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Change Healthcare Reports Third Quarter 2016 Results

NASHVILLE, Tenn., Nov. 10, 2016 /PRNewswire/ -- Change Healthcare Holdings, Inc., a leading provider of software and analytics, network solutions and technology-enabled services designed to enable smarter healthcare, today announced financial results for the three and nine months ended September 30, 2016, as summarized below:





















Three Months Ended


Nine Months Ended



September 30,


September 30,

(In millions)


2016


2015


2016


2015

Solutions revenue (exclusive of postage)


$307.6


$287.9


$942.4


$810.2

Net income (loss)


$2.5


($32.9)


($26.3)


($30.7)

Adjusted EBITDA


$106.3


$101.8


$314.7


$287.2

 

Highlights Include:

  • As previously announced on June 28, 2016, Change Healthcare jointly announced the creation of a new healthcare information technology company with McKesson Corporation. The new entity will combine Change Healthcare and the majority of McKesson Technology Solutions (MTS) business into a separate company positioned to address the healthcare industry's emerging and most pressing administrative challenges. On August 31, 2016, McKesson Corporation received a request for additional information and documentary materials from the U.S. Department of Justice pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976.  Change Healthcare continues to anticipate that the transaction will be completed in the first half of calendar year 2017.
  • Third quarter solutions revenue was $307.6 million, an increase of 6.8%, compared to $287.9 million for the same period in 2015.
  • Third quarter net income was $2.5 million compared to a net loss of $32.9 million for the same period in 2015.
  • Third quarter Non-GAAP Adjusted EBITDA increased 4.5% to $106.3 million from $101.8 million for the comparable period in 2015.

"During the third quarter, we made additional progress on our long-term strategic objectives by continuing to focus on helping our customers increase revenue as well as improve cost, quality and outcomes across the healthcare industry," commented Neil de Crescenzo, president and chief executive officer for Change Healthcare. "We're also focused on planning for our pending transaction with McKesson Technology Solutions and remain excited about the opportunity this transaction presents to form a new entity well-positioned to address the healthcare industry's emerging and most pressing administrative challenges."

Solutions Revenue

Third quarter solutions revenue was $307.6 million, an increase of 6.8%, compared to $287.9 million for the same period in 2015. This increase in solutions revenue as compared to the prior year period was primarily due to the Altegra Health acquisition in August 2015 and continued growth in electronic payments and payment integrity solutions. These gains were partially offset by lower volumes in communication and payment print solutions and eligibility and enrollment solutions.

Year-to-date solutions revenue was $942.4 million, an increase of 16.3%, compared to $810.2 million for the same period in 2015.

Net Income/Loss

Third quarter net income was $2.5 million compared to a net loss of $32.9 million for the same period in 2015. Third quarter net income was primarily due to a reduction of intangible asset amortization expense from the prior year period related to the previous trade name and changes in state tax laws and rates in the current year period.

Year-to-date net loss was $26.3 million compared to $30.7 million for the same period in 2015.

Non-GAAP Adjusted EBITDA

Third quarter Non-GAAP Adjusted EBITDA increased 4.5% to $106.3 million, or 34.6% of solutions revenue, from $101.8 million, or 35.3% of solutions revenue, for the comparable period in 2015. This increase in Adjusted EBITDA compared to the prior year period was primarily due to business growth, including the impact of acquisitions. Consistent with expectations, Non-GAAP Adjusted EBITDA decreased as a percentage of solutions revenue compared to the prior year period primarily due to changes in revenue mix as a result of the Altegra Health acquisition.

Year-to-date Non-GAAP Adjusted EBITDA increased 9.6% to $314.7 million, or 33.4% of solutions revenue, from $287.2 million, or 35.5% of solutions revenue, for the comparable period in 2015.

A reconciliation of Change Healthcare's financial results determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP) to certain Non-GAAP financial measures has been provided in the financial statement tables included in this release to supplement its unaudited condensed consolidated financial statements presented on a GAAP basis.  An explanation of these Non-GAAP measures is also included below under the heading "Explanation of Non-GAAP Financial Measures."

Balance Sheet

As of September 30, 2016, cash and cash equivalents were $92.4 million compared to $66.7 million as of December 31, 2015.

