Change Healthcare Inc. Reports First Quarter Fiscal 2020 Financial Results

13 Aug by Vitaliy Dadalyan

Change Healthcare Inc. Reports First Quarter Fiscal 2020 Financial Results

NASHVILLE, Tenn.–(BUSINESS WIRE)–Change Healthcare Inc. (Nasdaq: CHNG), a leading independent healthcare technology company, today reported financial results for Change Healthcare LLC (“Change Healthcare”) for the first quarter of fiscal year 2020 ended June 30, 2019.

“Change Healthcare delivered on our financial objectives and executed well across several strategic initiatives, advancing existing and new innovative solutions,” said Neil de Crescenzo, President and Chief Executive Officer. “The success of our initial public offering places us in a strong financial position to support our growth initiatives. Our comprehensive suite of software and analytics, technology-enabled services, and network solutions places us in a unique position to partner with payers and providers to reduce costs, improve quality, and continue to transition towards value-based care.”

Adoption of the New Revenue Recognition Standard – ASC 606

Change Healthcare adopted the new revenue recognition accounting standard Accounting Standards Codification (“ASC”) 606 effective April 1, 2019 on a modified retrospective basis. Financial results for reporting periods during fiscal year 2020 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to fiscal year 2020 are presented in conformity with the prior revenue recognition standard ASC 605. This press release includes additional information to reconcile the impacts of the adoption of the new revenue recognition standard on Change Healthcare’s financial results for the quarter ended June 30, 2019. This includes the presentation of financial results during fiscal year 2020 under ASC 605 for comparison to the prior year.

Fiscal 2020 First Quarter Highlights for Change Healthcare LLC:

Financial Summary – ASC 606 (standard adopted effective April 1, 2019)

  • Total revenue of $855.6 million, including solutions revenue of $797.1 million
  • Net income of $71.9 million, resulting in net income of $0.28 per diluted unit
  • Adjusted net income of $141.5 million, resulting in adjusted net income of $0.56 per diluted unit.
  • Adjusted EBITDA of $281.1 million

Financial Summary – ASC 605 for Change Healthcare LLC:

  • Total revenue of $814.0 million, including solutions revenue of $755.5 million
  • Net income of $26.7 million, resulting in net income of $0.11 per diluted unit
  • Adjusted net income of $96.2 million, resulting in adjusted net income of $0.38 per diluted unit.(1)
  • Adjusted EBITDA of $233.5 million

(1) Common units of Change Healthcare LLC are equivalent to the number of outstanding common shares of Change Healthcare Inc. and membership interests of Change Healthcare LLC held by subsidiaries of McKesson.

Following our initial public offering, the Securities & Exchange Commission (“SEC”) provided us with updated feedback regarding Change Healthcare LLC’s calculation of adjusted net income. As a result, Change Healthcare LLC will now define and report adjusted net Income as net income (loss) before amortization expense from acquired intangible assets, as adjusted to exclude the impact of certain items that are not reflective of its core operations, and the tax effects of the foregoing adjustments. Based on prior feedback reflected in Change Healthcare Inc.’s prospectus filed with the SEC on June 26, 2019, Change Healthcare LLC did not distinguish between amortization resulting from acquired intangible assets and amortization attributable to developed software. As a result, under the previous formulation, adjusted net income was defined as net income (loss) before total amortization expense, as adjusted to exclude the impact of certain items that are not reflective of its core operations, and the tax effects of the foregoing adjustments.

Financial Results – ASC 606 (standard adopted effective April 1, 2019)

First Quarter Fiscal 2020

  • Solutions revenue was $797.1 million. The primary difference resulting from the new accounting standard is that more of our revenue is recognized upon delivery of the related product or service as compared to over time under the prior revenue recognition standard.
  • Net Income was $71.9 million, resulting in net income of $0.28 per diluted unit. In addition to the revenue impact noted above, net income under the new accounting standard also was impacted favorably by an extended recognition period for commissions, decreasing expenses by $5.9 million.
  • Adjusted net Income was $141.5 million, resulting in adjusted net income of $0.56 per diluted unit.
  • Adjusted EBITDA was $281.1 million. Adjusted EBITDA as percent of Solutions revenue for the first quarter of 2020 was 35.3%

Financial Results – ASC 605 (standard before April 1, 2019)

