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EX-31.1 - EX-31.1 - Cotiviti Holdings, Inc.cotv-20170331ex311e1a627.htm
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EX-32.2 - EX-32.2 - Cotiviti Holdings, Inc.cotv-20170331ex322ba5469.htm
EX-32.1 - EX-32.1 - Cotiviti Holdings, Inc.cotv-20170331ex321170716.htm
EX-31.2 - EX-31.2 - Cotiviti Holdings, Inc.cotv-20170331ex3122ba76e.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


Form 10-Q


(Mark One)

 

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

For the quarterly period ended March 31, 2017

OR

 

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

 

Cotiviti Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware

(State or other jurisdiction of incorporation)

 

001-37787
(Commission
File Number)

46-0595918
(IRS Employer
Identification No.)

115 Perimeter Center Place
Suite 700
Atlanta, GA 30346
(Address of principal executive offices)

30346
(Zip Code)

 

(770) 379-2800

(Registrant’s telephone number, including area code)


 

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

 

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

 

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

☒ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

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

 

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of March 31, 2017 was 91,838,470.

 

 

 


 

i


 

Definitions

 

As used in this Quarterly Report on Form 10-Q for the period ended March 31, 2017 (this “Quarterly Report on Form 10‑Q” or this “Report”), the following abbreviations and terms have the meanings as listed below. Additionally, the terms “Cotiviti,” “we,” “us” and “our” refer to Cotiviti Holdings, Inc. and its consolidated subsidiaries, unless the context clearly indicates otherwise. The term “Cotiviti Holdings” refers only to Cotiviti Holdings, Inc. and not to any of its subsidiaries. Unless and as otherwise stated, any references in this Annual Report to any agreement means such agreement and all schedules, exhibits and attachments in each case as amended, restated, supplemented or otherwise modified to the date of filing this Annual Report.

 

2016 Plan: refers to the Cotiviti Holdings, Inc. 2016 Equity Incentive Plan.

 

Adjusted EBITDA: refers to net income (loss) to Cotiviti before depreciation and amortization, interest expense, other non-operating (income) expense, income tax expense (benefit), transaction-related expenses and other and stock-based compensation.

 

Affordable Care Act: refers to the Patient Protection and Affordable Care Act of 2010.

 

ASC: refers to the FASB Accounting Standards Codification.

 

ASU: refers to Accounting Standards Update issued by the FASB.

 

CMS: refers to the Centers for Medicare and Medicaid Services, the United States federal agency which administers Medicare and Medicaid.

 

EPS: refers to earnings per share.

 

Exchange Act: refers to the United States Securities Exchange Act of 1934, as amended.

 

FASB: refers to the Financial Accounting Standards Board.

 

First Lien Credit Facilities: refers to the First Lien Term A Loans in the original principal amount of $250.0 million, the First Lien Term B Loans in the original principal amount of $550.0 million and the $100.0 million Revolver under the Restated Credit Agreement.

 

First Lien Term A Loans: refers to the first lien term A loans in the original principal amount of $250.0 million under our Restated Credit Agreement.

 

First Lien Term B Loans: refers to the first lien term B loans in the original principal amount of $550.0 million under our Restated Credit Agreement.

 

First Lien Term Loans: refers, collectively, to the First Lien Term A Loans and the First Lien Term B Loans under our Restated Credit Agreement.

 

GAAP: refers to generally accepted accounting principles in the United States.

 

HIPAA: we collectively refer to the United States Health Insurance Portability and Accountability Act of 1996, as amended by the HITECH Act, together with their implementing regulations including the Omnibus Final Rule, as “HIPAA”.

 

HITECH: refers to the United States Health Information Technology for Economic and Clinical Health Act of 2009, enacted as part of the American Recovery and Reinvestment Act of 2009, which amended HIPAA.

 

ICD-10: refers to the 10th revision of the International Statistical Classification of Diseases and Related Health Problems, a medical classification list adopted by the World Health Organization containing codes for, among other things, diseases, signs and symptoms, abnormal findings, complaints, social circumstances and external causes of injury or diseases.

ii


 

 

iHealth Technologies: refers to iHealth Technologies, Inc., a predecessor name of a wholly-owned subsidiary.

 

Initial First Lien Credit Facilities: refers to the Initial First Lien Term Loan and the Initial First Lien Revolver.

 

Initial First Lien Term Loan: refers to the first lien term loan in the original principal amount of $810.0 million under our Initial Secured Credit Facilities.

 

Initial First Lien Revolver: refers to the $75.0 million first lien revolving facility under our Initial Secured Credit Facilities.

 

Initial Second Lien Credit Facility: refers to the second lien term loan in the original principal amount of $265.0 million under our Initial Secured Credit Facilities.

 

Initial Secured Credit Facilities: refers to the loans provided pursuant to the First Lien Credit Agreement, dated as of May 14, 2014, entered into by our subsidiary Cotiviti Corporation and certain of our other subsidiaries, as borrowers and/or guarantors, the lenders named therein, as lenders, and the agents named therein, pursuant to which the lenders agreed to provide the Initial First Lien Credit Facilities, comprising the $810.0 million Initial First Lien Term Loan and the $75.0 million Initial First Lien Revolver, and the $265.0 million Initial Second Lien Credit Facility. The Initial Secured Credit Facilities were refinanced in September 2016 with the First Lien Credit Facilities pursuant to the Restated Credit Agreement.

 

IPO: refers to an initial public offering of common equity.

 

IT: refers to information technology.

 

JOBS Act: refers to the United States Jumpstart Our Business Startups Act of 2012.

 

LIBOR: refers to the London inter-bank offered rate.

 

Medicaid: refers to the means-tested United States government health care insurance program for people of all ages, jointly funded by state and federal governments and managed by the states. The Social Security Amendments of 1965 created Medicaid by adding Title XIX to the Social Security Act of 1935.

 

Medicare: refers to the United States government health care insurance program providing health insurance to people age 65 and older, regardless of income or medical history, as well as people of all ages with disabilities and certain medical conditions. The Social Security Amendments of 1965 created Medicare by adding Title XVIII to the Social Security Act of 1935.

 

Medicare RAC: refers to a Medicare Recovery Audit Contractor; we are one of the Medicare RACs for CMS under the Medicare Recovery Audit Program.

 

NYSE: refers to the New York Stock Exchange, on which our shares are listed under the symbol “COTV.”

 

Omnibus Final Rule: refers to the Final Omnibus Privacy, Security, Breach Notification and Enforcement Rules, implemented in 2013, which amended the original Privacy, Security, Breach Notification and Enforcement Rules under HIPAA, as directed pursuant to the HITECH Act.

 

Restated Credit Agreement: refers to the Amended and Restated First Lien Credit Agreement, dated as of September 28, 2016, entered into by our subsidiary Cotiviti Corporation and certain other of our subsidiaries, as borrowers and/or guarantors, the lenders named therein, as lenders, and the agents named therein, pursuant to which the lenders agreed to provide the First Lien Credit Facilities comprising the First Lien Term A Loans in the original principal amount of $250.0 million, the First Lien Term B Loans in the original principal amount of $550.0 million and the $100.0 million Revolver.

 

Revolver: refers to the $100.0 million first lien revolving credit facility under our Restated Credit Agreement.

 

iii


 

RSUs: refers to restricted stock units.

 

Sarbanes-Oxley Act: refers to the United States Sarbanes-Oxley Act of 2002.

 

SEC: refers to the United States Securities and Exchange Commission.

 

SG&A: refers to selling, general and administrative.

 

iv


 

PART I - FINANCIAL INFORMATION

 

ITEM 1.   Consolidated Financial Statements

 

Cotiviti Holdings, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2017

    

2016

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

128,458

 

$

110,635

 

Restricted cash

 

 

7,232

 

 

9,103

 

Accounts receivable, net of allowance for doubtful accounts of $648 and $851 at March 31, 2017 and December 31, 2016, respectively; and net of estimated allowance for refunds and appeals of $35,518 and $41,020 at March 31, 2017 and December 31, 2016, respectively

 

 

62,072

 

 

67,735

 

Prepaid expenses and other current assets

 

 

17,847

 

 

14,957

 

Total current assets

 

 

215,609

 

 

202,430

 

Property and equipment, net

 

 

70,286

 

 

67,640

 

Goodwill

 

 

1,196,121

 

 

1,196,024

 

Intangible assets, net

 

 

518,131

 

 

533,305

 

Other long-term assets

 

 

2,746

 

 

2,864

 

TOTAL ASSETS

 

$

2,002,893

 

$

2,002,263

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

18,000

 

$

18,000

 

Customer deposits

 

 

7,232

 

 

9,103

 

Accounts payable and accrued other expenses

 

 

26,736

 

 

23,162

 

Accrued compensation costs

 

 

29,379

 

 

58,589

 

Estimated liability for refunds and appeals

 

 

61,766

 

 

62,539

 

Total current liabilities

 

 

143,113

 

 

171,393

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

758,348

 

 

762,202

 

Other long-term liabilities

 

 

5,765

 

 

8,799

 

Deferred tax liabilities

 

 

119,759

 

 

120,533

 

Total long-term liabilities

 

 

883,872

 

 

891,534

 

Total liabilities

 

 

1,026,985

 

 

1,062,927

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock ($0.001 par value; 600,000,000 shares authorized, 91,845,947 and 90,748,740 issued, and 91,838,470 and 90,741,340 outstanding at March 31, 2017 and December 31, 2016, respectively)

 

 

92

 

 

91

 

Additional paid-in capital

 

 

921,186

 

 

911,582

 

Retained earnings

 

 

60,892

 

 

33,917

 

Accumulated other comprehensive loss

 

 

(6,161)

 

 

(6,156)

 

Treasury stock, at cost (7,477 and 7,400 shares at March 31, 2017 and December 31, 2016, respectively)

 

 

(101)

 

 

(98)

 

Total stockholders' equity

 

 

975,908

 

 

939,336

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,002,893

 

$

2,002,263

 

 

See accompanying notes to consolidated financial statements.

