the three months
ended June 30, 2010 were $16.0 million, or 16.8% of total net revenue, an increase of $0.4 million,
or 2.7%, from selling and marketing expenses of $15.6 million,
or 18.5% of total net revenue, for the three months ended June 30, 2009. The increase was primarily attributable to a $0.4 million
increase in expenses associated with our annual customer and vendor
meeting held during the quarter.
Total expenses related to our customer and vendor meeting amounted to
$4.8 million and $4.4 million for the three months ended June 30,
2010 and 2009, respectively. In addition, we had a $0.2 million increase in compensation expense
related to new and existing employees. This increase was partially offset by a $0.2 million decrease in
advertising expense during the period.
General and administrative expenses. General and administrative expenses for the three
months ended June 30, 2010 were $31.9 million, or 33.6% of total net revenue, an increase of $4.4
million, or 16.3%, from general and administrative expenses of $27.5 million, or 32.6% of total net
revenue, for the three months ended June 30, 2009.
The
increase was primarily attributable to a net
$4.7 million increase in compensation expense comprised of a $6.0 million increase in
salary-related compensation expense related to new and existing employees offset by a $1.3 million
reduction in performance-based incentive compensation expense; a $1.9 million increase in
acquisition-related professional fees; and an $0.8 million increase in other operating infrastructure
expense. The increase was partially offset
by a $1.3 million decrease in share-based compensation expense (for the
reason described within Product development
expenses); a $1.2 million decrease in bad debt expense due to significantly lower uncollectable
accounts compared to the prior period; and a $0.5 million
decrease in legal expenses compared to the prior period.
Depreciation. Depreciation expense for the three months ended June 30, 2010 was $4.5
million, or 4.8% of total net revenue, an increase of $1.6 million, or 52.1%, from depreciation of
$3.0 million, or 3.5% of total net revenue, for the three months ended June 30, 2009. The increase
was primarily attributable to depreciation resulting from purchases
of property and equipment
and to a lesser extent increases to capitalized software development subsequent to June 30, 2009.
Amortization of intangibles. Amortization of intangibles for the three months ended
June 30, 2010 was $6.0 million, or 6.3% of total net revenue, a decrease of $1.0 million, or 13.9%,
from amortization of intangibles of $7.0 million, or 8.3% of total net revenue, for the three
months ended June 30, 2009. The decrease was primarily attributable to the amortization of certain
identified intangible assets that are nearing the end of their useful life under an accelerated
method of amortization.
Segment Operating Expenses
Revenue Cycle Management expenses. Revenue Cycle Management operating expenses for the
three months ended June 30, 2010 were $50.4 million, or 52.9% of total net revenue, an increase of
$3.7 million, or 8.0%, from $46.6 million, or 55.4% of total net revenue, for the three months
ended June 30, 2009.
Revenue Cycle Management operating expenses increased as a result of a $3.4 million increase
in cost of revenue in connection with direct labor costs associated with revenue growth; a net $3.1
million increase in compensation expense that is comprised of a $5.2 million increase in
salary-related compensation expense to new and existing employees, primarily operational
service-based employees, offset by a $2.1 million reduction in
performance-based incentive compensation expense; and a $1.2 million increase in
depreciation expense. The increase was partially offset by a $1.3 million decrease in bad debt
expense due to significantly lower uncollectable accounts compared to the prior year; a $0.9
million decrease in share-based compensation expense (for the reason described within Product development
expenses); a $0.7 million decrease in amortization of intangibles; a $0.6 million decrease in
legal expenses due to lower activity than in the prior period; a
$0.3 million decrease in telecommunications expense; and
a $0.2 million decrease in our operating infrastructure expense.
As a percentage of Revenue Cycle Management segment net revenue, segment expenses decreased to
88.0% from 91.8% for the three months ended June 30, 2010 and 2009, respectively, for the reasons
described above.
Spend Management expenses. Spend Management operating expenses for the three months
ended June 30, 2010 were $25.0 million, or 26.3% of total net revenue, an increase of $3.3 million,
or 15.0%, from $21.7 million, or 25.8% of total net revenue for the three months ended June 30,
2009. The increase in Spend Management expenses was primarily attributable to a $1.8 million
increase in cost of revenues associated with new customers and the
revenue mix shift in the segment
towards supply chain consulting services, as previously described; a $1.2 million increase in
compensation expense related to new and existing employees; a $0.4 million increase in other operating
infrastructure expense; and a $0.2 million increase in expenses associated with our annual customer
and vendor meeting held during the period. The increase was partially offset by a $0.3 million
decrease in the amortization of intangibles as certain of these assets reached the end of their
useful life.
As a percentage of Spend Management segment net revenue, segment expenses remained consistent
increasing to 65.9% from 65.0% for the three months ended June 30, 2010 and 2009, respectively.
Corporate expenses. Corporate expenses for the three months ended June 30, 2010 were
$10.8 million, an increase of $3.2 million, or 42.2%, from $7.6 million for the three months ended
June 30, 2009, or 11.3% and 9.0% of total net revenue, respectively. The increase in corporate
expenses was primarily attributable to $1.9 million in acquisition-related expenses; a net $0.5
million increase in
28
Table of Contents
compensation expense that is comprised of a $0.9 million increase in
salary-related compensation expense related to new and existing employees offset by a $0.4 million
reduction in performance-based incentive compensation expense; a $0.5 million increase in
telecommunications expense; a $0.4 million increase in depreciation expense; and a $0.4 million
increase in other operating infrastructure expense. The increase was partially offset by a $0.5
million decrease in share-based compensation expense (for the reason described within Product development
expenses).
We
expect to incur additional costs related to certain due diligence and
acquisition-related activities in future periods.
Non-operating Expenses
Interest expense. Interest expense for the three months ended June 30, 2010 was $3.8
million, a decrease of $1.0 million, or 20.1%, from interest expense of $4.8 million for
the three months ended June 30, 2009. As of June 30, 2010, we had total indebtedness of $184.1
million compared to $241.4 million as of June 30, 2009. The decrease in interest expense is
primarily attributable to the decrease in our indebtedness compared to the prior period. Our
interest expense may vary for the remainder of 2010 as a result of fluctuations in interest rates.
Other income. Other income for the three months ended June 30, 2010 was $0.1 million,
comprised principally of rental income. Other expense for the three months ended June 30, 2009 was
approximately $0.1 million principally comprised of foreign exchange transaction losses.
Income tax expense. Income tax expense for the three months ended June 30, 2010 was
$2.1 million, an increase of $0.8 million from an income tax expense of $1.3 million for the three
months ended June 30, 2009. The increase was primarily attributable to higher income before taxes
in the three months ended June 30, 2010 as compared to the prior period. The income tax expense
recorded during the three months ended June 30, 2010 and 2009 reflected an effective tax rate of
38.5% and 37.7%, respectively. The increase in our estimated annual effective tax rate was
primarily attributable to the expiration of the credit for research and development expenditures.
Although legislation extending this credit has been proposed, Congress has not yet reenacted this
tax provision. If the legislation extending this credit is passed during the year ending December
31, 2010, retrospectively, our estimated annual effective tax rate will be impacted favorably.
