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| MDAS > SEC Filings for MDAS > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2008 2007 Amount % 2008 2007 Amount %
Gross fees $ 90.2 $ 61.5 $ 28.7 46.7 % $ 235.2 $ 169.5 $ 65.7 38.8 %
Revenue share obligation (14.2 ) (12.2 ) (2.0 ) 16.4 (39.2 ) (34.9 ) (4.2 ) 12.3
Total net revenue 76.0 49.3 26.7 54.2 196.0 134.6 61.4 45.6
Operating income 11.8 6.1 5.7 93.4 25.3 22.7 2.6 11.5
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During the three and nine months ended September 30, 2008, increases in gross
fees and total net revenues compared to the same periods ending September 30,
2007 were primarily attributable to:
• the acquisitions of XactiMed (in May 2007), MD-X (in July 2007) and Accuro
(in June 2008) by our Revenue Cycle Management segment (or the "Revenue
Cycle Management Segment Acquisitions"); and
• strong performance by our Spend Management segment due to higher administrative fees, consulting fees, and subscription revenues, partially offset by declining performance from our decision support software and services in our Revenue Cycle Management segment, which was the result of a scheduled and planned step down in software support and maintenance fees from a large customer and the negative impact of the delay of the release of our newest decision support software (which was released in October 2008).
Increases in operating income during the three and nine months ended
September 30, 2008 compared to the same periods ending September 30, 2007 were
primarily attributable to the increase in gross fees and net revenue described
above partially offset by the following increases in expenses:
• significant increases in amortization of acquired intangibles (an increase
of approximately $2.2 million and $5.2 million during the three and nine
months ended September 30, 2008, respectively);
• non-recurring charges incurred during the nine months ended September 30, 2008, including $2.1 million in intangible asset impairment charges, primarily related to the Accuro Acquisition, and a $3.9 million interest rate swap cancellation charge;
• expenses related to acquisition integration efforts at our Revenue Cycle Management segment; and
• greater general and administrative costs associated with being a publicly-traded company which contributed to higher costs as compared to the prior year. The initial public offering of our common stock was completed on December 18, 2007.
Adjusted EBITDA (a) is summarized as follows for the three and nine months ended September 30, 2008 (unaudited, in millions):
Three Months Ended September 30, Change Nine Months Ended September 30, Change
2008 2007 Amount % 2008 2007 Amount %
Adjusted EBITDA(a) $ 25.2 $ 15.0 $ 10.2 68.1 % $ 60.3 $ 44.8 $ 15.5 34.4 %
Adjusted EBITDA margin 33.2 % 30.4 % 30.8 % 33.3 %
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(a) Adjusted EBITDA is a non-GAAP measure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -Use of Non-GAAP Financial Measures."
Adjusted EBITDA increased $10.2 million and $15.5 million during the three and
nine months ended September 30, 2008, respectively, primarily attributable to
the increases in gross fees and net revenue described above. In addition, for
the nine months ended September 30, 2008, the Adjusted EBITDA margin declined
due to the impact of an increased mix of revenue from our Revenue Cycle
Management segment which generally exhibits lower Adjusted EBITDA margins as
compared to our Spend Management segment.
Recent Developments
Acquisition of Accuro
On June 2, 2008, we completed the acquisition of Accuro. During the three months
ended September 30, 2008, we adjusted our initial preliminary purchase price by
approximately $0.5 million in connection with a post-closing working capital
adjustment required by the purchase agreement. We accrued the approximate
$0.5 million working capital adjustment on our unaudited Condensed Consolidated
Balance Sheet as of September 30, 2008 and paid the adjustment amount in
October 2008.
We acquired all the outstanding stock of Accuro for a total preliminary purchase
price of approximately $357.9 million comprised of approximately $209.9 million
in cash (including approximately $5.4 million in acquisition related costs and
the approximate $0.5 million accrued post-closing working capital adjustment),
approximately 8.85 million unregistered shares of our common stock valued at
approximately $129.4 million, and an additional deferred payment of
$20.0 million payable at our option either in cash or in shares of our common
stock on the first anniversary of the transaction closing date. Accuro's results
of operations are included in our unaudited Condensed Consolidated Statement of
Operations for all periods subsequent to the acquisition date of June 2, 2008.