First Quarter Fiscal 2020

  • Solutions revenue was $755.5 million, compared to $757.7 million for the first fiscal quarter of 2019. Total revenue for the current period, which includes Postage revenue, was $814.0 million compared to $823.3 million in the same period of the prior year. Growth in both the Software & Analytics and Network Solutions businesses was more than offset by an unfavorable impact of $9.2 million from divestitures as well as planned contract eliminations in our Technology-enabled Services business.
  • Net Income was $26.7 million, resulting in net income of $0.11 per diluted unit, compared with net income of $12.5 million and net income of $0.05 per diluted unit, respectively, for the first fiscal quarter of 2019. The favorable impact of productivity improvements and growth across our Software & Analytics and Network Solutions businesses was partially offset by divestitures as well as planned contract eliminations in our Technology Enabled Service business. As part of our stated strategy, we are repositioning certain of our Revenue Cycle Management (“RCM”) service solutions to better address end-market dynamics, enhance efficiency and to improve the long-term growth potential of these solutions.
  • Adjusted net income was $96.2 million, resulting in Adjusted Net Income of $0.38 per diluted unit, compared with adjusted net income of $97.6 million or $0.39 per diluted unit, respectively, for the first fiscal quarter of 2019. Adjusted net income reflects the items noted above.
  • Adjusted EBITDA was $233.5 million, compared with $227.8 million for the first fiscal quarter of 2019. Adjusted EBITDA as a percent of Solutions revenue for the first fiscal quarter of 2020 was 30.9%, compared with 30.1% for the first quarter of 2019. The favorable impact of productivity improvements and growth across our Software and Analytics and Network Solutions segment was partially offset by the unfavorable impact of divestitures as well as planned contract elimination in our Technology Enabled Services business.

Change Healthcare LLC Cash Flow and Balance Sheet Highlights

Net cash provided by operating activities was $84.5 million for three months ended June 30, 2019, a decrease of 55.7% from $190.9 million for the three months ended June 30, 2018. Free cash flow was $17.1 million for the three months ended June 30, 2019, a decrease of 86.4% from $125.7 million for the three months ended June 30, 2018. Adjusted free cash flow was $60.8 million, a decrease of $138.5 million year over year.

Net cash provided by operating activities, free cash flow, and adjusted free cash flow each are affected by pass-thru funds we receive from certain pharmaceutical industry participants in advance of our obligation to remit these funds to participating retail pharmacies. The decrease in cash flow from operations, free cash flow and adjusted free cash flow primarily resulted from the inclusion of $154.6 million of such pass-thru funds in the three months ended June 30, 2018 as compared to $12.3 million for the three months ended June 30, 2019.

Change Healthcare LLC ended the quarter with over $27.4 million of cash, cash equivalents and restricted cash and approximately $5,790.6 million of total long-term debt. Subsequent to quarter end, Change Healthcare Inc. closed an initial public offering of common stock and a concurrent offering of tangible equity units providing approximately $888 million in net proceeds and redeemed $805 million in Term Loan Facility obligations.

As of June 30, 2019, no amounts had been drawn under the senior secured revolving line of credit. On July 3, 2019, the company amended its Revolving Credit Facility to increase the current commitment amount from $500 million to $785 million and to extend the maturity to July 3, 2024.

Recent Business Highlights

  • Introduced Assurance Reimbursement Management Denial Propensity Scoring and Revenue Performance Advisor Denial Prevention. With performance enhanced by Claims Lifecycle Artificial Intelligence, providers of any size now can proactively identify problem claims that could result in denials, and remediate potential issues before the claims are filed.
  • Awarded a six-year contract by CommonWell Health Alliance® to continue to provide clinical interoperability services, including patient identification, record locator services, and document retrieval to improve patient access and care delivery.
  • Introduced the first patient liability solution across the entire patient journey. Developed in partnership with our customers, our Patient Liability Management suite combines revenue cycle management solutions with expert advisory and patient engagement services. The resulting synchronized and engaging patient experience increases collections while improving patient satisfaction.
  • Introduced InterQual 2019, our latest edition of the industry’s flagship clinical decision support solution. Among the new features is support for ‘Hospital in the Home’ programs, which are increasingly used as alternatives to some acute inpatient stays. This latest edition also advances the technology in InterQual AutoReview with Episode Day One review functionality.