1


 

Cotiviti Holdings, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

Net revenue

 

$

160,133

 

$

142,718

 

Cost of revenue (exclusive of depreciation and amortization, stated separately below):

 

 

 

 

 

 

 

Compensation

 

 

56,288

 

 

53,461

 

Other costs of revenue

 

 

6,686

 

 

5,398

 

Total cost of revenue

 

 

62,974

 

 

58,859

 

Selling, general and administrative expenses (exclusive of depreciation and amortization, stated separately below):

 

 

 

 

 

 

 

Compensation

 

 

24,693

 

 

19,110

 

Other selling, general and administrative expenses

 

 

16,879

 

 

15,229

 

Total selling, general and administrative expenses

 

 

41,572

 

 

34,339

 

Depreciation and amortization of property and equipment

 

 

5,575

 

 

4,835

 

Amortization of intangible assets

 

 

15,199

 

 

15,207

 

Transaction-related expenses

 

 

731

 

 

240

 

Total operating expenses

 

 

126,051

 

 

113,480

 

Operating income

 

 

34,082

 

 

29,238

 

Other expense (income):

 

 

 

 

 

 

 

Interest expense

 

 

8,421

 

 

16,060

 

Other non-operating (income) expense

 

 

(453)

 

 

(299)

 

Total other expense (income)

 

 

7,968

 

 

15,761

 

Income before income taxes

 

 

26,114

 

 

13,477

 

Income tax (benefit) expense

 

 

(861)

 

 

5,393

 

Net income

 

$

26,975

 

$

8,084

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

57

 

 

(26)

 

Change in fair value of derivative instruments

 

 

(62)

 

 

(482)

 

Total other comprehensive (loss) income

 

 

(5)

 

 

(508)

 

Comprehensive income

 

$

26,970

 

$

7,576

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.30

 

$

0.10

 

Diluted

 

 

0.28

 

 

0.10

 

 

See accompanying notes to consolidated financial statements.

2


 

Cotiviti Holdings, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

26,975

 

$

8,084

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Deferred income taxes

 

 

1,877

 

 

(5,405)

 

Depreciation and amortization

 

 

20,774

 

 

20,042

 

Stock-based compensation expense

 

 

2,083

 

 

1,074

 

Amortization of debt issuance costs

 

 

645

 

 

1,348

 

Accretion of asset retirement obligations

 

 

48

 

 

46

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

1,871

 

 

(1,518)

 

Accounts receivable

 

 

5,663

 

 

12,266

 

Other assets

 

 

(2,612)

 

 

7,493

 

Customer deposits

 

 

(1,871)

 

 

1,518

 

Accrued compensation

 

 

(29,210)

 

 

(8,452)

 

Accounts payable and accrued other expenses

 

 

(841)

 

 

(2,225)

 

Estimated liability for refunds and appeals

 

 

(774)

 

 

2,262

 

Other long-term liabilities

 

 

247

 

 

144

 

Other

 

 

(303)

 

 

(324)

 

Net cash provided by operating activities

 

 

24,572

 

 

36,353

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(9,660)

 

 

(9,467)

 

Other investing activities

 

 

 —

 

 

 2

 

Net cash used in investing activities

 

 

(9,660)

 

 

(9,465)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

7,363

 

 

16

 

Purchase of treasury shares

 

 

(3)

 

 

 —

 

Repayment of debt

 

 

(4,500)

 

 

(2,025)

 

Net cash provided by (used in) financing activities

 

 

2,860

 

 

(2,009)

 

Effect of foreign exchanges on cash and cash equivalents

 

 

51

 

 

 8

 

Net increase in cash and cash equivalents

 

 

17,823

 

 

24,887

 

Cash and cash equivalents at beginning of period

 

 

110,635

 

 

149,365

 

Cash and cash equivalents at end of the period

 

$

128,458

 

$

174,252

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

649

 

$

590

 

Cash paid for interest

 

 

7,587

 

 

14,565

 

Noncash investing activities (accrued property and equipment purchases)

 

 

6,738

 

 

9,052

 

 

See accompanying notes to consolidated financial statements

 

 

3


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements

(In thousands, except shares and per share amounts)

(Unaudited)

 

Note 1. Description of Business

 

Cotiviti Holdings, Inc. (collectively with its subsidiaries, “we,” “our,” “Cotiviti” or the “Company”) is a leading provider of analytics‑driven payment accuracy solutions, focused primarily on the healthcare sector. Our integrated solutions help clients enhance payment accuracy in an increasingly complex healthcare environment. We leverage our robust technology platform, configurable analytics, proprietary information assets and expertise in healthcare reimbursement to help our clients enhance their claims payment accuracy. We help our healthcare clients identify and correct payment inaccuracies. We work with over 40 healthcare organizations, including over 20 of the 25 largest U.S. commercial, Medicare and Medicaid managed health plans, as well as CMS. We are also a leading provider of payment accuracy solutions to over 35 retail clients, including eight of the ten largest retailers in the United States.

 

Note 2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). All significant intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements are unaudited and have been prepared by us following the rules and regulations of the SEC. In our opinion they reflect all adjustments, including normal recurring items, that are necessary to present fairly the results of interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations; however, we believe that the disclosures are adequate to make the information presented not misleading. Operating results for the periods presented herein are not necessarily indicative of the results that may be expected for other interim periods or the entire fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Estimated Liability for Refunds and Appeals and Unbilled Receivables

 

The estimated liability for refunds and appeals representing our estimate of claims that may be overturned related to revenue which had already been received was $61,766 and $62,539 at March 31, 2017 and December 31, 2016, respectively. The estimated allowance for refunds and appeals representing our estimate of claims that may be overturned related to amounts in accounts receivable was $35,518 and $41,020 at March 31, 2017 and December 31, 2016, respectively.

 

Unbilled receivables represent revenue recognized related to claims for which clients have received economic value that were not invoiced at the balance sheet date. Unbilled receivables of approximately $49,676 and $51,643 as of March 31, 2017 and December 31, 2016, respectively, are included in accounts receivable on our Consolidated Balance Sheets.

 

Certain unbilled receivables arise when a portion of our earned fee is deferred at the time of the initial invoice. At a later date (which can be up to a year after original invoice, and at other times during the year after completion of the audit period based on contractual terms or as agreed with our client), we invoice the unbilled receivable amount. Notwithstanding the deferred due date, our clients acknowledge we have earned this unbilled receivable at the time of the original invoice, but we have agreed to defer billing the client for the related services. Unbilled receivables of this nature were approximately $6,087 and $6,137 as of March 31, 2017 and December 31, 2016, respectively, and are included in accounts receivable on our Consolidated Balance Sheets.

 

We record periodic changes in unbilled receivables and refund liabilities as adjustments to revenue.

 

4


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

Recently Issued Accounting Standards

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU2017-04”), which is intended to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of the goodwill. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted. We are evaluating this new guidance and do not believe it will have a material impact on our consolidated financial statements and related disclosures as the fair values of our reporting units exceed their carrying values.

 

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (“ASU 2016-18”), which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the statement of cash flows. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are evaluating this guidance and its impact on our consolidated financial statements and related disclosures and expect the adoption of this ASU could impact the disclosure of our cash flows from operations.

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) which addresses eight specific cash flow issues in order to reduce diversity in practice. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are evaluating this guidance and its impact on our consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) which changes the accounting recognition, measurement and disclosure for leases in order to increase transparency. ASU 2016-02 requires lease assets and liabilities to be recognized on the balance sheet and key information about leasing arrangements to be disclosed. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We are evaluating this new guidance and its impact on our consolidated financial statements and related disclosures.

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) which changes the current financial instruments model primarily impacting the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are evaluating this new guidance and do not believe it will have a material impact on our consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance and provides clarification of principles for recognizing revenue from contracts with customers. ASU 2014-09 sets forth a five-step model for determining when and how revenue is recognized. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Additional disclosures will be required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The two permitted transition methods under ASU 2014-09 are the full retrospective method, in which case the new guidance would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of the initial application. The guidance is effective for public companies with annual periods beginning after December 15, 2017 and interim periods within that reporting period. The

5


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.

 

In 2016, we formed an internal team to evaluate and quantify the potential impact of this new revenue guidance. As of the date of this filing, we have made significant progress on our contract reviews and policy drafting. We will continue to evaluate this new guidance and plan to provide additional information about our method of adoption and the impact, if any, on our consolidated financial statements and related disclosures in future filings.

 

Note 3. Property and Equipment

 

Property and equipment by major asset class for the periods presented consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

    

2017

    

2016

 

Computer equipment

 

$

41,106

 

$

40,349

 

Software

 

 

53,837

 

 

42,614

 

Furniture and fixtures

 

 

8,802

 

 

8,652

 

Leasehold improvements

 

 

4,895

 

 

4,392

 

Projects in progress

 

 

7,234

 

 

12,001

 

Property and equipment, gross

 

$

115,874

 

$

108,008

 

Less: accumulated depreciation and amortization

 

 

45,588

 

 

40,368

 

Property and equipment, net

 

$

70,286

 

$

67,640

 

 

In December 2015, we purchased a perpetual software license, which is included in the software total above. We are paying for this software over a two year period ending in January 2018. As such, there is approximately $3,256 and $3,351 included in accounts payable and accrued other expenses on our Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, respectively, and $3,225 included in other long-term liabilities on our Consolidated Balance Sheets as of December 31, 2016.

 

Total depreciation and amortization expense related to property and equipment, including capitalized software costs, was $5,575 and $4,835 for the three months ended March 31, 2017 and 2016, respectively.