Comparison of the Six Months Ended June 30, 2010 and June 30, 2009
Six Months Ended June 30, | ||||||||||||||||||||||||
2010 | 2009 | Change | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
(Unaudited, in thousands) | ||||||||||||||||||||||||
Net revenue: |
||||||||||||||||||||||||
Revenue Cycle Management |
$ | 115,890 | 61.5 | % | $ | 97,790 | 59.9 | % | $ | 18,100 | 18.5 | % | ||||||||||||
Spend Management |
||||||||||||||||||||||||
Gross administrative fees(1) |
85,902 | 45.6 | 80,276 | 49.2 | 5,626 | 7.0 | ||||||||||||||||||
Revenue share obligation(1) |
(29,348 | ) | (15.6 | ) | (27,412 | ) | (16.8 | ) | (1,936 | ) | 7.1 | |||||||||||||
Other service fees |
16,089 | 8.5 | 12,539 | 7.7 | 3,550 | 28.3 | ||||||||||||||||||
Total Spend Management |
72,643 | 38.5 | 65,403 | 40.1 | 7,240 | 11.1 | ||||||||||||||||||
Total net revenue |
$ | 188,533 | 100.0 | % | $ | 163,193 | 100.0 | % | $ | 25,340 | 15.5 | % |
(1) | These are non-GAAP measures. See Use of Non-GAAP Financial Measures section for additional information. |
Total net revenue. Total net revenue for the six months ended June 30, 2010 was
$188.5 million, an increase of $25.3 million, or 15.5%, from total net revenue of $163.2
million for the six months ended June 30, 2009. The increase in total net revenue was
comprised of an $18.1 million increase in Revenue Cycle Management revenue and an increase of $7.2
million in Spend Management revenue.
Revenue Cycle Management net revenue. Revenue Cycle Management net revenue for the six
months ended June 30, 2010 was $115.9 million, an increase of $18.1 million, or 18.5%, from net
revenue of $97.8 million for the six months ended June 30, 2009. The increase was primarily
attributable to a $14.4 million increase in revenue from our comprehensive revenue cycle service
engagements including certain performance fees earned and a $5.9
million increase in revenue from our revenue cycle technology tools.
The increase was partially offset by a $2.2 million decrease in revenue relating to our
decision support business primarily due to a scheduled and planned
step down in license fees from a large
business intelligence customer.
29
Table of Contents
Spend Management net revenue. Spend Management net revenue for the six months ended
June 30, 2010 was $72.6 million, an increase of $7.2 million, or 11.1%, from net revenue of $65.4
million for the six months ended June 30, 2009. The increase was primarily the result of a $5.6
million, or 7.0% increase, in non-GAAP gross administrative fees and a $3.5 million, or 28.3% increase, in
other service fees. This was partially offset by a $1.9 million increase in revenue share
obligation, as discussed further below:
| Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $5.6 million, or 7.0%, as compared to the prior period, and was attributable to both increased customer purchasing volumes in certain supply categories as well as an increase in the average administrative fee percentage realized from our manufacturer and distributor contracts. This net increase in non-GAAP gross administrative fee revenue was comprised of $6.1 million, or a 7.6% increase, in non-GAAP gross administrative fee revenue not associated with performance targets. This increase was partially offset by an approximate $0.5 million increase from the prior period in the deferral of contingent revenue, which will be recognized upon acceptance from certain customers that respective performance targets are achieved. We may have fluctuations in our non-GAAP gross administrative fee revenue in future periods as the timing of vendor reporting and customer acknowledgement of achieved performance targets varies and may not result in discernible trends. | ||
| Revenue share obligation. Non-GAAP revenue share obligation increased $1.9 million, or 7.1%, as compared to the prior period. We analyze the impact of our non-GAAP revenue share obligation on our results of operations by calculating the ratio of non-GAAP revenue share obligation to non-GAAP gross administrative fees (or the revenue share ratio). Our revenue share ratio was 34.2% and 34.1% for the six months ended June 30, 2010 and 2009, respectively. Excluding the impact of contingent revenue mentioned above and the related revenue share obligation, our revenue share ratio was 32.5% and 32.9% for the six months ended June 30, 2010 and 2009, respectively. We have not had any significant changes in our customer revenue mix during the year that would result in a material impact on our revenue share ratio. We may experience fluctuations in our revenue share ratio because of the timing of vendor reporting and the timing of revenue recognition based on performance target achievement for certain customers. | ||
| Other service fees. The $3.5 million, or 28.3%, increase in other service fees primarily related to higher revenues from medical device consulting and strategic sourcing services. The growth in supply chain consulting was mainly due to an increased number of engagements from new and existing customers. In addition, we recorded $3.4 million in revenue associated with our annual customer and vendor meeting for the six months ended June 30, 2010 compared to $3.0 million for the six months ended June 30, 2009. |
Total Operating Expenses
Six Months Ended June 30, | ||||||||||||||||||||||||
2010 | 2009 | Change | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
(Unaudited, in thousands) | ||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Cost of revenue |
$ | 44,479 | 23.6 | % | $ | 34,358 | 21.1 | % | $ | 10,121 | 29.5 | % | ||||||||||||
Product development expenses |
10,193 | 5.4 | 11,268 | 6.9 | (1,075 | ) | (9.5 | ) | ||||||||||||||||
Selling and marketing expenses |
26,677 | 14.1 | 26,491 | 16.2 | 186 | 0.7 | ||||||||||||||||||
General and administrative expenses |
64,098 | 34.0 | 54,932 | 33.7 | 9,166 | 16.7 | ||||||||||||||||||
Depreciation |
8,833 | 4.7 | 5,895 | 3.6 | 2,938 | 49.8 | ||||||||||||||||||
Amortization of intangibles |
12,110 | 6.4 | 14,011 | 8.6 | (1,901 | ) | (13.6 | ) | ||||||||||||||||
Total operating expenses |
166,390 | 88.3 | 146,955 | 90.0 | 19,435 | 13.2 | ||||||||||||||||||
Operating expenses by segment: |
||||||||||||||||||||||||
Revenue Cycle Management |
101,938 | 54.1 | 92,138 | 56.5 | 9,800 | 10.6 | ||||||||||||||||||
Spend Management |
44,595 | 23.7 | 39,943 | 24.5 | 4,652 | 11.6 | ||||||||||||||||||
Total segment operating expenses |
146,533 | 77.7 | 132,081 | 80.9 | 14,452 | 10.9 | ||||||||||||||||||
Corporate expenses |
19,857 | 10.5 | 14,874 | 9.1 | 4,983 | 33.5 | ||||||||||||||||||
Total operating expenses |
$ | 166,390 | 88.3 | % | $ | 146,955 | 90.0 | % | $ | 19,435 | 13.2 | % |
Cost of revenue. Cost of revenue for the six months ended June 30, 2010 was $44.5
million, or 23.6% of total net revenue, an increase of $10.1 million, or 29.5%, from cost of
revenue of $34.4 million, or 21.1% of total net revenue, for the six months ended June 30, 2009.