Full Year Fiscal 2020 Outlook and 2021 Guidance – ASC 606

Change Healthcare expects Full-Year Fiscal 2020 Solutions Revenue growth of 1-2% including the impact of the sale of our extended care business and planned contract exits in our Technology-enabled Services business; Adjusted EBITDA growth of 6% – 8% and Adjusted Net Income Growth of 9% -11%.

For Fiscal year 2021, the Company expects Solutions Revenue growth of 4%-6%, Adjusted EBITDA growth of 6%-8%.

Second Quarter Fiscal 2020 Guidance – ASC 606

Change Healthcare expects Second Quarter Fiscal 2020 Solutions Revenue in the range of $710 million – $730 million; Adjusted EBITDA in the range of $210 million – $220 million and; Adjusted Net Income in the range of $80 million – $90 million.

While fiscal first quarter revenue increased as a result of ASC 606 implementation, full year revenue is not expected to differ materially between the two accounting standards. Hence, the acceleration of revenue to the first quarter of the fiscal year will reduce the quarterly reported revenue in subsequent Fiscal 2020 reported results versus the prior revenue recognition standard. The impact from extended recognition periods for commission expense as a result of the adoption of ASC 606 is expected to be favorable about $4 million per quarter pre-tax for the remainder of fiscal 2020.

A reconciliation of the forward-looking second-quarter and full-year fiscal 2020 Adjusted EBITDA outlook to net income cannot be provided without unreasonable effort because of the inherent difficulty of accurately forecasting the occurrence and financial impact of the various adjusting items necessary for such reconciliation that have not yet occurred, are out of our control, or cannot be reasonably predicted. For the same reasons, Change Healthcare LLC is unable to assess the probable significance of the unavailable information, which could have a material impact on its future GAAP financial results.

Conference Call and Webcast Information

Change Healthcare will host a conference call on August 14, 2019 at 8:00 a.m. ET. Investors and other interested parties are invited to listen to the conference call by dialing 1-(877) 279-0788 in the U.S.; 1-(270) 215-9894 from abroad, including the conference ID number: 5461017; or via a live, audio webcast on the Company’s website at https://ir.changehealthcare.com/.

A webcast replay will be available for on-demand listening shortly after the completion of the call until the first-quarter fiscal 2021 earnings call, at the aforementioned URL. In addition, a digital audio playback will be available until 11:00 a.m. Eastern Time on Wednesday, August 21, 2019, by dialing 1-855-859-2056 or 1-404-537-3406 and referencing confirmation 5461017.

About Change Healthcare

Change Healthcare (Nasdaq: CHNG) is a leading independent healthcare technology company that provides data and analytics-driven solutions to improve clinical, financial and patient engagement outcomes in the U.S. healthcare system. We are a key catalyst of a value-based healthcare system, accelerating the journey toward improved lives and healthier communities. Learn more at changehealthcare.com.

CHNG-IR

Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of federal securities laws. Any statements made in this quarterly report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plans and strategies. These statements often include words such as “anticipate,” “expect,” “suggest,” “plan,” “believe,” “intend,” “estimate,” “target,” “project,” “should,” “could,” “would,” “may,” “will,” “forecast,” “outlook,” “potential,” “continues,” “seeks,” “predicts,” and the negatives of these words and other similar expressions. Forward-looking statements involve known and unknown risks, uncertainties, including factors disclosed in the Registration Statement on Form S-1 (No. 333-230345) in the section entitled “Risk Factors,” and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on any forward-looking statements in this release. All forward-looking statements are based on information currently available to Change Healthcare and are qualified in their entirety by this cautionary statement. The statements herein speak only as of the date such statements were first made. Except to the extent required by law, Change Healthcare assumes no obligation to update any such forward-looking statements or other statements included in this release.

Non-GAAP Financial Measures

In the Company’s earnings releases, prepared remarks, conference calls, slide presentations and webcasts, there may be use or discussion of non-GAAP financial measures. We believe such measures provide supplemental information to investors with regard to our operating performance and assist investors’ ability to compare our financial results to those of other companies in the same industry. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between the comparable GAAP financial measure and each non-GAAP financial measure are included in this press release after the consolidated financial statements. These non-GAAP financial measures are calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These non-GAAP financial measures should be considered only as supplemental to, and not as superior to, financial measures prepared in accordance with GAAP and may be defined and calculated differently by others in the same industry.

Change Healthcare Inc.