 

Note 4. Intangible Assets

 

Intangible asset balances by major asset class for the periods presented were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Weighted

 

 

 

Gross

 

 

 

 

Net

 

Average

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Amortization

 

 

    

Amount

    

Amortization

    

Amount

    

Period

 

March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

640,095

 

$

156,549

 

$

483,546

 

13.7

years

 

Acquired software

 

 

82,400

 

 

52,015

 

 

30,385

 

6.2

years

 

Connolly trademark

 

 

4,200

 

 

 —

 

 

4,200

 

   indefinite-lived

 

Total

 

$

726,695

 

$

208,564

 

$

518,131

 

12.8

years

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

640,052

 

$

144,768

 

$

495,284

 

13.7

years

 

Acquired software

 

 

82,400

 

 

48,579

 

 

33,821

 

6.2

years

 

Connolly trademark

 

 

4,200

 

 

 —

 

 

4,200

 

   indefinite-lived

 

Total

 

$

726,652

 

$

193,347

 

$

533,305

 

12.8

years

 

 

Amortization expense was $15,199 and $15,207 for the three months ended March 31, 2017 and 2016, respectively.

6


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

 

As of March 31, 2017 amortization expense for the next 5 years is expected to be:

 

 

 

 

 

 

Remainder of 2017

   

$

42,628

 

2018

 

 

53,898

 

2019

 

 

53,898

 

2020

 

 

53,898

 

2021

 

 

49,576

 

 

 

Note 5. Goodwill

 

Total goodwill in our Consolidated Balance Sheets was $1,196,121 and $1,196,024 as of March 31, 2017 and December 31, 2016, respectively.

 

Changes in the carrying amount of goodwill by our Healthcare and Global Retail and Other segments for the three months ended March 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Global Retail

 

 

 

Healthcare

 

and Other

 

December 31, 2016

 

$

1,147,771

 

$

48,253

 

Foreign currency translation

 

 

 —

 

 

97

 

March 31, 2017

 

$

1,147,771

 

$

48,350

 

 

There was no impairment related to goodwill for any period presented.

 

Note 6. Commitments and Contingencies

 

We may be involved in various legal proceedings and litigation arising in the ordinary course of business. While any legal proceeding or litigation has an element of uncertainty, management believes the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

 

Medicare RAC Contract Contingency

 

In August 2014, CMS announced it would allow providers to remove all eligible claims currently pending in the appeals process by offering to pay hospitals 68% of the original claim amount. This settlement was offered to the providers and it was unknown what, if any, impact there would be for the Medicare RACs. On July 1, 2015, CMS issued a Technical Direction Letter to the Medicare RACs, including ourselves, indicating that Medicare RACs will only be entitled to the contract contingency fee on the settled amounts of the claims, or 32% of the original inpatient claim amounts. Based on the initial lists of finalized settlements provided by CMS, we would be required to refund CMS approximately $22,308 due to the related adjustments in Medicare RAC contingency fees. CMS further advised that as the hospital settlement project continues, additional settlement lists will be matched to Medicare RAC claims which may result in updated refund amounts to those initially provided. While there are uncertainties in any dispute resolution and results are uncertain, we have disputed CMS’s findings based on our interpretation of the terms of the Medicare RAC contract and our belief that the backup data provided by CMS is inaccurate and/or incomplete. Our liability for estimated refunds and appeals includes amounts for these settled claims based on our best estimates of the amount we believe will be ultimately payable to CMS based on our interpretation of the terms of the Medicare RAC contract. We believe that it is possible that we could be required to pay an additional amount up to approximately $13,000 in excess of the amount we accrued as of March 31, 2017 based on the claims data we have received from CMS to date. As CMS completes its settlement process with the providers and updated files are provided to us, the potential amount owed by us may change. On September 28, 2016, CMS announced a second settlement process to allow eligible providers to settle their inpatient claims currently under appeal beginning December 1, 2016. This second settlement process could result in additional

7


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

amounts owed to CMS. CMS has not yet provided us with any information and accordingly the amount of any such additional claims cannot presently be determined.

 

Note 7. Long‑term Debt

 

Long‑term debt for the periods presented was as follows:

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

    

2017

    

2016

 

First Lien Term A Loan

 

$

243,580

 

$

246,694

 

First Lien Term B Loan

 

 

543,130

 

 

544,345

 

Revolver

 

 

 —

 

 

 —

 

Total debt

 

 

786,710

 

 

791,039

 

Less: debt issuance costs

 

 

10,362

 

 

10,837

 

Less: current portion

 

 

18,000

 

 

18,000

 

Total long-term debt

 

$

758,348

 

$

762,202

 

 

The Restated Credit Agreement includes certain binding affirmative and negative covenants, including delivery of financial statements and other reports, maintenance of existence and transactions with affiliates. The negative covenants restrict our ability, among other things, to incur indebtedness, grant liens, make investments, sell or otherwise dispose of assets or enter into a merger, pay dividends or repurchase stock. There is a required financial covenant applicable only to the Revolver and the Term A Loan, pursuant to which we agree not to permit our Secured Leverage Ratio to exceed 5.50:1.00 through September 2018, 5.25:1.00 through September 2019 and 5.00:1.00 through June 2021. In addition, the Restated Credit Agreement includes certain events of default including payment defaults, failure to perform affirmative covenants, failure to refrain from actions or omissions prohibited by negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults and a change of control default. We were in compliance with all such covenants as of March 31, 2017 and December 31, 2016, respectively.

 

The Restated Credit Agreement requires mandatory prepayments based upon annual excess cash flows commencing with the year ended December 31, 2017. The mandatory prepayment is contingently payable in the second quarter based on an annual excess cash flow calculation for the proceeding year as defined within the Restated Credit Agreement. 

 

As of March 31, 2017, the aggregate maturities of long‑term debt (excluding any amounts that may become payable with respect to the aforementioned mandatory prepayment provision for annual excess cash flows) for each of the next five years are expected to be $13,500 for the remainder of 2017, $18,000 in 2018, $24,250 in 2019, $30,500 in 2020 and $183,625 in 2021.

 

In April 2017, we entered into and executed the First Amendment Agreement to the then outstanding Restated Credit Agreement, which, among other things, provided for a 25 basis point reduction in applicable interest rate spread over LIBOR associated with the First Lien Term B Loan. As a result, we expect to record a loss on extinguishment of approximately $3,000, which will be included in our Consolidated Statements of Comprehensive Income during the second quarter of 2017.

 

 

Note 8. Derivative Instruments

 

We are exposed to fluctuations in interest rates on our long‑term debt. We manage our exposure to fluctuations in the 3‑month LIBOR through the use of interest rate cap agreements designated as cash flow hedges. We are meeting our objective by hedging the risk of changes in cash flows related to changes in LIBOR by capping the interest on our floating rate debt linked to LIBOR to approximately 3%. We do not utilize derivatives for speculative or trading purposes.

8


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

 

As of March 31, 2017 and December 31, 2016, we had $540,000 in notional debt outstanding related to these interest rate caps, which cover quarterly interest payments through September 2019. The notional amount decreases over time.

 

All of our outstanding interest rate cap contracts qualify for cash flow hedge accounting treatment in accordance with ASC 815, Derivatives and Hedging. Cash flow hedge accounting treatment allows for gains and losses on the effective portion of qualifying hedges to be deferred in accumulated other comprehensive (loss) income until the underlying transaction occurs, rather than recognizing the gains and losses on these instruments in earnings during each period they are outstanding. When the actual interest payments are made on our variable rate debt and the related derivative contract settles, any effective portion of realized interest rate hedging derivative gains and losses previously recorded in accumulated other comprehensive (loss) income is recognized in interest expense. We recognized interest expense of $201 and $82 related to interest rate caps during the three months ended March 31, 2017 and 2016, respectively. 

 

Ineffectiveness results, in certain circumstances, when the change in total fair value of the derivative instrument differs from the change in the fair value of our expected future cash outlays for the related interest payment and is recognized immediately in interest expense. There was no ineffectiveness recorded during the three months ended March 31, 2017 and 2016, respectively. Likewise, if the hedge does not qualify for hedge accounting, the periodic changes in its fair value are recognized in the period of the change in interest expense. All cash flows related to our interest rate cap agreements are classified as operating cash flows.

 

Any outstanding derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements, but we do not expect that the counterparty will fail to meet their obligations. The amount of such credit exposure is generally the positive fair value of our outstanding contracts. To manage credit risks, we select counterparties based on credit assessments, limit our overall exposure to any single counterparty and monitor the market position of any counterparty.

 

The table below reflects quantitative information related to the fair value of our derivative instruments and where these amounts are recorded in our consolidated financial statements as of the period presented:

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

    

2017

    

2016

 

Liability fair value recorded in other long-term liabilities

 

$

1,691

 

$

1,729

 

Liability fair value recorded in accounts payable and accrued other expenses

 

 

1,046

 

 

1,065

 

Estimated amount of existing losses expected to be reclassified into earnings in the next 12 months

 

 

(2,200)

 

 

(1,783)

 

 

We record deferred hedge premiums which are being paid over the life of the hedge in accumulated other comprehensive (loss) income until the related hedge ultimately settles and interest payments are made on the underlying debt. As of March 31, 2017, we have made payments of $2,945 related to these deferred premiums. We expect to pay an additional $3,449 in deferred premiums through 2019 related to our outstanding interest rate cap agreements which is reflected in the fair value of these derivatives in the table above.

 

9


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

Comprehensive income includes changes in the fair value of our interest rate cap agreements which qualify for hedge accounting. Changes in other comprehensive income for the periods presented related to derivative instruments classified as cash flow hedges were as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Balance at beginning of period, January 1

 

$

(3,334)

 

$

(2,968)

 

Reclassifications in earnings, net of tax of $76 and $31, respectively

 

 

125

 

 

51

 

Change in fair value of derivative instrument, net of tax of $112 and $323, respectively

 

 

(187)

 

 

(533)

 

Balance at end of period, March 31 

 

$

(3,396)

 

$

(3,450)

 

 

 

Note 9. Fair Value Measurements

 

We measure assets and liabilities at fair value based on assumptions market participants would use in pricing an asset or liability in the principal or most advantageous market. Authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value whereby inputs are assigned a hierarchical level. The hierarchical levels are:

 

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

Level 2: Observable prices, other than quoted prices included in Level 1 inputs for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Unobservable inputs for the asset or liability used to measure fair value to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 

The following table summarizes our financial instruments measured at fair value within the Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

 —

 

$

 

$

786,710

 

$

 

$

 

$

791,039

 

Interest rate cap agreements

 

 

 

 

2,737

 

 

 

 

 

 

2,794

 

 

 

Total

 

$

 —

 

$

2,737

 

$

786,710

 

$

 —

 

$

2,794

 

$

791,039

 

 

The fair value of our private debt is determined based on fluctuations in current interest rates, the trends in market yields of debt instruments with similar credit ratings, general economic conditions and other quantitative and qualitative factors. The carrying value of our debt approximates its fair value. Refer to Note 7 for more information on our long-term debt.