30
Table of Contents
The increase was primarily attributable to: (i) the continuing change in our revenue mix
toward the Revenue Cycle Management segment, which provided a higher percentage of consolidated net
revenue compared to the prior year increasing from 59.9% to 61.5%; and (ii) an increase in
service-related engagements in both our Revenue Cycle Management and Spend Management segments,
which provides for a higher cost of revenue given these activities are more labor intensive. In
addition, our Spend Management segment incurs direct costs relating to certain new and existing
arrangements whereby the related revenue associated with these arrangements is deferred until
certain financial performance targets are achieved. The related revenue will be recorded once the
performance targets are achieved and accepted by our customers.
We may experience higher cost
of revenue if: (i) the revenue mix continues to shift towards Revenue Cycle Management segment
products and services and more specifically if the revenue mix within the Revenue Cycle Management
segment shifts towards more service-related engagements; and (ii) we experience continued growth
in our consulting services within the Spend Management segment.
Product development expenses. Product development expenses for the six months ended
June 30, 2010 were $10.2 million, or 5.4% of total net revenue, a decrease of $1.1 million, or
9.5%, from product development expenses of $11.3 million, or 6.9% of total net revenue, for the six
months ended June 30, 2009.
The decrease during the six months ended June 30, 2010 was primarily attributable to a $0.6
million decrease in compensation expense to new and existing employees and a $0.3 million
decrease in share-based compensation expense resulted from the use of the accelerated method of
expense attribution used for our service-based equity awards that are subject to graded vesting,
which comprises a majority of our total equity awards. This method results in a continual decrease
in annual share-based compensation expense over the requisite service period of each grant. We
expect the utilization of this expense attribution method for our service-based equity awards to
impact share-based compensation in future periods. The
remaining $0.2 million decrease was attributable to lower expenses in our operating infrastructure
compared to the prior period.
Our
product development capitalization rate for the six months ended June
30, 2010 and 2009, was 43.1% and 38.6%, respectively.
We
plan to continue to focus on development efforts designed to integrate, enhance and standardize our
products. We also plan to continue to develop a number of new Revenue Cycle Management products and
services and enhance our existing products in both segments. We expect to maintain or increase our
product development spending for the rest of 2010.
Selling and marketing expenses. Selling and marketing expenses for the six months
ended June 30, 2010 were $26.7 million, or 14.1% of total net revenue, an increase of $0.2 million,
or 0.7%, from selling and marketing expenses of $26.5 million, or 16.2% of total net revenue, for
the six months ended June 30, 2009. The increase was primarily attributable to a $0.4 million
increase in compensation expense to new and existing employees and a $0.4 million increase in expenses
associated with our annual customer and vendor meeting held during the period.
Total expenses related to our customer and vendor meeting amounted to
$4.8 million and $4.4 million for the six months ended June 30, 2010
and 2009, respectively.
The increase was
partially offset by a $0.4 million decrease in advertising expenses and a $0.2 million decrease in
share-based compensation expense (for the reason described within Product and development expenses).
General and administrative expenses. General and administrative expenses for the six
months ended June 30, 2010 were $64.1 million, or 34.0% of total net revenue, an increase of $9.2
million, or 16.7%, from general and administrative expenses of $54.9 million, or 33.7% of total net
revenue, for the six months ended June 30, 2009.
The increase was primarily attributable to a net
$11.5 million increase in compensation expense that is comprised of a $12.4 million increase in
salary-related compensation expense to new and existing employees offset by a $0.9 million
reduction in performance-based incentive compensation; $1.9 million in acquisition-related
professional fees; a $0.6 million increase in charitable
contributions; and a $0.6 million increase in other operating infrastructure expense. The
increase was partially offset by a $2.3 million decrease in bad debt expense due to significantly lower uncollectable accounts compared to the
prior year; a $1.7 million decrease in share-based compensation
expense (for the reason described within Product
development expenses); and a $1.4 million decrease in legal expenses due to lower activity than in
the prior year.
Depreciation. Depreciation expense for the six months ended June 30, 2010 was $8.8
million, or 4.7% of total net revenue, an increase of $2.9 million, or 49.8%, from depreciation of
$5.9 million, or 3.6% of total net revenue, for the six months ended June 30, 2009. The increase
was primarily attributable to depreciation resulting from purchases
of property and equipment
and to a lesser extent increases to capitalized software development subsequent to June 30, 2009.
Amortization of intangibles. Amortization of intangibles for the six months ended June
30, 2010 was $12.1 million, or 6.4% of total net revenue, a decrease of $1.9 million, or 13.6%,
from amortization of intangibles of $14.0 million, or 8.6% of total net revenue, for the six months
ended June 30, 2009. The decrease was primarily attributable to the amortization of certain
identified intangible assets that are nearing the end of their useful life under an accelerated
method of amortization.
31
Table of Contents
Segment Operating Expenses
Revenue Cycle Management expenses. Revenue Cycle Management operating expenses for the
six months ended June 30, 2010 were $101.9 million, or 54.1% of total net revenue, an increase of
$9.8 million, or 10.6%, from $92.1 million, or 56.5% of total net revenue, for the six months ended
June 30, 2009.
Revenue Cycle Management operating expenses increased as a result of a net $8.9 million
increase in compensation expense that is comprised of a $10.7 million increase in salary-related
compensation expense to new and existing employees, primarily operational service-based
employees. This was offset by a $1.8 million reduction in
performance-based incentive compensation expense;
a $7.2 million increase in cost of revenue in connection with direct labor costs associated with
revenue growth; and a $2.2 million increase in depreciation expense. The increase was partially
offset by a $2.5 million decrease in bad debt expense due to significantly lower uncollectable
accounts compared to the prior year; a $1.6 million decrease in legal expenses due to lower
activity than in the prior year; a $1.6 million decrease in
share-based compensation expense (for the
reason described within Product and development expenses); a $1.3 million decrease in
amortization of intangibles; a $0.8 million decrease in our operating infrastructure expense; a
$0.4 million decrease in rent expense; and a $0.3 million decrease in advertising expenses.
As a percentage of Revenue Cycle Management segment net revenue, segment expenses decreased to
88.0% from 94.2% for the six months ended June 30, 2010 and 2009, respectively, for the reasons
described above.
Spend Management expenses. Spend Management operating expenses for the six months
ended June 30, 2010 were $44.6 million, or 23.7% of total net revenue, an increase of $4.7 million,
or 11.6%, from $39.9 million, or 24.5% of total net revenue, for the six months ended June 30,
2009. The increase in Spend Management expenses was primarily attributable to a $3.3 million
increase in cost of revenues associated with new customers and the
revenue mix shift in the segment
towards supply chain consulting services; a $1.3 million
increase in compensation expense related to new
and existing employees; and a $0.7 million increase in other operating infrastructure expense.
The increase was partially offset by a $0.6 million decrease in the amortization
of intangibles as certain of these assets reached the end of their useful life.
As a percentage of Spend Management segment net revenue, segment expenses remained consistent
increasing to 61.4% from 61.1% for the six months ended June 30, 2010 and 2009, respectively.