Accuro is a provider of ASP-based revenue cycle management solutions that help
hospitals, health systems and other ancillary healthcare providers optimize
revenue capture and cash flow. The purchase price paid to Accuro's former
shareholders reflects a premium relative to the value of the identified assets
due to the strategic importance of the transaction to our Company and because
Accuro's technology and service business model does not rely intensively on
fixed assets. The following factors contribute to the strategic importance of
the transaction:
• The acquisition expands our research and development capability and general market presence, and increases our revenue cycle management product and service offerings with well regarded solutions and recurring revenue streams;
• Accuro's business is complementary and a long-term strategic fit that provides us opportunities to expand market share and further penetrate our current customer base;
• The acquisition of Accuro, which was one of our largest and most scaled Revenue Cycle Management segment competitors, allows us to compete effectively for hospital and health system customers; and
• The acquisition offers us the opportunity to leverage cost and revenue synergies.
In addition, Accuro had filed an initial registration statement on Form S-1 with
the SEC on January 23, 2008; accordingly, the Accuro stockholders required a
valuation that was consistent with comparable publicly-traded companies.
Purchase price adjustments related to Accuro were recorded as of September 30,
2008. However, the purchase price allocation continues to be preliminary and is
subject to adjustment in future quarters (typically up to one year from the date
of acquisition). In connection with integrating the operations of Accuro, we
expect to incur additional integration-related expenses during the remainder of
2008. However, we are unable to reliably estimate future integration expenses at
this time.
On August 13, 2008, we filed an amended Form 8-K/A with the SEC that includes
certain historical financial statements of Accuro, and certain unaudited pro
forma combined condensed financial statements of MedAssets and Accuro.
Credit Facility Amendment
In May 2008, in connection with the completion of the Accuro Acquisition, we
entered into the Third Amendment to our existing credit agreement. The amendment
increased our term loan facility by $50.0 million and the commitments to loan
amounts under our revolving credit facility from $110.0 million to
$125.0 million. The amendment also increased the applicable margins on the rate
of interest we pay under our credit agreement. Upon closing this amendment, we
received $50.0 million of proceeds (excluding debt issuance costs) under our
increased term loan facility, and we borrowed $50.0 million under our revolving
credit facility. The proceeds of the $100.0 million in increased borrowings and
existing cash on hand were used to fund the cash portion of the Accuro
Acquisition purchase price.
In September 2008, a subsidiary of Lehman Brothers Holdings Inc. that had
extended commitments of $15.0 million under our revolving credit facility filed
for bankruptcy. This lender has not funded its ratable share of borrowing
requests since this filing and we do not expect that this lender will fund its
pro rata share of any future borrowing requests. Accordingly, until such time as
these commitments are assigned to a substitute lender, the effective commitments
outstanding under the revolver have declined by $15.0 million to $110.0 million.
Termination of Interest Rate Swaps
In June 2008, we terminated two floating-to-fixed rate LIBOR-based interest rate
swaps that were originally set to terminate by July 2010. In consideration of
the early terminations, we paid to the swap counterparty, and incurred an
expense, of $3.9 million for the nine months ended September 30, 2008.
Accordingly, the swaps are no longer recorded on our Condensed Consolidated
Balance Sheet as of September 30, 2008.
Impairment of Intangible Assets
As a result of integrating the operations of Accuro into our operations, certain
of our pre-existing intangible assets were deemed to be impaired as they no
longer provided future economic benefit. Such intangible assets primarily
included certain acquired trade names, developed technology, and internally
developed software. Hence, we recorded non-cash impairment charges totaling
approximately $2.1 million during the nine months ended September 30, 2008.
2008 Long-Term Incentive Plan
Our stockholders approved a new long-term performance incentive plan at our
annual meeting on October 30, 2008. We expect our stock compensation expense
will increase in future periods as we issue new equity awards under the plan.
Segment Structure and Revenue Streams
We deliver our solutions through two business segments, Revenue Cycle Management
and Spend Management. Management's primary metrics to measure segment financial
performance are gross fees, net revenue and Segment Adjusted EBITDA. All our
revenues are from external customers, and inter-segment revenues have been
eliminated. See Note 11 of the Notes to our unaudited Condensed Consolidated
Financial Statements herein for discussion of Segment Adjusted EBITDA, and
certain items of our segment results of operations and financial position.