Total debt was $2.8 billion as of September 30, 2016 and December 31, 2015.

The Company increased its financial flexibility during the third quarter by extending the maturity date in respect of $96.6 million of its existing $125.0 million revolving credit facility from November 2016 to August 2018 on the same terms as the existing revolving credit facility.

Cash Flow

Cash flow provided by operations totaled $145.0 million for the nine months ended September 30, 2016 compared to $152.3 million for the same period in the prior year.  Cash flow from operations for the nine months ended September 30, 2016 was impacted by increased interest payments as a result of the Altegra Health acquisition and related financing and the timing of collections and related disbursements.

About Change Healthcare

Change Healthcare is a leading provider of software and analytics, network solutions and technology-enabled services that optimize communications, payments and actionable insights designed to enable smarter healthcare. By leveraging its Intelligent Healthcare Network, which includes the single largest financial and administrative network in the United States healthcare system, payers, providers and pharmacies are able to increase revenue, improve efficiency, reduce costs, increase cash flow and more effectively manage complex workflows. Learn more at www.changehealthcare.com.

Explanation of Non-GAAP Financial Measures

Change Healthcare's management believes that, in order to properly understand Change Healthcare's short-term and long-term financial trends, investors may wish to consider the impact of certain non-cash or non-operating items, when used as a supplement to financial performance measures prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).  Management uses results of operations before such excluded items to evaluate the operational performance of Change Healthcare as a basis for strategic planning and as a performance evaluation metric in determining achievement of certain executive and management incentive compensation programs.  Investors should consider these Non-GAAP measures in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP.  In addition to the description provided below, reconciliations of GAAP to Non-GAAP results are provided in the financial statement tables included in this release.

In this release, Change Healthcare defines Adjusted EBITDA as EBITDA (which is defined as net income (loss) before net interest expense, income tax provision (benefit) and depreciation and amortization), plus certain other non-cash or non-operating items (collectively, "EBITDA Adjustments").

To properly evaluate Change Healthcare's business, Change Healthcare encourages investors to review the GAAP financial information included in this release, and not rely on any single financial measure to evaluate Change Healthcare's business.  Change Healthcare also strongly encourages investors to review the reconciliation of net income (loss) to the Non-GAAP measure of Adjusted EBITDA.  Adjusted EBITDA, as Change Healthcare defines it, may differ from and may not be comparable to similarly titled measures used by other companies, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations.  Adjusted EBITDA calculations also are used in Change Healthcare's credit facilities and indentures, although the adjustments used to calculate Adjusted EBITDA as used in Change Healthcare's credit facilities and indentures may vary in certain respects among such agreements and from those presented below.

Management uses Adjusted EBITDA to facilitate a comparison of Change Healthcare's operating performance on a consistent basis from period to period that, when viewed in combination with Change Healthcare's GAAP results, management believes provides a more complete understanding of factors and trends affecting Change Healthcare's business than GAAP measures alone.  Management believes this Non-GAAP measure assists Change Healthcare's board of directors, management, lenders and investors in comparing Change Healthcare's operating performance on a consistent basis because it removes where applicable, the impact of Change Healthcare's capital structure, asset base, acquisition accounting, non-cash charges and non-operating items from Change Healthcare's operating performance.