Corporate expenses. Corporate expenses for the six months ended June 30, 2010 were
$19.9 million, an increase of $5.0 million, or 33.5%, from $14.9 million for the six months ended
June 30, 2009, or 10.5% and 9.1% of total net revenue, respectively. The increase in corporate
expenses was primarily attributable to $1.9 million in
acquisition-related expenses; a $1.1 million increase in other operating
infrastructure expense; a net $1.0
million increase in compensation expense that is comprised of a $1.4 million increase in
salary-related compensation expense related to new and existing employees offset by a $0.4 million
reduction in performance-based incentive compensation expense; a $0.7 million increase
in depreciation expense; a $0.4 million increase in
charitable contributions; and a $0.4 million increase in professional fees. The increase was partially offset by a $0.5 million decrease in
share-based compensation expense (for the reason described within Product development expenses).
We
expect to incur additional costs related to certain due diligence and
acquisition-related activities in future periods.
Non-operating Expenses
Interest expense. Interest expense for the six months ended June 30, 2010 was $7.7
million, a decrease of $2.1 million, or 20.7%, from interest
expense of $9.8 million for the six
months ended June 30, 2009. As of June 30, 2010, we had total indebtedness of $184.1 million
compared to $241.4 million as of June 30, 2009. The decrease in interest expense is primarily
attributable to the decrease in our indebtedness compared to the prior period. Our interest expense
may vary for the remainder of 2010 as a result of fluctuations in interest rates.
Other income. Other income for the six months ended June 30, 2010 was $0.2 million,
comprised principally of rental income. Other income for the six months ended June 30, 2009 was
$0.2 million, comprised principally of rental income slightly offset by foreign exchange
transaction losses.
Income tax expense. Income tax expense for the six months ended June 30, 2010 was $5.8
million, an increase of $3.2 million from an income tax expense of $2.6 million for
the six months ended June 30, 2009. The increase was primarily attributable to higher income
before taxes in the six months ended June 30, 2010 as compared to the prior period. The income tax
expense recorded during the six months ended June 30, 2010 and 2009 reflected an effective tax rate
of 39.7% and 38.8%, respectively. The increase in our estimated annual effective tax rate was
primarily attributable to the expiration of the credit for research and development expenditures.
Although legislation has been proposed, Congress has not yet reenacted this tax provision. If the
legislation extending this credit is passed during the year ending December 31, 2010,
retrospectively, our estimated annual effective tax rate will be impacted favorably.
32
Table of Contents
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make
estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amount
of revenue and expenses during the reporting period. We base our estimates and judgments on
historical experience and other assumptions that we find reasonable under the circumstances. Actual
results may differ materially from such estimates under different conditions.
Management considers an accounting policy to be critical if the accounting policy requires
management to make particularly difficult, subjective or complex judgments about matters that are
inherently uncertain. A summary of our critical accounting policies is included in Item 7
(Managements Discussion and Analysis of Financial Condition and Results of Operations) of Part II,
of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no
material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009, except as discussed below.
Allowance for Doubtful Accounts
In evaluating the collectibility of our accounts receivable, we assess a number of factors,
including a specific clients ability to meet its financial obligations to us, such as whether a
customer declares bankruptcy. Other factors include the length of time the receivables are past due
and historical collection experience. Based on these assessments, we record a reserve for specific
account balances as well as a general reserve based on our historical experience for bad debt to
reduce the related receivables to the amount we expect to collect from clients. If circumstances
related to specific clients change, or economic conditions deteriorate such that our past
collection experience is no longer relevant, our estimate of the recoverability of our accounts
receivable could be further reduced from the levels provided for in the Condensed Consolidated
Financial Statements. If actual results are not consistent with our estimates or assumptions, we
may experience a higher or lower expense.
We have not made any material changes in the accounting methodology used to estimate the
allowance for doubtful accounts. If actual results are not consistent with our estimates or
assumptions, we may experience a higher or lower expense.
Our bad debt expense to total net revenue ratio for the three months ended June 30, 2010 and
2009 was 0.03% and 1.47% (or 0.05% and 2.11% of other service fee revenue), respectively. Our bad
debt expense to total net revenue ratio for the six months ended June 30, 2010 and 2009 was 0.23%
and 1.55% (or 0.33% and 2.29% of other service fee revenue), respectively. The decrease in the
three and six months ended June 30, 2010 was attributable to the decline in uncollectible accounts
and bankruptcies that occurred during the prior period and due to
improved internal processes to manage our accounts receivable
exposure with respect to customers in our Revenue
Cycle Management segment. However, as our revenue mix continues to shift more towards our Revenue
Cycle Management segment, we may experience a higher bad debt expense to total revenue ratio
percentage based on our current collections experience with our hospital customers.
Liquidity and Capital Resources
Our primary cash requirements involve payment of ordinary expenses, working capital
fluctuations, debt service obligations and capital expenditures. Our capital expenditures typically
consist of software purchases, internal product development capitalization and computer hardware
purchases. Historically, the acquisition of complementary businesses has resulted in a significant
use of cash. Our principal sources of funds have primarily been cash provided by operating
activities and borrowings under our credit facilities.
We believe we currently have adequate cash flow from operations, capital resources and
liquidity to meet our cash flow requirements including the following near term obligations (next 12
months): (i) our working capital needs; (ii) our debt service obligations; (iii) planned capital
expenditures for the remainder of the year; (iv) our revenue share obligation and rebate payments;
and (v) estimated federal and state income tax payments.
Historically, we have utilized federal net operating loss carryforwards (NOLs) for both
regular and Alternative Minimum Tax payment purposes. Consequently, our federal cash tax payments
in past reporting periods have been minimal. However, given the limited remaining balance of our
NOLs, we have become a full cash taxpayer in 2010.
We have not historically utilized borrowings available under our credit agreement to fund
operations. However, pursuant to the change in our cash management practice in 2008, we currently
use the swing-line component of our revolving credit facility for funding operations while we
voluntarily apply our excess cash balances to reduce our swing-line loan on a daily basis and to
reduce our revolving credit facility on a routine basis. In addition, we may periodically make
voluntary repayments on our term loan.
During the three months ended June 30, 2010, we made an
$18.5 million voluntary repayment on our term loan.
33
Table of Contents
As of June 30, 2010, we had zero dollars drawn on our revolving credit facility resulting in
$124.0 million of availability under our revolving credit facility inclusive of the swing-line
(netted for a $1.0 million letter of credit). Based on our analysis as of June 30, 2010, we are in
compliance with all applicable covenant requirements of our credit agreement. We may observe
fluctuations in cash flows provided by operations from period to period. Certain events may cause
us to draw additional amounts under our swing-line or revolving facility and may include the
following:
| changes in working capital due to inconsistent timing of cash receipts and payments for major recurring items such as trade accounts payable, revenue share obligation, incentive compensation, changes in deferred revenue, and other various items; | ||
| acquisitions; and | ||
| unforeseeable events or transactions. |
We may continue to pursue acquisitions or investments in the future. We may also increase
our capital expenditures consistent with our anticipated growth in infrastructure, software
solutions, and personnel, and as we expand our market presence. Cash provided by operating
activities may not be sufficient to fund such expenditures. Accordingly, in addition to the use of
our available revolving credit facility, we may need to engage in additional equity or debt
financings to secure additional funds for such purposes. Any debt financing obtained by us in the
future could involve restrictive covenants relating to our capital raising activities and other
financial and operational matters including higher interest costs, which may make it more difficult
for us to obtain additional capital and to pursue business opportunities, including potential
acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to
us, if at all. If we are unable to obtain required financing on terms satisfactory to us, our
ability to continue to support our business growth and to respond to business challenges could be
limited.