 

The fair value of the interest rate cap agreements is determined using the market standard methodology of discounting the future expected variable cash receipts that would occur if interest rates rose above the strike rate of the caps. The analysis reflects the contractual terms of the derivatives, including period to maturity and remaining deferred premium payments, and uses observable market‑based inputs, including interest rates and implied volatilities. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rates. As such, the estimated fair values of these liabilities are classified as Level 2 in the fair value hierarchy. Refer to Note 8 for more information on our interest rate cap agreements.

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Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

 

Note 10. Income Taxes

 

The following table presents our income tax provision and effective income tax rate: 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Income tax provision

 

$

(861)

 

$

5,393

 

Effective income tax rate

 

 

(3.3)

%  

 

40.0

%

 

Our effective income tax rate was (3.3)% and 40.0% for the three months ended March 31, 2017 and 2016, respectively. The decrease in the effective tax rate is primarily due to a $10,422 tax benefit related to stock option exercises. Additionally, we realized a tax benefit of $337 during the three months ended March 31, 2017 related to the settlement of an uncertain tax position as a result of the closure of our audit with the Internal Revenue Service for the tax year ended December 31, 2014 and the iHealth Technologies, Inc. audit for the tax years ended December 31, 2012, December 31, 2013 and May 13, 2014. 

 

We file income taxes with the U.S. federal government and various states and foreign jurisdictions. We operate in a number of state and local jurisdictions and as such are subject to state and local income tax examinations based upon various statutes of limitations in each jurisdiction. We are currently under audit by the State of New York for the tax year ended December 31, 2014 and for iHealth Technologies for the tax years ended December 31, 2012, December 31, 2013, May 13, 2014 and December 31, 2014.

 

Note 11. Stockholders’ Equity

 

Secondary Offering

 

On March 7, 2017 we completed a secondary public offering of 9,683,000 shares of our common stock by certain of our stockholders, including 1,263,000 shares sold to the underwriters pursuant to their option to purchase additional shares, at a public offering price of $36.00 per share. All of the shares offered were sold by selling stockholders.  Accordingly, we did not receive any proceeds from the sale of the shares. In connection with this offering, we incurred approximately $600 in professional services expenses, which are included in transaction-related expenses on our Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017.

 

Note 12. Earnings per Share

 

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. For all periods presented, potentially dilutive outstanding shares consisted solely of equity incentive awards. Our potential common shares consist of the incremental common shares issuable upon the exercise of stock options or vesting of RSUs. The dilutive effect of outstanding equity incentive awards is reflected in diluted earnings per share by application of the treasury stock method. For all periods presented, all outstanding common stock consisted of a single class.

 

11


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

Basic and diluted earnings per share are computed as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

Net income available to common stockholders

 

$

26,975

 

$

8,084

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock

 

 

91,138,356

 

 

77,231,196

 

Dilutive effect of stock-based awards

 

 

3,766,874

 

 

526,162

 

Adjusted weighted average outstanding and assumed conversions for diluted EPS

 

 

94,905,230

 

 

77,757,358

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.30

 

$

0.10

 

Diluted

 

 

0.28

 

 

0.10

 

 

Employee stock options and restricted stock units (“RSUs”) that were excluded from the calculation of diluted earnings per share because their effect is anti‑dilutive for the periods presented were as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

 

 

 

 

Employee stock-based awards

 

361,566

 

2,019,649

 

 

The criteria associated with all of our outstanding performance-based stock options as defined in the terms of the applicable award agreements, were satisfied as of September 30, 2016 and, as a result, outstanding performance-based stock options were included in the calculation of diluted earnings per share for the three months ended March 31, 2017. Performance-based stock options of 2,794,910 were not included in the calculation of diluted earnings per share for the three months ended March 31, 2016 as the vesting conditions had not yet been satisfied.

 

Note 13. Stock‑Based Compensation

 

Stock Options

 

The following is a summary of stock option activity under the Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

    

Weighted

    

average

    

 

 

 

 

average

 

remaining

 

Aggregate

 

Outstanding

 

exercise price

 

contractual life

 

Intrinsic Value

 

Options

 

per share

 

(Years)

 

(in thousands)

Outstanding at December 31, 2016

5,997,372

 

$

10.18

 

7.30

 

$

145,270

Granted

534,262

 

 

34.39

 

 

 

 

 —

Forfeited

(35,008)

 

 

12.58

 

 

 

 

 —

Exercised

(1,096,999)

 

 

6.86

 

 

 

 

 —

Expired

(2,893)

 

 

13.79

 

 

 

 

 —

Outstanding at March 31, 2017

5,396,734

 

$

13.23

 

7.56

 

$

153,263

 

 

 

 

 

 

 

 

 

 

Vested, exercisable, expected to vest

 

 

 

 

 

 

 

 

 

at March 31, 2017

5,396,734

 

$

13.23

 

7.56

 

$

153,263

Exercisable at March 31, 2017

3,188,518

 

$

9.95

 

6.99

 

$

101,004

 

 

 

 

 

 

 

 

 

 

 

Aggregate intrinsic value represents the difference between our estimated fair value of common stock and the exercise price of outstanding in‑the‑money options. The fair value per share of common stock was $41.63 as of 

12


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

March 31, 2017 based upon the closing price of our common stock on the NYSE. The total intrinsic value of stock options exercised was $33,482 for the three months ended March 31, 2017 and insignificant for the three months ended March 31, 2016.  

 

Restricted Stock Units

 

The following is a summary of RSU activity under the 2016 Plan:

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

Weighted

 

 

 

 

 

 

average

 

 

 

 

 

 

grant date fair value

 

 

Number of Awards

 

 

 

per share

Outstanding at December 31, 2016

 

67,295

 

 

 

$

25.88

Granted

 

235,412

 

 

 

 

34.39

Forfeited

 

(3,875)

 

 

 

 

24.70

Vested and converted to shares, net of units withheld for taxes

 

(131)

 

 

 

 

19.00

Units withheld for taxes

 

(77)

 

 

 

 

19.00

Outstanding at March 31, 2017

 

298,624

 

 

 

$

32.59

Expected to vest at March 31, 2017

 

298,624

 

 

 

$

32.59

 

 

 

 

 

 

 

 

 

Employee Stock Purchase Plan

 

We have an ESPP for US and non-US employees (collectively, “ESPP”), both of which have a series of six month offering periods, with a new offering period beginning on the first day of January and July each year. The ESPP was adopted by our Board of Directors in May 2016. In order for the US ESPP to qualify as an “employee stock purchase plan” under the requirements of Section 423 of the United States Internal Revenue Code of 1986, as amended, the ESPP is subject to stockholder approval at our first annual meeting of stockholders to be held on May 25, 2017. The ESPP was effective January 1, 2017 with the first purchase date scheduled for June 30, 2017. Employees may contribute up to 10% of their pay towards the purchase of common stock via payroll deductions to a maximum of $10 per year, or $5 per offering period. Purchase dates occur on the last business day of June and December of each year.

 

Stock Compensation Expense

 

We used the following weighted average assumptions to estimate the fair value of stock options granted for the periods presented as follows:

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2017

    

Expected term (years)

 

 

6.25

 

Expected volatility

 

 

40.00

%  

Expected dividend yield

 

 

0.00

%  

Weighted average risk-free interest rate

 

 

1.93

%  

Weighted average grant date fair value

 

$

14.45

 

 

No stock options were granted during the three months ended March 31, 2016.

 

We recorded total stock‑based compensation expense of $2,083 and $1,074 for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, we had total unrecognized compensation cost related to 2,506,840 unvested stock options and RSUs under the Plans of $25,037 which we expect to recognize over the next 2.9 years.

 

13


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

Note 14. Segment Information

 

We conduct our business through two reportable business segments: Healthcare and Global Retail and Other. Through our Healthcare segment, we offer prospective and retrospective claims accuracy solutions to healthcare payers in the United States. We also provide analytics-based solutions unrelated to our healthcare payment accuracy solutions, on a limited basis in the United States. Through our Global Retail and Other segment, we provide retrospective claims accuracy solutions to retailers primarily in the United States, Canada and the United Kingdom, as well as solutions that improve efficiency and effectiveness of payment networks for a limited number of clients.

 

We evaluate the performance of each segment based on segment net revenue and segment operating income. Operating income is calculated as net revenue less operating expenses and is not affected by other expense (income) or by income taxes. Indirect costs are generally allocated to the segments based on the segments’ proportionate share of revenue and expenses directly related to the operation of the segment. We do not allocate interest expense, other non-operating (income) expense or the provision for income taxes, since these items are not considered in evaluating the segment’s overall operating performance. Our Chief Operating Decision Maker does not receive or utilize asset information to evaluate performance of operating segments. Accordingly, asset-related information has not been presented.