Revenue Cycle Management
Our Revenue Cycle Management (including the operations of Accuro) segment
provides a comprehensive suite of software and services spanning the revenue
cycle workflow of hospitals, health systems and other ancillary healthcare
providers - from patient admission, patient financial liability estimation,
charge capture, case management, contract management and health information
management through claims processing and accounts receivable management. Our
workflow solutions, together with our data management and business intelligence
tools, increase revenue capture and cash collections, reduce accounts receivable
balances and improve regulatory compliance. Our Revenue Cycle Management segment
revenue consists of the following components:
Subscription and implementation fees. We earn fixed subscription fees on a
monthly or annual basis on multi-year contracts for customer access to our
ASP-based solutions. We also charge our customers upfront fees for
implementation services. Implementation fees are earned over the subscription
period or estimated customer relationship period, whichever is longer.
Transaction fees. For certain revenue cycle management solutions, we earn fees
that vary based on the volume of customer transactions or enrolled members.
Software-related fees. We earn license, consulting, maintenance and other
software-related service fees for our business intelligence, decision support
and other software products.
Service fees. For certain revenue cycle management solutions we earn fees based
on a percentage of cash remittances collected.
Spend Management
Our Spend Management segment provides a suite of technology-enabled services
that help our customers manage their non-labor expense categories. Our solutions
lower supply and medical device pricing and utilization by managing the
procurement process through our group purchasing organization's portfolio of
contracts, our consulting services and business intelligence tools. Our Spend
Management segment revenue consists of the following components:
Administrative fees and revenue share obligations. We earn administrative fees
from manufacturers, distributors and other vendors of products and services with
whom we have contracts under which our group purchasing organization customers
may purchase products and services. Administrative fees represent a percentage,
which we refer to as our administrative fee ratio, typically ranging from 0.25%
to 3.00% of the purchases made by our group purchasing organization customers
through contracts with our vendors.
Our group purchasing organization customers make purchases, and receive
shipments, directly from the vendors. Generally on a monthly or quarterly basis,
vendors provide us with a report describing the purchases made by our customers
through our group purchasing organization vendor contracts, including associated
administrative fees. We recognize revenue upon the receipt of these reports from
vendors.
Some customer contracts require that a portion of our administrative fees are
contingent upon achieving certain financial improvements, such as lower supply
costs, which we refer to as performance targets. Contingent administrative fees
are not recognized as revenue until the customer confirms achievement of those
contractual performance targets. Prior to customer confirmation that a
performance target has been achieved, we record contingent administrative fees
as deferred revenue on our consolidated balance sheet. Often, recognition of
this revenue occurs in periods subsequent to the recognition of the associated
costs. Should we fail to meet a performance target, we may be contractually
obligated to refund some or all of the contingent fees.
Additionally, in many cases, we are contractually obligated to pay a portion of
the administrative fees to our hospital and health system customers. Typically
this amount, or revenue share obligation, is calculated as a percentage of
administrative fees earned on a particular customer's purchases from our
vendors. Our total net revenue on our consolidated statements of operations is
shown net of the revenue share obligation.
Other service fees. The following items are included as other service fees in
our condensed consolidated statement of operations:
• Consulting fees. We consult with our customers regarding the costs and
utilization of medical devices and implantable physician preference items,
or PPI, and the efficiency and quality of their key clinical service lines.
Our consulting projects are typically fixed fee projects with a duration of
three to nine months, and the related revenues are earned as services are
rendered.
• Subscription fees. We also offer technology-enabled services that provide spend management analytics and data services to improve operational efficiency, reduce supply costs, and increase transparency across spend management processes. We earn fixed subscription fees on a monthly basis for these ASP-hosted services.