Discussion of Cash Flow
Cash and cash equivalents at June 30, 2010 were zero representing a $5.5 million decrease from
December 31, 2009.
Operating Activities.
The following table summarizes the cash provided by operating activities for the six months
ended June 30, 2010 and 2009:
Six Months Ended June 30, | ||||||||||||||||
2010 | 2009 | Change | ||||||||||||||
Amount | Amount | Amount | % | |||||||||||||
(Unaudited, in millions) | ||||||||||||||||
Net income |
$ | 8.8 | $ | 4.1 | $ | 4.7 | 114.6 | % | ||||||||
Non-cash items |
27.6 | 31.7 | (4.1 | ) | (12.9 | ) | ||||||||||
Net changes in working capital |
(0.6 | ) | (12.8 | ) | 12.2 | (95.3 | ) | |||||||||
Net cash provided by operations |
$ | 35.8 | $ | 23.0 | $ | 12.8 | 55.7 | % |
Net income represents the profitability attained during the periods presented and is
inclusive of certain non-cash expenses. These non-cash expenses include depreciation for fixed
assets, amortization of intangible assets, stock compensation expense, bad debt expense, deferred
income tax expense, excess tax benefit from the exercise of stock options, loss on sale of assets
and non-cash interest expense. Refer to our Condensed Consolidated Statement of Cash Flows for
detailed fluctuations of these non-cash items. The total for these non-cash expenses was $27.6
million and $31.7 million for the six months ended June 30,
2010 and 2009, respectively.
The decrease in non-cash expenses for the six months ended June 30,
2010 compared to June 30, 2009 was primarily attributable to: (i)
lower share-based compensation; (ii) a decrease in bad debt expense;
and (iii) a decrease in amortization of intangibles.
Working capital is a measure of our liquid assets. Changes in working capital are included in
the determination of cash provided by operating activities. For the six months ended June 30, 2010,
the working capital changes resulting in a reduction to cash flow from operations of $0.6 million
primarily consisted of the following:
Reduction of cash flow
| an increase in accounts receivable of $3.7 million primarily related to the timing of invoicing and cash collections and our revenue growth; | ||
| an increase in prepaid expenses and other assets of $4.2 million primarily related to income tax assets due to the annualization of book tax timing differences; and |
34
Table of Contents
| an $0.8 million decrease in accrued payroll and benefits due to payroll cycle timing. |
The working capital changes resulting in reductions to the 2010 operating cash flow
discussed above were partially offset by the following increases to cash flow:
Increase to cash flow
| a $3.6 million increase in deferred revenue for cash receipts not yet recognized as revenue; | ||
| a $2.6 million working capital increase in trade accounts payable due to the timing of various payment obligations; and | ||
| a $2.5 million increase in other accrued expenses which primarily consisted of $1.4 million in acquisition-related fees and the timing of various payment obligations. |
For the six months ended June 30, 2009, working capital changes resulting in a
reduction to cash flow from operations of $12.8 million primarily consisted of the following:
Reduction of cash flow
| an increase in accounts receivable of $3.9 million related to the timing of invoicing and cash collections and our revenue growth; | ||
| an increase in other long-term assets of $1.9 million related to the timing of cash payments for our deferred sales expenses; | ||
| an increase in prepaid expenses and other assets of $1.2 million primarily related to sales incentive compensation payments; | ||
| a decrease in accrued payroll and benefits of $6.5 million due to payroll cycle timing; and | ||
| a $2.7 million decrease in other accrued expenses due to the timing of various payment obligations. |
The working capital changes resulting in reductions to the 2009 operating cash flow
discussed above were partially offset by the following increases to cash flow:
Increase to cash flow
| a $2.0 million working capital increase in trade accounts payable due to the timing of various payment obligations; and | ||
| an increase in accrued revenue share obligation and rebates of $0.9 million due to the timing of cash payments and customer purchasing volume at our GPO. |
Investing Activities.
Investing activities used $18.9 million of cash for the six months ended June 30, 2010 which
included: $8.0 million of capital expenditures that were primarily related to the growth in our RCM
segment; $7.7 million for investment in software development; and $3.2 million relating to
an acquisition we completed during the period (refer to Note 3 in the Notes to the Condensed Consolidated Financial
Statements).
Investing activities used $31.5 million of cash for the six months ended June 30, 2009 which
included: a $19.8 million deferred purchase consideration payment (inclusive of $1.5 million of
imputed interest) made in June 2009 as part of the Accuro Acquisition; $7.1 million for investment
in software development; and $6.2 million of capital expenditures that were primarily related to
the infrastructure growth in our RCM segment.
We believe that cash used in investing activities will continue to be materially impacted by
continued growth in investments in property and equipment, future acquisitions and capitalized
software. Our property, equipment, and software investments consist primarily of SaaS-based
technology infrastructure to provide capacity for expansion of our customer base, including
computers and related equipment and software purchased or implemented by outside parties. Our
software development investments consist primarily of company-managed design, development, testing and deployment of new application functionality.
35
Table of Contents
Financing Activities.
Financing activities used $22.4 million of cash for the six months ended June 30, 2010. We
received $5.9 million from the issuance of common stock related to equity award exercises and $3.1
million from the excess tax benefit associated with those exercises. This was offset by payments
made on our credit facility of $31.0 million (comprised of a voluntary prepayment on our term loan
of $18.5 million, our 2009 excess cash flow payment of $11.3 million and $1.2 million in mandatory
quarterly principal payments) in addition to payments of $0.3 million that were made on our finance
obligation. Our credit agreement requires an annual payment of excess cash flow which we expect to
pay in the first quarter of 2011 provided our consolidated leverage ratio is more than 1.5 to 1.0.
Financing activities used $3.2 million of cash for the six months ended June 30, 2009. We
borrowed $60.9 million on our credit facility during the period. We also received $4.5 million from
the issuance of common stock and $3.3 million from the excess tax benefit from the exercise of
stock options. These were offset by payments made on our credit facility of $65.2 million and $0.3
million that were made on our finance obligation.
Off-Balance Sheet Arrangements and Commitments
We have provided a $1.0 million letter of credit to guarantee our performance under the terms
of a ten-year lease agreement. The letter of credit is associated with the capital lease of a
building located in Cape Girardeau, Missouri under a finance obligation. We do not believe that
this letter of credit will be drawn.