 

Our operating segment results for the periods presented were as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

(unaudited)

 

Net Revenue

 

 

 

 

 

 

 

Healthcare

 

$

139,803

 

$

124,130

 

Global Retail and Other

 

 

20,330

 

 

18,588

 

Consolidated net revenue

 

$

160,133

 

$

142,718

 

Operating Income

 

 

 

 

 

 

 

Healthcare

 

$

31,161

 

$

26,622

 

Global Retail and Other

 

 

2,921

 

 

2,616

 

Consolidated operating income

 

$

34,082

 

$

29,238

 

 

Operating segment net revenue by product type for the periods presented was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

%

    

2016

    

%

    

 

 

(unaudited)

 

Healthcare

 

 

 

 

 

 

 

 

 

 

 

Retrospective claims accuracy

 

$

77,516

 

48.4

 

$

65,270

 

45.7

 

Prospective claims accuracy

 

 

59,717

 

37.3

 

 

55,410

 

38.8

 

Transaction services

 

 

2,570

 

1.6

 

 

3,450

 

2.5

 

Total Healthcare

 

 

139,803

 

87.3

 

 

124,130

 

87.0

 

Global Retail and Other

 

 

 

 

 

 

 

 

 

 

 

Retrospective claims accuracy

 

 

19,674

 

12.3

 

 

17,990

 

12.6

 

Other

 

 

656

 

0.4

 

 

598

 

0.4

 

Total Global Retail and Other

 

 

20,330

 

12.7

 

 

18,588

 

13.0

 

Consolidated net revenue

 

$

160,133

 

100.0

 

$

142,718

 

100.0

 

 

 

 

 

 

14


 

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

 

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and the related notes of Cotiviti Holdings, Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our Annual Report on Form 10-K, filed with the SEC.

 

This discussion and analysis contains forward-looking statements regarding the industry outlook, our expectations for the performance of our business, our liquidity and capital resources and other non-historical statements. These forward-looking statements are subject to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in “—Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” Our actual results may differ materially from those contained in or implied by these forward-looking statements.

 

Overview

 

We are a leading provider of analytics-driven payment accuracy solutions, focused primarily on the healthcare sector. Our integrated solutions help clients enhance payment accuracy in an increasingly complex healthcare environment. We leverage our robust technology platform, configurable analytics, proprietary information assets and expertise in healthcare reimbursement to help our clients enhance their claims payment accuracy. We help our healthcare clients identify and correct payment inaccuracies, which resulted in approximately $3.3 billion in savings in 2016. We work with over 40 healthcare organizations, including over 20 of the 25 largest U.S. commercial, Medicare and Medicaid managed health plans, as well CMS. We are also a leading provider of payment accuracy solutions to over 35 retail clients, including eight of the ten largest retailers in the United States. We operate in two segments, Healthcare and Global Retail and Other.

 

Our growth strategy for healthcare includes:

 

·

expand within our existing client base by increasing the volume of claims we review with our solutions; expanding utilization across the depth and breadth of our solutions; and cross-selling our prospective and retrospective solutions.

 

·

expand our client base;

 

·

innovate to improve and develop new solutions to expand the scope of our services; and

 

·

pursue opportunistic acquisitions and strategic partnerships in payment accuracy and adjacent markets.

 

As a result of the meaningful savings we deliver to our clients, we have increased our client base and strengthened our long-standing relationships with many of the leading healthcare payers in the United States. In 2016, we generated revenue from six new clients and four cross-sell clients which we believe will drive revenue growth in 2017 and beyond. In the first quarter of 2017, we generated revenue from three new clients. The average length of our relationships with our ten largest healthcare clients is over ten years. We have also substantially increased the annual savings captured by our healthcare clients over time. As a result, we believe our revenue is highly recurring and we have strong visibility into future revenue.

 

We are also a leading provider of payment accuracy solutions to the retail market. Retailers process and validate extremely high volumes of transactions with disparate suppliers on varying terms. We work with retail clients in the United States, Canada and the United Kingdom to realize their negotiated allowances, concessions, rebates and other incentives associated with merchandise procurement, logistics and other service transactions. In 2016, we generated over $500 million in savings for our retail clients.

 

For a further discussion of our two operating segments, (i) Healthcare and (ii) Global Retail and Other, refer to “—Our Segments” and Note 14 to the consolidated financial statements.

 

15


 

Factors Affecting Our Results of Operations

 

Recent Developments – 2017 Highlights

 

·

We continued to execute on our strategy, increasing volume and expanding the adoption of our solutions within our existing healthcare clients which contributed to healthcare revenue growth of 13% in the first quarter 2017.

 

·

Growth in our healthcare business also continues to benefit from the addition of new clients and our successful cross-sell efforts. During the three months ended March 31, 2017, we generated $1.5 million in revenue from seven new clients added within the past year and from an additional two existing clients who have adopted either prospective or retrospective solutions.

 

·

In March 2017, we began auditing under our two new Medicare RAC contracts awarded in October 2016 and expect to generate approximately 1-2% of total revenue from these contracts in 2017.

 

·

During the three months ended March 31, 2017, approximately 1.1 million shares of common stock were issued upon the exercise of stock options. The stock option exercises resulted in a $10.4 million tax benefit and an effective tax rate of (3.3)% for the three months ended March 31, 2017.

 

·

In April 2017, we entered into and executed the First Amendment Agreement to the then outstanding Restated Credit Agreement, which, among other things, provided for a 25 basis point reduction in applicable interest rate spread over LIBOR associated with the First Lien Term B Loan. As a result, we expect to record a loss on extinguishment of approximately $3.0 million, during the second quarter of 2017.

 

Dollar Amount of Claims Reviewed

 

Revenue in our Healthcare segment in a given period is impacted by the dollar amount of claims we review for our clients, which impacts inaccurate payments that we identify for our clients and the amount of revenue we receive under our performance fee-based contracts. The dollar amount of claims that we review is driven by the scope of claims submitted to us by our clients. The dollar amount of inaccurate payments we identify is also dependent upon the type and number of our solutions used by our clients.

 

In our Global Retail and Other segment, our revenue is dependent on (i) the amount of payments that we review for our retail clients and (ii) the timing of our payment reviews, which typically are completed on a batch processing basis following the lapse of a period of time after payment.

 

Healthcare Industry and General Economic Conditions

 

A majority of our business is directly related to the healthcare industry and is affected by healthcare spending and complexity in the healthcare industry, as follows:

 

·

Healthcare Spending by Payers. Changing demographics, the shift to managed care plans within government healthcare and increased healthcare coverage may lead to an increase in healthcare spending by our payer clients. From 2004 to 2014, healthcare costs in the United States grew at a 4.8% CAGR to $3.0 trillion and increased 5.8% in 2015 to $3.2 trillion. According to CMS, healthcare costs are expected to continue to grow at an average annual rate of 5.6% through 2025. Our revenue is impacted by the expansion or contraction of healthcare coverage and spending, which directly affects the number of payments available for our review.

 

·

Complexity in the Healthcare Industry. We believe reimbursement models will continue to become more complex as healthcare payers accommodate new markets and lines of business and as advancements in medical care increase the number of testing and treatment options available. The adoption of the ICD-10 coding framework in October 2015 has resulted in a nearly five times increase of possible diagnosis codes to approximately 68,000, further complicating the claims process. As reimbursement models grow more complex and healthcare coverage increases, the complexity and number of claims may also increase, which could impact the demand for our payment accuracy solutions. Also, many of the changes promulgated by the Affordable Care Act require implementing regulations that

16


 

have not yet been drafted or have been released only as proposed rules. Such changes could have a further impact on our results of operations.

 

In addition, our Global Retail and Other segment is impacted by general economic conditions. For example, in a difficult economy, consumers may be willing to spend less and retailers may reduce their purchasing accordingly, thereby reducing their overall payments available for review. Alternatively, in an expanding economy, retailers may increase their purchasing to meet expected increasing demand resulting in increased payments subject to review using our solutions.

 

 

Components of Results of Operations

 

Net revenue

 

Our net revenue is generated from contracts with our clients. Our client contracts generally provide for performance fees that are based on a percentage of the inaccurate payments that we prevent through our prospective claims accuracy solutions or the payment recoveries received by our clients that use our retrospective claims accuracy solutions. We derive less than 3% of our revenue on a “fee-for-service” basis whereby billing is based upon a flat fee or a fee per hour. Our clients may request a refund or offset if their providers or vendors ultimately reject the payment inaccuracies we find or if our clients determine not to pursue reimbursement from their providers or vendors even though we may have collected fees. We record an estimate for refund liabilities at any given time based on actual historical refund data by client type. In such cases, we record any such refund as a reduction of revenue.

 

Historically, there has been a seasonal pattern to our healthcare revenue with the revenues in the first quarter generally lower than the other quarters and revenues in the fourth quarter generally being higher than the other quarters. Accordingly, the comparison of revenue from quarter to quarter may fluctuate and is dependent on various factors, including, but not limited to, reset of member liability, timing of special projects and timing of inaccurate payments being prevented or recovered as well as the aforementioned seasonal considerations. Consequently, you should not rely on our revenue for any one quarter as an indication of our future performance.

 

Cost of revenue

 

Our cost of revenue is comprised of:

 

·

Compensation, which includes the total compensation and benefit-related expenses, including stock-based compensation expense, for employees who provide direct revenue generating services to clients; and

 

·

Other costs of revenue, which primarily include expenses related to the use of subcontractors and professional services firms, costs associated with the retrieval of medical records and facilities-related costs associated with locations that are used strictly for revenue generating activities. Cost of revenue does not include depreciation and amortization, which is stated separately in our consolidated statement of operations.

 

Selling, general and administrative expenses

 

Our selling, general and administrative expenses are comprised of:

 

·

Compensation, which includes total compensation and benefit-related expenses, including stock-based compensation expense, for our employees who are not directly involved in revenue generating activities including those involved with developing new service offerings; and

 

·

Other selling, general and administrative expenses, which include all of our general operating costs. These costs include, but are not limited to, rent and occupancy costs for facilities associated with locations that are used for employees not serving in revenue generating roles, telecommunications costs, information technology infrastructure costs, software licensing costs, advertising and marketing expenses, costs associated with developing new service offerings and expenses related to the use of certain subcontractors

17


 

and professional services firms. Selling, general and administrative expenses do not include depreciation and amortization, which is stated separately in our consolidated statement of operations.

 

Depreciation and amortization of property and equipment

 

Depreciation and amortization of property and equipment consists of depreciation related to our investments in property and equipment, including claims accuracy solutions software, as well as amortization of capitalized internal-use software and software development costs.

 

Amortization of intangible assets

 

Amortization of intangible assets includes amortization of customer relationships and acquired software.

 

Transaction-related expenses

 

Transaction-related expenses consist primarily of professional services and other expenses associated with our IPO and other offerings as well as certain expenses associated with corporate development activity.