Forward-Looking Statements

Statements made in this press release that express Change Healthcare's or management's intentions, plans, beliefs, expectations or predictions of future events are forward-looking statements.  These statements often include words such as "may," "will," "should," "believe," "expect," "anticipate," "intend," "plan," "estimate" or similar expressions.  Forward-looking statements may include information concerning the pending MTS transaction and Change Healthcare's possible or assumed future results of operations, including descriptions of Change Healthcare's revenues, profitability, outlook and overall business strategy.  You should not place undue reliance on these statements because they are subject to numerous uncertainties and factors relating to the pending MTS transaction and Change Healthcare's operations and business environment, all of which are difficult to predict and many of which are beyond Change Healthcare's control.  Although Change Healthcare believes that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect Change Healthcare's actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.  Such factors related to Change Healthcare's actual financial results or results of operations include:  effects of competition, including competition from entities that are customers for certain of Change Healthcare's solutions; Change Healthcare's ability to maintain relationships with its customers and channel partners; Change Healthcare's ability to effectively cross-sell its solutions to existing customers and to continue to generate revenue and maintain profitability by developing or acquiring and successfully deploying new or updated solutions; the anticipated benefits from acquisitions (including Altegra Health) and the pending MTS transaction not being fully realized or not being realized within the expected time frames; general economic, business or regulatory conditions affecting the healthcare information technology and services industries; as well as the other risks discussed in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections and elsewhere in Change Healthcare's Annual Report filed on Form 10-K for the year ended December 31, 2015, as well as other reports filed by Change Healthcare with the Securities and Exchange Commission (the "SEC"). Such factors related to the pending MTS transaction include: the ability to satisfy all applicable closing conditions to the transaction, including antitrust clearance; the ability to successfully complete the related financing transactions; the ability to accurately estimate the costs associated with the MTS transaction;  the possibility that the expected benefits of the MTS transaction may not materialize as expected; the ability to successfully implement an integration strategy for the combined entity; as well as the ability to ensure continued performance or market growth of the combined entity's products and services. More information regarding the pending MTS transaction is included in the Current Reports on Form 8-K filed by Change Healthcare with the SEC on July 5, 2016 and September 6, 2016.

Forward-looking statements made by Change Healthcare herein, or elsewhere, speak only as of the date on which made. Change Healthcare expressly disclaims any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in Change Healthcare's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based.   

 


 

Change Healthcare Holdings, Inc.

Condensed Consolidated Statements of Operations

(unaudited and amounts in thousands)
















Three Months


Three Months


Nine Months


Nine Months



Ended


Ended


Ended


Ended



September 30,


September 30,


September 30,


September 30,



2016


2015


2016


2015

Revenue:













Solutions revenue


$

307,586


$

287,946


$

942,362


$

810,162

Postage revenue



73,880



89,839



234,205



268,119

Total revenue



381,466



377,785



1,176,567



1,078,281

Costs and expenses:













Cost of operations (exclusive of depreciation and amortization below)



138,685



129,385



430,216



371,859

Development and engineering



16,494



11,651



46,015



32,600

Sales, marketing, general and administrative



69,513



56,719



210,377



151,955

Customer postage



73,880



89,839



234,205



268,119

Depreciation and amortization



65,899



85,817



188,882



183,446

Accretion



1,721



6,458



10,645



15,254

Impairment of long-lived assets



20



219



251



1,180

Operating income (loss)



15,254



(2,303)



55,976



53,868

Interest expense, net



46,534



45,541



139,720



121,685

Contingent consideration





(4,660)





(4,825)

Income (loss) before income tax provision (benefit)



(31,280)



(43,184)



(83,744)



(62,992)

Income tax provision (benefit)



(33,765)



(10,278)



(57,438)



(32,264)

Net income (loss)


$

2,485


$

(32,906)


$

(26,306)


$

(30,728)

 

 

 

Change Healthcare Holdings, Inc.

Condensed Consolidated Balance Sheets

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










September 30,


December 31,



2016


2015








ASSETS

Current assets:







Cash and cash equivalents


$

92,449


$

66,655

Accounts receivable, net of allowance for doubtful accounts of $3,610 and $3,379  at September 30, 2016 and December 31, 2015, respectively



276,378



280,858

Prepaid expenses and other current assets



42,559



35,413

Total current assets



411,386



382,926

Property and equipment, net



227,670



244,145

Goodwill



2,229,228



2,230,100

Intangible assets, net



1,638,654



1,707,863

Other assets, net



9,776



8,500

Total assets


$

4,516,714


$

4,573,534

LIABILITIES AND EQUITY

Current liabilities:







Accounts payable


$

26,316


$

27,950

Accrued expenses



177,796



167,169

Deferred revenues



18,189



12,943

Current portion of long-term debt



30,163



32,775

Total current liabilities



252,464



240,837

Long-term debt, excluding current portion



2,740,554



2,741,178

Deferred income tax liabilities



370,233



430,383

Tax receivable agreement obligations to related parties



184,139



173,493

Other long-term liabilities



16,173



11,954

Commitments and contingencies







Equity:







Common stock (par value, $.01), 100 shares authorized and outstanding at September 30, 2016 and December 31, 2015, respectively