We lease office space and equipment under operating leases. Some of these operating leases
include rent escalations, rent holidays, and rent concessions and incentives. However, we recognize
lease expense on a straight-line basis over the minimum lease term utilizing total future minimum
lease payments. Our consolidated future minimum rental payments under our operating leases with
initial or remaining non-cancelable lease terms of at least one year are as follows as of June 30,
2010 for each respective year (in thousands):
Amount | ||||
(Unaudited) | ||||
2010 |
$ | 4,833 | (1) | |
2011 |
7,906 | |||
2012 |
7,980 | |||
2013 |
7,671 | |||
2014 |
6,911 | |||
Thereafter |
20,179 | |||
Total future minimum rental payments |
$ | 55,480 | ||
(1) | Represents remaining rental payments due during the fiscal year ending December 31, 2010. |
Other than the lease commitments above, we did not have any other off-balance
sheet arrangements that have or are reasonably likely to have a current or future material effect
on our financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Use of Non-GAAP Financial Measures
In order to provide investors with greater insight, promote transparency and allow for a more
comprehensive understanding of the information used by management and
the Board in financial
and operational decision-making, we supplement our Condensed Consolidated Financial Statements
presented on a GAAP basis in this Quarterly Report on Form 10-Q with the following non-GAAP
financial measures: gross fees, gross administrative fees, revenue share obligation, EBITDA,
Adjusted EBITDA, Adjusted EBITDA margin and cash diluted earnings per share.
These non-GAAP financial measures have limitations as analytical tools and should not be
considered in isolation or as a substitute for analysis of our results as reported under GAAP. We
compensate for such limitations by relying primarily on our GAAP results and using non-GAAP
financial measures only supplementally. We provide reconciliations of non-GAAP measures to their
most directly comparable GAAP measures, where possible. Investors are encouraged to carefully
review those reconciliations. In addition, because these non-GAAP measures are not measures of
financial performance under GAAP and are susceptible to varying calculations, these measures, as
defined by us, may differ from and may not be comparable to similarly titled measures used by other
companies.
36
Table of Contents
Gross Fees, Gross Administrative Fees and Revenue Share Obligation. Gross fees include
all gross administrative fees we receive pursuant to our vendor contracts and all other fees we
receive from customers. Our revenue share obligation represents the portion of the gross
administrative fees we are contractually obligated to share with certain of our GPO customers.
Total net revenue (a GAAP measure) reflects our gross fees net of our revenue share obligation.
These non-GAAP measures assist management and the Board and may be helpful to investors in
analyzing our growth in the Spend Management segment given that administrative fees constitute a
material portion of our revenue and are paid to us by over 1,150 vendors contracted by our GPO, and
that our revenue share obligation constitutes a significant outlay to certain of our GPO customers.
A reconciliation of these non-GAAP measures to their most directly comparable GAAP measure can be
found in the Overview and Results of Operations section of Item 2.
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin. We define: (i) EBITDA, as net
income (loss) before net interest expense, income tax expense (benefit), depreciation and
amortization; (ii) Adjusted EBITDA, as net income (loss) before net interest expense, income tax
expense (benefit), depreciation and amortization and other non-recurring, non-cash or non-operating
items; and (iii) Adjusted EBITDA margin, as Adjusted EBITDA as a percentage of net revenue. We use
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin to facilitate a comparison of our operating performance on a
consistent basis from period to period and provide for a more complete understanding of factors and
trends affecting our business than GAAP measures alone. These measures assist management and the
Board and may be useful to investors in comparing our operating performance consistently over time
as it removes the impact of our capital structure (primarily interest charges and amortization of
debt issuance costs), asset base (primarily depreciation and amortization) and items outside the
control of the management team (taxes), as well as other non-cash (purchase accounting adjustments,
and imputed rental income) and non-recurring items, from our operational results. Adjusted EBITDA
also removes the impact of non-cash share-based compensation expense and certain
acquisition-related charges.
Our Board and management also use these measures as (i) one of the primary methods for
planning and forecasting overall expectations and for evaluating, on at least a quarterly and
annual basis, actual results against such expectations; and (ii) as a performance evaluation metric
in determining achievement of certain executive incentive compensation programs, as well as for
incentive compensation plans for employees generally.
Additionally, research analysts, investment bankers and lenders may use these measures to
assess our operating performance. For example, our credit agreement requires delivery of compliance
reports certifying compliance with financial covenants certain of which are, in part, based on an
adjusted EBITDA measurement that is similar to the Adjusted EBITDA measurement reviewed by our
management and our Board. The principal difference is that the measurement of adjusted EBITDA
considered by our lenders under our credit agreement allows for certain adjustments (e.g.,
inclusion of interest income, franchise taxes and other non-cash expenses, offset by the deduction
of our capitalized lease payments for one of our office leases) that result in a higher adjusted
EBITDA than the Adjusted EBITDA measure reviewed by our Board and management and disclosed in our
Annual Report on Form 10-K. Additionally, our credit agreement contains provisions that utilize
other measures, such as excess cash flow, to measure liquidity.
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not measures of liquidity under GAAP,
or otherwise, and are not alternatives to cash flow from continuing operating activities. Despite
the advantages regarding the use and analysis of these measures as mentioned above, EBITDA,
Adjusted EBITDA and Adjusted EBITDA margin, as disclosed in this Quarterly Report on Form 10-Q,
have limitations as analytical tools, and you should not consider these measures in isolation, or
as a substitute for analysis of our results as reported under GAAP; nor are these measures intended
to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of
EBITDA are:
| EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; | ||
| EBITDA does not reflect changes in, or cash requirements for, our working capital needs; | ||
| EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our credit agreement; | ||
| EBITDA does not reflect income tax payments we are required to make; and | ||
| Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements. |
Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently
evaluate our business, we encourage you to review the GAAP financial statements included elsewhere
in this Quarterly Report on Form 10-Q, and not rely on any single financial
37
Table of Contents
measure to evaluate our business. We also strongly urge you to review the reconciliation of net income to Adjusted EBITDA
in this section, along with our Condensed Consolidated Financial Statements included elsewhere in
this Quarterly Report on Form 10-Q.
The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net income, a
comparable GAAP-based measure. All of the items included in the reconciliation from net income to
EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation and amortization,
impairment of intangibles and share-based compensation expense) or (ii) items that management does
not consider in assessing our on-going operating performance (e.g., income taxes and interest
expense). In the case of the non-cash items, management believes that investors may find it useful
to assess our comparative operating performance because the measures without such items are less
susceptible to variances in actual performance resulting from depreciation, amortization and other
non-cash charges and more reflective of other factors that affect operating performance. In the
case of the other non-recurring items, management believes that investors may find it useful to
assess our operating performance if the measures are presented without these items because their
financial impact does not reflect ongoing operating performance.