 

Interest expense

 

Interest expense consists of accrued interest and related payments on our outstanding long-term debt as well as the amortization of debt issuance costs. Additionally, interest expense includes any effective portion of realized interest rate hedging derivative gains and losses previously recorded in accumulated other comprehensive (loss) income when the actual interest payments are made on our variable rate debt and the related derivative contract settles.

 

Other non-operating (income) expense

 

Other non-operating (income) expense primarily consists of foreign exchange gains and losses. In addition, income received for certain sub-leases, interest income and realized gains and losses are included in other non-operating (income) expense.

 

Income tax (benefit) expense

 

Income tax (benefit) expense consists of federal, state, local and foreign taxes based on earnings in multiple jurisdictions. Our income tax expense is impacted by the pre-tax earnings in jurisdictions with varying tax rates and any related foreign tax credits or deductions that may be available to us. Our current and future provision for income taxes will vary from statutory rates due to the impact of income tax incentives and holidays, certain non-deductible expenses, valuation allowances in certain countries, withholding taxes, excess tax benefits on the exercise of stock options and other discrete items.

 

Stock-based compensation expense

 

We grant equity incentive awards to certain employees, officers and non-employee directors as long-term incentive compensation. We recognize the related expense for these awards ratably over the applicable vesting period. Such expense is recognized in either cost of revenue or selling, general and administrative expenses based upon the function of the optionee. The following table shows the allocation of stock-based compensation expense between our expense line items for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

 

(unaudited)

 

 

Cost of revenue

 

$

466

 

$

289

 

 

Selling, general and administrative expenses

 

 

1,617

 

 

785

 

 

Total

 

$

2,083

 

$

1,074

 

 

 

18


 

As of March 31, 2017, we had total unrecognized stock-based compensation expense related to unvested stock options and RSUs of $25.0 million, which we expect to recognize over the next 2.9 years. 

 

Foreign currency translation adjustments.

 

The assets and liabilities of our foreign subsidiaries with a functional currency other than the U.S. Dollar are translated into U.S. Dollars using applicable exchange rates at the balance sheet date. Revenue and expenses are translated at average exchange rates effective during the year. The resulting foreign currency translation gains and losses are included as a component of other comprehensive (loss) income. We had upward foreign currency translation adjustments of $0.1 million for the three months ended March 31, 2017 compared to insignificant downward foreign currency translation adjustments for the three months ended March 31, 2016. The translation adjustments were the result of the strengthening of the U.S. Dollar against the Canadian Dollar and British Pound over the corresponding period.

 

Change in fair value of derivative instruments, net of related taxes.

 

We are a party to interest rate cap agreements that hedge the potential impact fluctuations in interest rates may have on payments we make pursuant to our long-term debt. We had a downward net change in fair value of derivative instruments, net of related taxes, of approximately $0.1 million and $0.5 million for the three months ended March 31, 2017 and 2016, respectively. The downward changes were the result of fluctuations in three-month LIBOR.

 

How We Assess Our Performance

 

Adjusted EBITDA

 

We believe Adjusted EBITDA (a non-GAAP measure) is useful to investors as a supplemental measure to evaluate our overall operating performance. Management uses Adjusted EBITDA as a measurement to compare our operating performance to our peers and competitors. We define Adjusted EBITDA as net income before depreciation and amortization, interest expense, other non-operating (income) expense such as foreign currency translation, income tax (benefit) expense, transaction-related expenses and other and stock-based compensation. See the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding these adjustments. Management believes Adjusted EBITDA is useful because it provides meaningful supplemental information about our operating performance and facilitates period-to-period comparisons without regard to our financing methods, capital structure or other items that we believe are not indicative of our ongoing operating performance. By providing this non-GAAP financial measure, management believes we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Management believes that Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties as a supplemental measure of financial performance within our industry. In addition, the determination of Adjusted EBITDA is consistent with the definition of a similar measure in our First Lien Credit Facilities.

 

Adjusted EBITDA has important limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

·

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

·

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

·

Although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

 

·

Adjusted EBITDA does not reflect the impact of stock-based compensation upon our results of operations;

 

·

Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

19


 

·

Adjusted EBITDA does not reflect our income tax (benefit) expense or the cash requirements to pay our income taxes; and

 

·

Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation.

 

The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

(in thousands)

 

(unaudited)

 

Net income

 

$

26,975

 

$

8,084

 

Depreciation and amortization

 

 

20,774

 

 

20,042

 

Interest expense

 

 

8,421

 

 

16,060

 

Other non-operating (income) expense(a)

 

 

(453)

 

 

(299)

 

Income tax (benefit) expense

 

 

(861)

 

 

5,393

 

Transaction-related expenses and other(b)

 

 

731

 

 

240

 

Stock-based compensation(c)

 

 

2,083

 

 

1,074

 

Adjusted EBITDA

 

$

57,670

 

$

50,594

 


 

(a)

Represents other non‑operating (income) expense that consists primarily of gains and losses on transactions settled in foreign currencies. Income received for certain sub‑leases is included herein.

 

(b)

Represents transaction‑related expenses that consist primarily of certain expenses associated with our secondary offering in 2017 and our IPO and other offering costs in 2016 as well as certain corporate development activity.

 

(c)

Represents expense related to equity incentive awards granted to certain employees, officers and non‑employee directors as long‑term incentive compensation. We recognize the related expense for these awards ratably over the vesting period.

 

Dollar Amount of Inaccurate Payments Prevented or Recovered

 

The majority of our net revenue consists of performance fees earned under our client contracts. Our performance fees generally represent a specified percentage of inaccurate payments that are either prevented prior to payment using our prospective claims accuracy solutions or recovered by our clients after they are identified using our retrospective claims accuracy solutions. For those clients where we identify any payment inaccuracies in advance of payment to the providers, the clients reduce the amount paid to the providers based upon the inaccuracies that we have identified. For those clients where we identify payment inaccuracies using our retrospective claims accuracy solutions after the client has made payment, clients generally recover claims either by taking credits against outstanding payables to healthcare providers or retail vendors, or future purchases from the related retail vendors, or receiving refund checks directly from those healthcare providers or retail vendors.

 

The dollar amount of inaccurate payments prevented or recovered in a given period is impacted by the dollar amount of claims or payments reviewed, the scope of claims or payments that we review, the success of our cross-selling efforts, our ability to retain existing clients and obtain new clients and our ability to enhance our existing solutions or create new solutions.

 

We believe the dollar amount of inaccurate payments prevented or recovered is useful to measure our overall operating performance and how well we are executing on our client contracts.

20


 

 

Factors Affecting the Comparability of our Results of Operations

 

As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.

 

Debt Refinancings, Repayments and Repricing

 

In connection with our various debt refinancings, we incurred significant debt issuance costs, primarily associated with the new indebtedness. These debt issuance costs are amortized utilizing the effective interest method over the associated life of the related indebtedness and recorded as interest expense. Unamortized debt issuance costs were $10.4 million as of March 31, 2017.  

 

In June 2016, we repaid $223.0 million in outstanding principal under our then outstanding second lien credit facility using proceeds from our IPO. We also made a voluntary prepayment of $13.1 million of outstanding principal under the second lien credit facility. As a result of these repayments, we recognized a loss on extinguishment of debt totaling $7.1 million during the three months ended June, 30, 2016 primarily related to the accelerated recognition of the unamortized portion of debt issuance costs and original issue discount.

 

In September 2016, we completed a refinancing of our then existing first and second lien credit facilities and entered the Amended and Restated First Lien Credit Agreement (the “Restated Credit Agreement”), which provides for first lien credit facilities (the “First Lien Credit Facilities” consisting of a (a) Term Loan A in the amount of $250.0 million, (b) Term Loan B in the amount of $550.0 million and (c) revolving credit facility (the “Revolver”) in the amount of up to $100.0 million, reducing our total debt principal outstanding by $22.7 million and reducing the interest rates. As a result of this refinancing, we recognized a loss on extinguishment of debt of $9.3 million during the three months ended September 30, 2016, primarily related to the payment of certain fees and the accelerated recognition of the unamortized portion of debt issuance costs and original issue discount related to indebtedness that was repaid to certain lenders.

 

In April 2017, we entered into and executed the First Amendment Agreement to the then outstanding Restated Credit Agreement, which, among other things, provided for lower applicable interest rates associated with the First Lien Term B Loan. As a result, we expect to record a loss on extinguishment of approximately $3.0 million, during the second quarter of 2017.

 

Our Segments

 

We report our results of operations in two segments, (i) Healthcare and (ii) Global Retail and Other. Through our Healthcare segment, we offer prospective and retrospective claims accuracy solutions to healthcare payers in the United States. We also provide analytics-based solutions unrelated to our healthcare payment accuracy solutions, on a limited basis in the United States. Through our Global Retail and Other segment, we provide retrospective claims accuracy solutions to retailers primarily in the United States, Canada and the United Kingdom, as well as solutions that improve efficiency and effectiveness of payment networks for a limited number of clients.

 

We evaluate the performance of each segment based on segment net revenue and segment operating income. The cost of revenue for each segment is based on direct expenses associated with revenue generating activities of each segment. We allocate selling, general and administrative expenses to each segment based on the segments’ proportionate share of revenue and expenses directly related to the operation of the segment as determined by management. The following table

21


 

sets forth the net revenue and operating income for our Healthcare and Global Retail and Other segments for the periods presented (in thousands).