Additional paid-in capital



1,325,585



1,319,754

Accumulated other comprehensive income (loss)



(4,719)



(2,656)

Accumulated deficit



(367,715)



(341,409)

Total equity



953,151



975,689

Total liabilities and equity


$

4,516,714


$

4,573,534

 

 

 

Change Healthcare Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited and amounts in thousands)











Nine Months


Nine Months




Ended


Ended




September 30,


September 30,




2016


2015


Operating activities








Net income (loss)


$

(26,306)


$

(30,728)


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








Depreciation and amortization



188,882



183,446


Accretion



10,645



15,254


Equity compensation



8,089



6,814


Deferred income tax expense (benefit)



(57,713)



(28,837)


Amortization of debt discount and issuance costs



10,224



7,441


Contingent consideration



-



(4,825)


Impairment of long-lived assets



251



1,180


Other



(1,417)



(1,474)


Changes in operating assets and liabilities:








Accounts receivable



3,489



6,147


Prepaid expenses and other



(8,344)



(11,674)


Accounts payable



(3,839)



10,517


Accrued expenses, deferred revenue and other liabilities



21,051



(918)


Net cash provided by (used in) operating activities



145,012



152,343


Investing activities








Purchases of property and equipment



(53,830)



(39,175)


Payments for acquisitions, net of cash acquired



1,502



(717,669)


Purchases of technology-based intangible assets



(43,495)



(3,676)


Net cash provided by (used in) investing activities



(95,823)



(760,520)


Financing activities








Proceeds from Term Loan Facility



-



385,411


Proceeds from Senior Notes



-



243,453


Proceeds from Revolving Facility



-



60,000


Payments on Revolving Facility



-



(60,000)


Payments on Term Loan Facility



(13,890)



(11,870)


Payment of debt assumed from acquisition



-



(154,469)


Payments of deferred financing obligations



(7,621)



(6,173)


Repurchase of Parent common stock



(1,884)



(4,351)


Capital contribution from Investor Group and management



-



166,881


Payment of contingent consideration



-



(5,553)


Other



-



(2,500)


Net cash provided by (used in) financing activities



(23,395)



610,829


Net increase (decrease) in cash and cash equivalents



25,794



2,652


Cash and cash equivalents at beginning of period



66,655



82,306


Cash and cash equivalents at end of period


$

92,449


$

84,958


 

 


















Change Healthcare Holdings, Inc.

Reconciliation of GAAP Net Income to Adjusted EBITDA

(unaudited and amounts in thousands)






































Three Months


Three Months


Nine Months


Nine Months






Ended


Ended


Ended


Ended






September 30,


September 30,


September 30,


September 30,






2016


2015


2016


2015

















Net income (loss)


$

2,485


$

(32,906)


$

(26,306)


$

(30,728)

Interest expense, net



46,534



45,541



139,720



121,685

Income tax provision (benefit)



(33,765)



(10,278)



(57,438)



(32,264)

Depreciation and amortization



65,899



85,817



188,882



183,446

EBITDA



81,153



88,174



244,858



242,139

















EBITDA Adjustments:














Equity compensation



3,035



2,631



8,089



6,814


Acquisition accounting adjustments



222



386



815



1,315


Acquisition-related costs



889



3,728



3,754



6,882


MTS transaction-related costs



6,818





15,787




Monitoring fees and related costs



1,525



1,960



4,710



5,138


Strategic initiatives, duplicative and transition costs



5,941



3,159



14,532



8,153


Severance costs



4,405



847



7,802



4,964


Accretion



1,721



6,458



10,645



15,254


Impairment of long-lived assets



20



219



251



1,180


Contingent consideration





(4,660)





(4,825)


Other non-routine, net



595



(1,121)



3,459



217


EBITDA Adjustments



25,171



13,607



69,844



45,092

Adjusted EBITDA


$

106,324


$

101,781


$

314,702


$

287,231

 

SOURCE Change Healthcare Holdings, Inc.

For further information: Julie Loftus Trudell, Senior Vice President, Investor Relations, 3055 Lebanon Pike, Suite 1000, Nashville, TN 37214, Direct: 615.932.3445, Cell: 757-642-1995, Email: jtrudell@changehealthcare.com

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