The following table reconciles net income to Adjusted EBITDA for the three and six months
ended June 30, 2010 and 2009:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Unaudited, in thousands) | ||||||||||||||||
Net income |
$ | 3,294 | $ | 2,175 | $ | 8,814 | $ | 4,080 | ||||||||
Depreciation |
4,540 | 2,985 | 8,833 | 5,895 | ||||||||||||
Depreciation (included in cost of revenue) |
719 | 617 | 1,441 | 1,220 | ||||||||||||
Amortization of intangibles, acquisition related |
6,026 | 7,000 | 12,110 | 14,011 | ||||||||||||
Amortization
of intangibles, acquisition related (included in
cost of revenue) |
185 | 185 | 370 | 370 | ||||||||||||
Interest expense, net of interest
income(1) |
3,772 | 4,758 | 7,685 | 9,739 | ||||||||||||
Income tax expense |
2,059 | 1,314 | 5,792 | 2,583 | ||||||||||||
EBITDA |
20,595 | 19,034 | 45,045 | 37,898 | ||||||||||||
Share-based compensation(2) |
3,039 | 4,574 | 6,511 | 8,960 | ||||||||||||
Rental income from capitalizing building
lease(3) |
(109 | ) | (109 | ) | (219 | ) | (219 | ) | ||||||||
Purchase accounting adjustment(4) |
| 15 | | 204 | ||||||||||||
Acquisition-related charges(5) |
1,869 | | 1,869 | | ||||||||||||
Adjusted EBITDA |
$ | 25,394 | $ | 23,514 | $ | 53,206 | $ | 46,843 |
(1) | Interest income is included in other income (expense) and is not netted against interest expense in our Condensed Consolidated Statement of Operations. | |
(2) | Represents non-cash share-based compensation to both employees and directors. We believe excluding this non-cash expense allows us to compare our operating performance without regard to the impact of share-based compensation expense, which varies from period to period based on the amount and timing of grants. | |
(3) | The imputed rental income recognized with respect to a capitalized building lease is deducted from net income (loss) due to its non-cash nature. We believe this income is not a useful measure of continuing operating performance. See our Consolidated Financial Statements filed in our annual report on Form 10-K for the year ended December 31, 2009 for further discussion of this rental income. | |
(4) | These adjustments include the effect on revenue of adjusting acquired deferred revenue balances, net of any reduction in associated deferred costs, to fair value as of the acquisition date for Accuro. The reduction of the deferred revenue balance materially affects period-to-period financial performance comparability and revenue and earnings growth in future periods subsequent to the acquisition and is not indicative of changes in underlying results of operations. In 2010, these adjustments will no longer be reconciling items related to acquired deferred revenue balances because the amounts were fully amortized in 2009. We may have this adjustment in future periods if we have any new acquisitions. | |
(5) | These charges reflect the due diligence and acquisition-related expenses pertaining to merger and acquisition activities. We consider these charges to be non-operating expenses and unrelated to our underlying results of operations. |
38
Table of Contents
Diluted Cash Earnings Per Share.
The Company defines diluted cash EPS as diluted earnings per share excluding non-cash
acquisition-related intangible amortization, non-recurring expense
items on a tax-adjusted basis,
non-cash tax-adjusted shared-based compensation expense and certain tax-adjusted acquisition-related
charges. Diluted cash EPS is not a measure of
liquidity under GAAP, or otherwise, and is not an alternative to cash flow from continuing
operating activities. Diluted cash EPS growth is used by the Company as the financial performance
metric that determines whether certain equity awards granted pursuant to the Companys Long-Term
Performance Incentive Plan will vest. Use of this measure for this purpose allows management and
the Board to analyze the Companys operating performance on a consistent basis by removing the
impact of certain non-cash and non-recurring items from our operations and by rewarding organic
growth and accretive business transactions. As a significant portion of senior managements
incentive based compensation is based on the achievement of certain diluted cash EPS growth over
time, investors may find such information useful; however, as a non-GAAP financial measure, diluted
cash EPS is not the sole measure of the Companys financial performance and may not be the best
measure for investors to gauge such performance.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Per share data | 2010 | 2009 | 2010 | 2009 | ||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
EPS diluted |
$ | 0.06 | $ | 0.04 | $ | 0.15 | $ | 0.07 | ||||||||
Pre-tax non-cash,
aquisition-related
intangible
amortization |
0.10 | 0.13 | 0.21 | 0.25 | ||||||||||||
Pre-tax non-cash,
share-based
compensation(1) |
0.05 | 0.08 | 0.11 | 0.16 | ||||||||||||
Pre-tax
acquisition-related
charges(2) |
0.03 | | 0.03 | | ||||||||||||
Tax effect on
pre-tax
adjustments(3) |
(0.07 | ) | (0.08 | ) | (0.14 | ) | (0.16 | ) | ||||||||
Non-GAAP cash EPS -
diluted |
$ | 0.17 | $ | 0.17 | $ | 0.36 | $ | 0.32 | ||||||||
Weighted average
shares diluted (in
000s) |
59,456 | 56,968 | 59,148 | 56,699 |
(1) | Represents the per share impact, on a tax-adjusted basis of non-cash share-based compensation to employees and directors. We believe excluding this non-cash expense allows us to compare our operating performance without regard to the impact of share-based compensation expense, which varies from period to period based on the amount and timing of grants. | |
(2) | Represents the per share impact, on a tax-adjusted basis of due diligence and acquisition-related expenses. We consider these charges to be non-operating expenses and unrelated to our underlying results of operations. | |
(3) | This amount reflects the tax impact to the adjustments used to derive Non-GAAP diluted cash EPS. The Company uses its effective tax rate for each respective period to tax effect the adjustments. The effective tax rate for the three months ended June 30, 2010 and 2009 was 38.5% and 37.7%, respectively. The effective tax rate for the six months ended June 30, 2010 and 2009 was 39.7% and 38.8%, respectively. |
New Pronouncements
Revenue Recognition
In October 2009, the FASB issued an accounting standards update for multiple-deliverable
revenue arrangements. The update addressed the accounting for multiple-deliverable arrangements to
enable vendors to account for products or services separately rather than as a combined unit. The
update also addresses how to separate deliverables and how to measure and allocate arrangement
consideration to one or more units of accounting. The amendments in the update significantly expand
the disclosures related to a vendors multiple-deliverable revenue arrangements with the objective
of providing information about the significant judgments made and changes to those judgments and
how the application of the relative selling-price method of determining stand-alone value affects
the timing or amount of revenue recognition. The accounting standards
update is applicable for
annual periods beginning after June 15, 2010, however, early adoption is permitted. We are
currently assessing the impact of the adoption of this update on our Condensed Consolidated
Financial Statements.
39
Table of Contents
In October 2009, the FASB issued an accounting standards update relating to certain revenue
arrangements that include software elements. The update will change the accounting model for
revenue arrangements that include both tangible products and software elements. Among other things,
tangible products containing software and non-software components that function together to deliver
the tangible products essential functionality are no longer within the scope of software revenue
guidance. In addition, the update also provides guidance on how a vendor should allocate
arrangement consideration to deliverables in an arrangement that includes tangible products and
software. The accounting standards update is applicable for annual periods beginning after
June 15, 2010, however, early adoption is permitted. The adoption of this update is not expected to
have a material impact on our Condensed Consolidated Financial Statements.
In April 2010, the FASB issued new standards for vendors who apply the milestone method of
revenue recognition to research and development arrangements. These new standards apply to
arrangements with payments that are contingent, at inception, upon achieving substantively
uncertain future events or circumstances. The guidance is applicable for milestones achieved
in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early
adoption is permitted. The adoption of this guidance will impact our
arrangements with one-time or nonrecurring performance
fees that are contingent upon achieving certain results. Historically, we have recognized those
types of performance fees in the period the respective performance
target has been met.
Upon adoption of this guidance on January 1, 2011, these performance
fees will be recognized ratably over the contract term.
We are continuing to assess the impact of the adoption of this update on our
Condensed Consolidated Financial Statements.