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

 

 

(unaudited)

 

Net Revenue

 

 

 

 

 

 

 

Healthcare

 

$

139,803

 

$

124,130

 

Global Retail and Other

 

 

20,330

 

 

18,588

 

Consolidated net revenue

 

$

160,133

 

$

142,718

 

Operating Income

 

 

 

 

 

 

 

Healthcare

 

$

31,161

 

$

26,622

 

Global Retail and Other

 

 

2,921

 

 

2,616

 

Consolidated operating income

 

$

34,082

 

$

29,238

 

 

The following table sets forth our segment net revenue and percentage of consolidated net revenue by product type for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

%

    

2016

    

%

    

 

 

(unaudited)

 

Healthcare

 

 

 

 

 

 

 

 

 

 

 

Retrospective claims accuracy

 

$

77,516

 

48.4

 

$

65,270

 

45.7

 

Prospective claims accuracy

 

 

59,717

 

37.3

 

 

55,410

 

38.8

 

Transaction services

 

 

2,570

 

1.6

 

 

3,450

 

2.5

 

Total Healthcare

 

 

139,803

 

87.3

 

 

124,130

 

87.0

 

Global Retail and Other

 

 

 

 

 

 

 

 

 

 

 

Retrospective claims accuracy

 

 

19,674

 

12.3

 

 

17,990

 

12.6

 

Other

 

 

656

 

0.4

 

 

598

 

0.4

 

Total Global Retail and Other

 

 

20,330

 

12.7

 

 

18,588

 

13.0

 

Consolidated net revenue

 

$

160,133

 

100.0

 

$

142,718

 

100.0

 

 

22


 

Results of Operations

 

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Percentage

 

 

 

 

 

 

Percentage of

 

 

 

 

Percentage of

 

Change

 

 

 

 

 

 

 Net Revenue

 

 

 

 

 Net Revenue

 

Period to

 

 

    

2017

    

 (%)

    

2016

    

 (%)

    

Period (%)

 

Net revenue

 

$

160,133

 

100.0

 

$

142,718

 

100.0

 

12.2

 

Cost of revenue (exclusive of depreciation and amortization, stated separately below):

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

56,288

 

35.1

 

 

53,461

 

37.5

 

5.3

 

Other costs of revenue

 

 

6,686

 

4.2

 

 

5,398

 

3.8

 

23.9

 

Total cost of revenue

 

 

62,974

 

39.3

 

 

58,859

 

41.2

 

7.0

 

Selling, general and administrative expenses (exclusive of depreciation and amortization, stated separately below):

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

24,693

 

15.4

 

 

19,110

 

13.4

 

29.2

 

Other selling, general and administrative expenses

 

 

16,879

 

10.6

 

 

15,229

 

10.7

 

10.8

 

Total selling, general and administrative expenses

 

 

41,572

 

26.0

 

 

34,339

 

24.1

 

21.1

 

Depreciation and amortization of property and equipment

 

 

5,575

 

3.5

 

 

4,835

 

3.4

 

15.3

 

Amortization of intangible assets

 

 

15,199

 

9.5

 

 

15,207

 

10.7

 

(0.1)

 

Transaction-related expenses

 

 

731

 

0.4

 

 

240

 

0.2

 

204.6

 

Total operating expenses

 

 

126,051

 

78.7

 

 

113,480

 

79.5

 

11.1

 

Operating income

 

 

34,082

 

21.3

 

 

29,238

 

20.5

 

16.6

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

8,421

 

5.3

 

 

16,060

 

11.3

 

(47.6)

 

Other non-operating (income) expense

 

 

(453)

 

(0.3)

 

 

(299)

 

(0.2)

 

51.5

 

Total other expense (income)

 

 

7,968

 

5.0

 

 

15,761

 

11.0

 

(49.4)

 

Income before income taxes

 

 

26,114

 

16.3

 

 

13,477

 

9.4

 

93.8

 

Income tax (benefit) expense

 

 

(861)

 

(0.5)

 

 

5,393

 

3.8

 

(116.0)

 

Net income

 

$

26,975

 

16.8

 

$

8,084

 

5.7

 

233.7

 

 

Net revenue

 

Net revenue was $160.1 million for the three months ended March 31, 2017 as compared to $142.7 million for the three months ended March 31, 2016. The increase of $17.4 million was the result of increased Healthcare segment revenue of $15.7 million and increased Global Retail and Other segment revenue of $1.7 million. See “−Segment net revenue and operating income.”

 

Cost of revenue

 

Cost of revenue related to compensation was $56.3 million for the three months ended March 31, 2017 as compared to $53.5 million for the three months ended March 31, 2016. The increase of $2.8 million was primarily the result of approximately $2.0 million in additional payroll related expenses due to increased headcount and growth of our Healthcare segment. Employee benefit costs increased approximately $0.6 million due to rising healthcare coverage costs and the increase in the number of our employees. Stock-based compensation increased by approximately $0.2 million due to additional equity incentive awards.  

 

Other costs of revenue were $6.7 million for the three months ended March 31, 2017 as compared to $5.4 million for the three months ended March 31, 2016. The increase of $1.3 million was primarily the result of an increase of approximately $0.6 million in professional and consulting fees as we have leveraged external resources and expertise.  Rent and occupancy increased approximately $0.3 million as a result of new and expanded locations. Personnel-related costs increased approximately $0.4 million due to the increase in the number of employees.

23


 

Selling, general and administrative expenses

 

Selling, general and administrative expenses related to compensation were $24.7 million for the three months ended March 31, 2017 as compared to $19.1 million for the three months ended March 31, 2016. The increase of $5.6 million was primarily related to a $4.6 million increase in compensation related expenses due to an increase in the number of employees to support our growing operations. Stock-based compensation increased $0.8 million due to additional equity incentive awards. Employee benefit costs increased approximately $0.2 million due to rising healthcare coverage costs and the increase in number of employees.

 

Other selling, general and administrative expenses were $16.9 million for the three months ended March 31, 2017 as compared to $15.2 million for the three months ended March 31, 2016. The increase of $1.7 million was primarily due to an increase of $1.0 million in IT infrastructure and telecommunications. Personnel-related expenses increased approximately $0.7 million due to the increase number of employees. Other variable costs increased approximately $0.3 million to support our growing operations. The increase was partially offset by a $0.3 million decrease in professional and consulting fees as our current need to leverage external resources has been reduced.

 

Depreciation and amortization of property and equipment

 

Depreciation and amortization of property and equipment was $5.6 million for the three months ended March 31, 2017 as compared to $4.8 million for the three months ended March 31, 2016. The increase of $0.8 million was due to continued investments in capital expenditures over the prior year.

 

Amortization of intangible assets

 

Amortization of intangible assets was $15.2 million for each of the three months ended March 31, 2017 and 2016 as there have been no changes in our intangible assets.

 

Transaction-related expenses

 

Transaction-related expenses were $0.7 million for the three months ended March 31, 2017 primarily related to expenses incurred in connection with our secondary public offering as well as certain expenses related to corporate development activity. Transaction-related expenses were $0.2 million for the three months ended March 31, 2016 primarily related to expenses incurred in connection with our IPO.

 

Interest expense

 

Interest expense was $8.4 million for the three months ended March 31, 2017 as compared to $16.1 million for the three months ended March 31, 2016.  The decrease of $7.7 million was primarily due to the significant decline in outstanding principal over the past year in connection with the use of our IPO proceeds and the September 2016 refinancing, which resulted in an $3.6 million decrease in interest expense. Additionally, interest rate reductions in connection with the September 2016 refinancing resulted in an $4.1 million decrease in interest expense.

 

Other non-operating income

 

We had other non-operating income of $0.5 million for the three months ended March 31, 2017 as compared to $0.3 million for the three months ended March 31, 2016. The increase of $0.2 million was primarily the result of foreign exchange gains related to our operations in India.

 

Income tax expense

 

We had a total income tax benefit of $0.9 million for the three months ended March 31, 2017 as compared to income tax expense of $5.4 million for the three months ended March 31, 2016. The decrease of $6.3 million was primarily the result of a $10.4 million excess tax benefit relating to stock option exercises during the three months ended March 31, 2017. The effective tax rate for the three months ended March 31, 2017 was (3.3)% compared to 40.0% for the three months ended March 31, 2016. The decrease in the effective tax rate is primarily due to the excess tax benefit related to

24


 

stock option exercises. Excluding the impact of discrete items, our effective income tax rate was 37.6% for the three months ended March 31, 2017.

 

Segment net revenue and operating income

 

Healthcare segment net revenue was $139.8 million for the three months ended March 31, 2017 as compared to $124.1 million for the three months ended March 31, 2016. The increase of $15.7 million was primarily the result of a net increase of $14.2 million due to increased penetration and extended scope of services provided to our existing client base and a $1.5 million increase due to the addition of new clients and the success of our cross-sell efforts.

 

Global Retail and Other segment net revenue was $20.3 million for the three months ended March 31, 2017 as compared to $18.6 million for the three months ended March 31, 2016. The increase of $1.7 million was primarily the result of the timing,  nature and size of the claims reviewed.

 

Healthcare segment operating income was $31.2 million for the three months ended March 31, 2017 as compared to $26.6 million for the three months ended March 31, 2016. The increase in operating income of $4.6 million was the result of an increase in net revenue noted above. This was partially offset by an increase in compensation expense of $6.4 million related to an increase in the number of employees in our growing Healthcare segment. Our ongoing investment in strategic initiatives contributed an additional $1.0 million in expense primarily related to an increase in IT infrastructure costs. Additionally, stock-based compensation expense increased approximately $0.9 million due to additional equity incentive awards. Rent and occupancy related costs increased $0.3 million as a result of new and expanded locations. Depreciation and amortization expenses increased by $0.7 million due to our continued investments in capital expenditures. Personnel-related expenses increased $1.0 million due to the increase in number of employees. Transaction-related expenses increased $0.5 million primarily related to the secondary offering. Additionally, certain variable costs increased approximately $0.3 million.

 

Global Retail and Other segment operating income was $2.9 million for the three months ended March 31, 2017 as compared to $2.6 million for the three months ended March 31, 2016. The increase in operating income of $0.3 million was the result of an increase in net revenue noted above. This increase was partially offset by a $1.0 million increase in compensation related expenses and a $0.1 million increase in stock-based compensation primarily related to additional equity incentive awards. Our ongoing investment in strategic initiatives contributed an additional $0.2 million in IT infrastructure costs. Additionally, certain variable costs increased approximately $0.1 million. 