Statements of Operations (unaudited and amounts in thousands, except share and per share amounts)

Three Months Ended

June 30,

2019

2018

Revenue

$

$

Operating expenses

General and administrative

251

31

Total operating expenses

251

31

Operating income (loss)

(251

)

(31

)

Non-operating (income) expense

Loss from Equity Method Investment in the Joint Venture

39,554

22,766

(Gain) Loss on Sale of Interests in the Joint Venture

(464

)

Management fee income

(104

)

(31

)

Total non-operating (income) expense

39,450

22,271

Income (loss) before income tax provision (benefit)

(39,701

)

(22,302

)

Income tax provision (benefit)

(2,184

)

(4,801

)

Net income (loss)

$

(37,517

)

$

(17,501

)

Net income (loss) per share:

Basic

$

(0.50

)

$

(0.23

)

Diluted

$

(0.50

)

$

(0.23

)

Weighted average common shares outstanding:

Basic

75,474,654

75,604,775

Diluted

75,474,654

75,604,775

Change Healthcare Inc.

Balance Sheets (unaudited and amounts in thousands, except share and per share amounts)

June 30,

March 31,

2019

2019

Assets

Current Assets:

Cash

$

3,409

$

3,409

Due from the Joint Venture

574

373

Income taxes receivable

1,601

1,781

Total current assets

5,584

5,563

Dividend receivable

48,807

81,264

Investment in the Joint Venture

1,253,535

1,211,996

Total assets

$

1,307,926

$

1,298,823

Liabilities and stockholders’ equity

Current liabilities:

Accrued expenses

$

343

$

176

Due to the Joint Venture

6,167

6,167

Total current liabilities

6,510

6,343

Deferred income tax liabilities

169,992

159,993

Commitments and contingencies (see Note 4)

Stockholders’ Equity:

Common Stock (par value, $.001), 9,000,000,000 and 252,800,000 shares authorized and 75,474,654 and 75,474,654 shares issued and outstanding at June 30, 2019 and March 31, 2019, respectively

75

75

Class X common stock (par value, $.001), 1 and 1 share authorized and no shares issued and outstanding at June 30, 2019 and March 31, 2019, respectively

Preferred stock (par value, $.001), 900,000,000 and 0 shares authorized and no shares issued and outstanding at June 30, 2019 and March 31, 2019, respectively

Additional paid-in capital

1,159,371

1,153,509

Accumulated other comprehensive income (loss)

(8,039

)

(3,256

)

Retained earnings (deficit)

(19,983

)

(17,841

)

Total stockholders’ equity

1,131,424

1,132,487

Total liabilities and stockholders’ equity

$

1,307,926

$

1,298,823

Change Healthcare Inc.

Statements of Cash Flows (unaudited and amounts in thousands)

Three Months Ended

June 30,

2019

2018

Cash flows from operating activities:

Net income (loss)

$

(37,517

)

$

(17,501

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Loss from Equity Method Investment in the Joint Venture

39,554

22,766

Deferred income tax expense (benefit)

(2,184

)

(4,801

)

(Gain) Loss on Sale of Interests in the Joint Venture

(464

)

Changes in operating assets and liabilities:

Due from the Joint Venture

(201

)

(31

)

Income taxes receivable

180

(208

)

Accrued expenses

168

31

Due to the Joint Venture

208

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Proceeds from sale of interests in Joint Venture

4,782

Net cash provided by (used in) investing activities

4,782

Cash flows from financing activities:

Payments to acquire common stock

(4,782

)

Net cash provided by (used in) financing activities

(4,782

)

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

3,409

Cash, cash equivalents and restricted cash at end of period

$

3,409

$

Change Healthcare LLC

Consolidated Statements of Operations (unaudited and amounts in thousands, except unit and per unit amounts)

Three Months Ended

June 30,

2019

2018

Revenue:

Solutions revenue

$

797,072

$

757,705

Postage revenue

58,484

65,558

Total revenue

855,556

823,263

Operating expenses:

Cost of operations (exclusive of depreciation and amortization below)

326,947

337,430

Research and development

49,339

55,324

Sales, marketing, general and administrative

193,273

206,914

Customer postage

58,484

65,558

Depreciation and amortization

71,316

68,527

Accretion and changes in estimate with related parties, net

3,880

3,824

Total operating expenses

703,239

737,577

Operating income (loss)

152,317

85,686

Non-operating (income) and expense

Interest expense, net

83,406

78,549

Contingent consideration

(791

)

272

Other, net

(3,778

)

(5,532

)