Operating Expenses
We classify our operating expenses as follows:
Cost of revenue. Cost of revenue primarily consists of the direct labor costs
incurred to generate our revenue. Direct labor costs consist primarily of
salaries, benefits, and other direct costs and share-based compensation expenses
related to personnel who provide services to implement our solutions for our
customers. As the majority of our service offerings are performed internally,
our costs to provide these services are primarily labor-driven. A less
significant portion of our cost of revenue derives from third-party products and
services, and client reimbursed out-of-pocket costs. Cost of revenue does not
include allocated amounts for rent, depreciation or amortization, but does
include the amortization for the cost of software to be sold, leased, or
otherwise marketed. As a result of the Accuro Acquisition, we expect some
reclassifications between and among cost of revenue and other operating expense
classifications resulting from the implementation of our accounting policies
that could affect period over period comparability.
Product development expenses. Product development expenses primarily consist of
the salaries, benefits, and share-based compensation expense of the technology
professionals who develop our software-related products and services.
Selling and marketing expenses. Selling and marketing expenses consist primarily
of costs related to marketing programs (including trade shows and brand
messaging), personnel-related expenses for sales and marketing employees
(including salaries, benefits, incentive compensation and share-based
compensation expense), certain meeting costs, and travel-related expenses.
General and administrative expenses. General and administrative expenses consist
primarily of personnel-related expenses for administrative employees (including
salaries, benefits, incentive compensation and share-based compensation expense)
and travel-related expenses, occupancy and other indirect costs, insurance
costs, professional fees, and other general overhead expenses. As compared to
2007, we expect that general and administrative expenses will continue to
increase as we incur additional expenses related to being a publicly-traded
company.
Depreciation. Depreciation expense consists primarily of depreciation of fixed
assets and the amortization of software, including capitalized costs of software
developed for internal use.
Amortization of intangibles. Amortization of intangibles includes the
amortization of all identified intangible assets (with the exception of
software), primarily resulting from acquisitions.
Results of Operations
Consolidated Tables
The following table sets forth our consolidated results of operations grouped by
segment for the periods shown:
Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management $ 45,791 $ 24,386 $ 102,218 $ 54,394
Spend Management
Administrative fees 39,867 34,837 117,634 105,880
Revenue share obligation (14,204 ) (12,195 ) (39,279 ) (34,914 )
Other service fees 4,518 2,245 15,392 9,237
Total Spend Management 30,181 24,887 93,747 80,203
Total net revenue 75,972 49,273 195,965 134,597
Operating expenses:
Revenue Cycle Management 41,702 23,850 100,704 51,104
Spend Management 17,217 15,566 54,289 49,754
Total segment operating expenses 58,919 39,416 154,993 100,858
Operating income:
Revenue Cycle Management 4,089 536 1,514 3,290
Spend Management 12,964 9,321 39,458 30,449
Total segment operating income 17,053 9,857 40,972 33,739
Corporate expenses(1) (5,226 ) (3,799 ) (15,683 ) (11,074 )
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Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
(Unaudited, in thousands)
Operating income 11,827 6,058 25,289 22,665
Other (expense) income:
Interest expense (5,803 ) (6,763 ) (15,120 ) (14,151 )
Other income (expense) 228 1,189 (2,101 ) 2,101
Income before income taxes 6,252 484 8,068 10,615
Income tax expense (2,566 ) (320 ) (3,259 ) (4,193 )
Net income 3,686 164 4,809 6,422
Reportable segment Adjusted EBITDA(2):
Revenue Cycle Management 14,003 6,139 26,043 16,137
Spend Management $ 15,207 $ 11,837 $ 46,547 $ 37,494
Reportable segment Adjusted EBITDA margin (3):
Revenue Cycle Management 30.6 % 25.2 % 25.5 % 29.7 %
Spend Management 50.4 % 47.6 % 49.6 % 46.8 %
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(1) Represents the expenses of corporate office operations. Corporate does not represent an operating segment of the Company.
(2) Management's
primary
metric of
segment
profit or
loss is
Segment
Adjusted
EBITDA. See
Note 11 of
our
unaudited
Notes to
Condensed
Consolidated
Financial
Statements
herein.
(3) Reportable
segment
Adjusted
EBITDA
margin
represents
each
reportable
segment's
Adjusted
EBITDA as a
percentage
of each
segment's
respective
net revenue.
Comparison of the Three Months Ended September 30, 2008 and September 30, 2007
Three Months Ended September 30,
2008 2007 Change
% of % of
Amount Revenue Amount Revenue Amount %
. . .
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