 

 

Liquidity and Capital Resources

 

Overview

 

Our primary sources of liquidity are our existing cash and cash equivalents, cash provided by operating activities and borrowings under our credit facilities. As of March 31, 2017, we had cash and cash equivalents of $128.5 million and availability under the Revolver of $99.5 million. Our total indebtedness was $791.0 million as of March 31, 2017. 

 

In April 2017, we successfully repriced our First Lien Term B Loan, reducing the interest rate by 25 basis points.

 

Our principal liquidity needs have been, and we expect them to continue to be, debt service, capital expenditures, working capital and potential mergers and acquisitions. Our capital expenditures support investments in our underlying infrastructure to enhance our solutions and technology for future growth. Our capital expenditures were $9.7 million and $9.5 million for the three months ended March 31, 2017 and 2016, respectively. The increase is primarily due to expenditures associated with enhancing our IT platform. We do not expect our capital expenditures to continue to increase. However, our strategy includes the expansion of our existing solutions and the development of new solutions, which will require cash expenditures over the next few years and will be funded primarily with cash provided by operating activities.

 

We believe that our cash flow from operations, availability under our First Lien Credit Facilities and available cash and cash equivalents will be sufficient to meet our liquidity needs for at least the foreseeable future. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of additional indebtedness, the issuance of

25


 

equity financings, or a combination thereof. We cannot assure you that we will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our obligations and fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control. Accordingly, we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available from additional indebtedness or otherwise to meet our liquidity needs. If we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions, which could possibly result in additional expenses or dilution.

 

Summary of Cash Flows

 

The following table provides a summary of cash flows from operating, investing and financing activities for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

 

 

(unaudited)

 

Net cash provided by operating activities

 

$

24,572

 

$

36,353

 

Net cash used in investing activities

 

 

(9,660)

 

 

(9,465)

 

Net cash provided by (used in) financing activities

 

 

2,860

 

 

(2,009)

 

 

Operating Activities

 

Net cash provided by operating activities was $24.6 million and $36.4 million for the three months ended March 31, 2017 and 2016, respectively. The decrease in cash provided by operating activities for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 primarily was due to a $27.2 million increase in net income adjusted for the exclusion of non-cash expenses, offset by approximately a $39.0 million decrease related to the effect of changes in operating assets and liabilities.

 

Net income adjusted for the exclusion of non-cash expenses was approximately $52.1 million for the three months ended March 31, 2017 as compared to $24.9 million for the three months ended March 31, 2016. The increase was primarily due to the growth in our Healthcare operations and the reduction in interest expense.

 

The effect of changes in operating assets and liabilities was a decrease of $27.5 million for the three months ended March 31, 2017 compared to a increase of $11.5 million for the three months ended March 31, 2016. The most significant drivers contributing to this increase relate to the following:

 

·

Changes in accounts receivable primarily driven by increased revenue and timing of collections. Accounts receivable, net of the allowance for doubtful accounts, decreased $5.7 million during the three months ended March 31, 2017 as compared to a decrease of $12.3 million during the three months ended March 31, 2016; 

 

·

Changes in accrued compensation primarily driven by timing of payments and an increase in the number of employees. Accrued compensation decreased $29.2 million during the three months ended March 31, 2017 as compared to a decrease of $8.5 million during the three months ended March 31, 2016; and

 

·

Timing of income tax payments including the impact of approximately $10.0 million paid during the year ended December 31, 2015 that was applied to our tax liabilities for the three months ended March 31, 2016. 

 

Investing Activities

 

Net cash used in investing activities was $9.7 million and $9.5 million for the three months ended March 31, 2017 and 2016, respectively. The increase in cash used in investing activities during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was due to an increase in capital expenditures due to our ongoing investments, particularly as it relates to enhancing our information technology infrastructure and platforms to support our growing operations.

 

26


 

Financing Activities

 

Net cash provided by financing activities was $2.9 million for the three months ended March 31, 2017 compared to net cash used of $2.0 million for the three months ended March 31, 2016. The increase in cash provided by financing activities during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to $7.4 million in proceeds from the exercise of stock options partially offset by scheduled debt principal payments of $4.5 million during the three months ended March 31, 2017 as compared to $2.0 million during the three months ended March 31, 2016.

 

Off-Balance Sheet Arrangements

 

Except for operating leases and certain letters of credit entered into in the normal course of business, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Contractual Obligations

 

Except as set forth below, there have been no material changes to our contractual obligations as described in the Annual Report on Form 10-K for the year ended December 31, 2016.

 

In April 2017, we repriced our First Lien Term B Loan reducing the interest rate by 25 basis points.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts and disclosure of contingent assets and liabilities. There have been no significant changes in the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Jumpstart Our Business Act of 2012

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the earlier of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Common Stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies.

 

At the end of our second fiscal quarter ending on June 30, 2017, we will analyze whether our aggregate worldwide market value of voting and non-voting common equity held by non-affiliates is over $700 million. If we exceed this threshold, then as of the end of our fiscal year ending on December 31, 2017, we will be considered a large accelerated filer and therefore will lose our status as an emerging growth company. Based on the current market value of our common stock held by non-affiliates, it is possible that we may become a large accelerated filer as of December 31, 2017.

 

Recently Issued Accounting Pronouncements

 

See “Recently Issued Accounting Pronouncements” in Note 2 of the unaudited consolidated financial statements.

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,”

27


 

“intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods, or by the inclusion of forecasts or projections. Examples of forward-looking statements include, but are not limited to, statements we make regarding the outlook for our future business and financial performance.

 

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following: our inability to successfully leverage our existing client base by expanding the volume of claims reviewed and cross-selling additional solutions; improvements to healthcare claims and retail billing processes reducing the demand for our solutions or rendering our solutions unnecessary; healthcare spending fluctuations; our clients declining to renew their agreements with us or renewing at lower performance fee levels; inability to develop new clients; delays in implementing our solutions; system interruptions or failures, including cyber-security breaches, identity theft or other disruptions that could compromise our information; our failure to innovate and develop new solutions for our clients; our failure to comply with applicable privacy, security and data laws, regulations and standards; changes in regulations governing healthcare administration and policies, including governmental restrictions on the outsourcing of functions such as those that we provide; loss of a large client; consolidation among healthcare payers or retailers; slow development of the healthcare payment accuracy market; negative publicity concerning the healthcare payment industry or patient confidentiality and privacy; significant competition for our solutions; our inability to protect our intellectual property rights, proprietary technology, information, processes and know-how; compliance with current and future regulatory requirements; declines in contracts awarded through competitive bidding or our inability to re-procure contracts through the competitive bidding process; our failure to accurately estimate the factors upon which we base our contract pricing; our inability to manage our growth; our inability to successfully integrate and realize synergies from any future acquisitions or strategic partnerships; our failure to maintain or upgrade our operational platforms; our failure to renew our Medicare Recovery Audit Contractor program contracts or if the terms of the Medicare RAC program contracts are substantially changed; litigation, regulatory or dispute resolution proceedings, including claims or proceedings related to intellectual property infringements; our inability to expand our retail business; our inability to manage our relationships with information suppliers, software vendors or utility providers; fluctuations in our results of operations; changes in tax rules; risks associated with international operations; our inability to realize the book value of intangible assets; our success in attracting and retaining qualified employees and key personnel; general economic, political and market forces and dislocations beyond our control; risks related to our substantial indebtedness and holding company structure; volatility in bank and capital markets; our status as a controlled company and as an emerging growth company; and provisions in our amended and restated certificate of incorporation.

 

For the reasons described above, as well as factors identified in “Item 1A – Risk Factors” in this Quarterly Report on Form 10-Q and the section of the Annual Report on Form 10-K entitled “Risk Factors,” we caution you against relying on any forward-looking statements. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

 

ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk

 

Except as set forth below, there have been no material changes to our quantitative and qualitative disclosures about market risk compared to the quantitative and qualitative disclosure about market risk described in the Annual Report on Form 10-K for the year ended December 31, 2016.

 

We are exposed to interest rate risk on our First Lien Credit Facilities, which bear interest at variable rates. As of March 31, 2017, we had $791.0 million outstanding principal under our long-term debt and $540.0 million notional debt outstanding related to interest rate cap agreements. Based on our outstanding debt as of March 31, 2017, and assuming that our mix of debt instruments, interest rate caps and other variables remain the same, the annualized effect of a one percentage point change in variable interest rates would have an annualized pretax impact on our earnings and cash flows of

28


 

approximately $7.5 million.

 

ITEM 4.   Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

Changes in Internal Control over Financial Reporting

 

There were no changes to our internal control over financial reporting during the three months ended March 31, 2017 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

We have not engaged an independent registered accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Our independent public registered accounting firm will first be required to attest to the effectiveness of our internal controls over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company.” In addition, as a newly public company, our management is presently not required to perform an annual assessment of the effectiveness of our internal controls over financial reporting until our second annual report on Form 10-K which is for the year ending December 31, 2017.

29


 

PART II - OTHER INFORMATION

 

ITEM 1.   Legal Proceedings

 

None.

 

ITEM 1A.   Risk Factors

 

For a discussion of potential risks and uncertainties related to our Company and our business see the information in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. 

 

 

ITEM 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

ITEM 3.   Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4.   Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.   Other Information

 

None.

 

30


 

ITEM 6.   Exhibits

 

 

 

 

Exhibit No.

  

Description of Exhibits

10.1*

 

First Amendment Agreement, dated as of April 7, 2017, to the Amended and Restated First Lien Credit Agreement dated as of September 28, 2016, by and among Cotiviti Corporation, Cotiviti Domestic Holdings, Inc., Cotiviti Intermediate Holdings, Inc., the other Loan Parties thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent.

 

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1*

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2*

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

**101.INS

 

XBRL Instance Document.

 

 

 

**101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

**101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

**101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

**101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

**101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 


*  Filed herewith.

 

** Submitted electronically with this Report.

 

 

 

31


 

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.

 

 

 

 

 

 

COTIVITI HOLDINGS, INC.

 

 

 

Date: May 3, 2017

By:

/S/ STEVE SENNEFF

 

 

Name:

Steve Senneff

 

 

Title:

Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

 

 

 

 

 

32