Subsequent Events
In February 2010, the FASB issued amended guidance on subsequent events. Under this amended
guidance, SEC filers are no longer required to disclose the date through which subsequent events
have been evaluated in originally issued and revised financial statements. This guidance was
effective immediately and we adopted these new requirements for the period ended March 31,
2010.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign currency exchange risk. Certain of our contracts are denominated in Canadian
dollars. As our Canadian sales have not historically been significant to our operations, we do not
believe that changes in the Canadian dollar relative to the U.S. dollar will have a significant
impact on our financial condition, results of operations or cash flows. On August 2, 2007, we
entered into a series of forward contracts to fix the Canadian dollar-to-U.S. dollar exchange rates
on a Canadian customer contract, as discussed in Note 11
to our Condensed Consolidated Financial Statements herein, which expired on April 30, 2010. We have
one other Canadian dollar contract that we have not elected to hedge. We currently do not transact
any other business in any currency other than the U.S. dollar. As we continue to grow our
operations, we may increase the amount of our sales to foreign customers. Although we do not expect
foreign currency exchange risk to have a significant impact on our future operations, we will
assess the risk on a case-specific basis to determine whether any forward currency hedge instrument
would be warranted.
Interest rate risk. We had outstanding borrowings on our term loan and revolving
credit facility of $184.1 million as of June 30, 2010. The term loan and revolving credit facility
bear interest at LIBOR plus an applicable margin.
On May 21, 2009, we entered into a LIBOR interest rate swap with a notional amount of $138.3
million beginning June 30, 2010, which effectively converts a portion of our variable rate term
loan credit facility to a fixed rate debt. The notional amount subject to the swap has pre-set
quarterly step downs corresponding to our anticipated principal reduction schedule.
The interest rate swap converts the three-month LIBOR rate on the corresponding notional
amount of debt to an effective fixed rate of 1.99% (exclusive of the applicable bank margin charged
by our lender). The interest rate swap terminates on March 31, 2012 and qualifies as a highly
effective cash flow hedge under GAAP for derivatives and hedging.
As such, the fair value of the derivative will be recorded on our Consolidated Balance Sheet.
The interest rate swap matures on March 31, 2012. As of June 30, 2010, the interest rate swap had a
negative market value of $1.7 million ($1.1 million net of tax). The liability is included in other
long-term liabilities in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2010.
The unrealized loss is recorded in other comprehensive loss, net of tax, in the Condensed
Consolidated Statement of Stockholders Equity.
We considered the credit worthiness of the counterparty of the hedged instrument. We believe
the swap is probable of occurring given the size, international presence and track record of the
counterparty to perform under the obligations of the contract and
that the counterparty is not at
risk of default that would change the highly effective status of the hedged instrument.
40
Table of Contents
On June 24, 2008 (effective June 30, 2008), we entered into an interest rate collar to hedge
our interest rate exposure on a notional $155.0 million of our outstanding term loan credit
facility ($184.1 million as of June 30, 2010). The collar set a maximum interest rate of 6.00% and
a minimum interest rate of 2.85% on the three-month LIBOR applicable to a notional $155.0 million
of term loan debt. This collar effectively limited our LIBOR interest exposure on this portion of
our term loan debt to within that range (2.85% to 6.00%). The collar did not hedge the applicable
margin payable to our lenders on our indebtedness. Settlement payments were made between the hedge
counterparty and us on a quarterly basis, coinciding with our term loan installment payment dates,
for any rate overage on the maximum rate and any rate deficiency on the minimum rate on the
notional amount outstanding.
The collar expired on June 30, 2010.
A hypothetical 100 basis point increase or decrease in LIBOR, which would represent potential
interest rate change exposure on our outstanding unhedged portion of our term loan and revolving
credit facility, would have resulted in an insignificant change to our interest expense for the
three and six months ended June 30, 2010, respectively.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed by us in reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. In
designing and evaluating disclosure controls and procedures, management recognizes that any
control and procedure, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives and management necessarily applies its
judgment in evaluating the cost-benefit relationship regarding the potential utilization of certain
controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation
of our chief executive officer and chief financial officer, evaluated the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act). Based on such evaluation, our chief executive officer and chief financial officer
have concluded that, as of the end of the period covered by this report, our disclosure controls
and procedures were effective and were operating at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting for the three
months ended June 30, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course
of our business. Following the settlement of the Med-Data dispute noted below, we are not presently
involved in any legal proceedings, the outcome of which, if determined adversely to us, would have
a material adverse affect on our business, operating results or financial condition.
In August 2007, Jacqueline Hodges, the former owner of Med-Data disputed our earn-out
calculation made under the Med-Data Asset Purchase Agreement and alleged that we failed to fulfill
our obligations with respect to the earn-out. In November 2007, Ms. Hodges filed a complaint in the
Federal District Court for the Northern District of Georgia, alleging that we failed to act in good
faith with respect to the operation of Med-Data subsequent to the acquisition which affected the
earn-out calculation. On March 21, 2008, we filed an answer denying the plaintiffs allegations and
also filed a counterclaim alleging that the plaintiffs fraudulently induced us to enter into the
purchase agreement by intentionally concealing the status of their relationship with their largest
customer.
On March 31, 2010, the Court entered summary judgment in favor of the Company and dismissed
Ms. Hodges claims. Ms. Hodges filed a motion for summary judgment as well to dismiss the Companys
counterclaim, but the Court denied this motion. The Company and Ms. Hodges have reached a
settlement, and all claims and counterclaims have been dismissed with prejudice.
Item 1A. Risk Factors
There have been no material changes in the risk factors as disclosed in our annual report on
Form 10-K for the fiscal year ended December 31, 2009.
41
Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the six months ended June 30, 2010, we issued approximately 49,000 unregistered shares
of our common stock in connection with stock option exercises related to stock options issued in
connection with our acquisition of OSI Systems, Inc. in June 2003. We received approximately $0.1
million in consideration in connection with these stock option exercises.
These issuances of our common stock were deemed to be exempt from registration in reliance on
Section 4(2) of the Securities Act, or Regulation D or Rule 701 promulgated thereunder, as
transactions by an issuer not involving any public offering.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. [Removed and Reserved]
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit | ||
No. | Description of Exhibit | |
31.1*
|
Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer | |
31.2*
|
Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer | |
32.1*
|
Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief Executive Officer and Chief Financial Officer | |
101.INS*
|
XBRL Instance Document | |
101.SCH*
|
XBRL Taxonomy Extension Schema Document | |
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith |
42
Table of Contents
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.
Signature | Title | Date | ||
Chairman of the Board of
Directors and Chief Executive Officer (Principal Executive Officer) |
||||
/s/ JOHN A. BARDIS
|
August 6, 2010 | |||
/s/ L. NEIL HUNN
|
Chief Financial Officer (Principal Financial Officer) |
August 6, 2010 |
43
Table of Contents
EXHIBIT INDEX
Exhibit | ||
No. | Description of Exhibit | |
31.1*
|
Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer | |
31.2*
|
Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer | |
32.1*
|
Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief Executive Officer and Chief Financial Officer | |
101.INS*
|
XBRL Instance Document | |
101.SCH*
|
XBRL Taxonomy Extension Schema Document | |
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith |
44