Total non-operating (income) and expense

78,837

73,289

Income (loss) before income tax provision (benefit)

73,480

12,397

Income tax provision (benefit)

1,565

(109

)

Net income (loss)

$

71,915

$

12,506

Net income (loss) per common unit(1):

Basic

$

0.29

$

0.05

Diluted

$

0.28

$

0.05

Weighted average common units outstanding(1):

Basic

251,469,846

251,599,967

Diluted

253,124,478

253,447,527

(1) Common units of Change Healthcare LLC are equivalent to the number of outstanding common shares of Change Healthcare Inc. and membership interests of Change Healthcare LLC held by subsidiaries of McKesson.

Change Healthcare LLC

Consolidated Balance Sheets (unaudited and amounts in thousands)

June 30,

March 31,

2019

2019

Assets

Current assets:

Cash and cash equivalents

$

27,122

$

47,718

Restricted cash

264

1,176

Accounts receivable, net of allowance for doubtful accounts

727,205

759,502

Contract assets

145,054

Prepaid expenses and other current assets

159,489

172,067

Total current assets

1,059,134

980,463

Property and equipment, net

194,027

197,263

Goodwill

3,284,979

3,284,266

Intangible assets, net

1,284,369

1,320,161

Other noncurrent assets, net

480,463

421,985

Total assets

$

6,302,972

$

6,204,138

Liabilities and members’ deficit

Current liabilities:

Drafts and accounts payable

$

48,855

$

98,550

Accrued expenses

332,750

316,179

Deferred revenues

361,663

437,636

Due to related parties, net

28,359

34,629

Current portion of long-term debt

7,085

2,789

Total current liabilities

778,712

889,783

Long-term debt, excluding current portion

5,783,537

5,787,150

Deferred income tax liabilities

107,255

106,099

Tax receivable agreement obligations to related parties

196,696

212,698

Other long-term liabilities

121,655

113,194

Commitments and contingencies (see Note 6)

Members’ deficit

(684,883

)

(904,786

)

Total liabilities and members’ deficit

$

6,302,972

$

6,204,138

Change Healthcare LLC

Consolidated Statements of Cash Flows (unaudited and amounts in thousands)

Three Months Ended

June 30,

2019

2018

Cash flows from operating activities:

Net income (loss)

$

71,915

$

12,506

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

71,316

68,527

Amortization of capitalized software developed for sale

3,452

3,760

Accretion and changes in estimate, net

3,880

3,824

Equity compensation

5,862

5,300

Deferred income tax expense (benefit)

1,158

(613

)

Amortization of debt discount and issuance costs

5,524

5,470

Contingent consideration

(791

)

272

Other

(460

)

(215

)

Changes in operating assets and liabilities:

Accounts receivable

7,748

16,996

Contract assets

(3,049

)

Prepaid expenses and other

(16,338

)

(28,733

)

Accounts payable

(33,954

)

(7,647

)

Accrued expenses, deferred revenue and other liabilities

(25,524

)

115,602

Due to related party, net

(6,269

)

(4,196

)

Net cash provided by (used in) operating activities

84,470

190,853

Cash flows from investing activities:

Capitalized expenditures

(67,414

)

(65,166

)

Net cash provided by (used in) investing activities

(67,414

)

(65,166

)

Cash flows from financing activities:

Payments under tax receivable agreements with related parties

(27,227

)

(25,096

)

Payments on Term Loan Facility

(12,750

)

(12,750

)

Receipts (payments) on derivative instruments

2,112

1,013

Payments of deferred financing obligations

(2,035

)

Capital contribution from Members from exercise of equity awards

205

Repurchase of equity awards

(4,838

)

Advances to Member and Other

(208

)

Other

(759

)

598

Net cash provided by (used in) financing activities

(38,624

)

(43,111

)

Effect of exchange rate changes on cash and cash equivalents

60

(812

)

Net increase (decrease) in cash, cash equivalents and restricted cash

(21,508

)

81,764

Cash, cash equivalents and restricted cash at beginning of period

48,894

50,011

Cash, cash equivalents and restricted cash at end of period

$

27,386

$

131,775

Contacts

Kerry Kelly

External Communications

339-236-2756

Kerry.Kelly@changehealthcare.com

Evan Smith

Investor Relations

404-338-2225

Evan.Smith@changehealthcare.com

Read full story here This article published with permission from Business Wire

Share this: