Company Quick10K Filing
Quick10K
HMS Holdings
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$36.97 87 $3,220
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-10-06 Regulation FD, Exhibits
8-K 2019-09-16 Regulation FD, Exhibits
8-K 2019-08-02 Earnings, Exhibits
8-K 2019-06-19 Officers, Regulation FD, Exhibits
8-K 2019-05-22 Officers, Shareholder Vote, Exhibits
8-K 2019-05-03 Earnings, Exhibits
8-K 2019-02-25 Officers
8-K 2019-02-22 Earnings, Exhibits
8-K 2019-01-09 Officers
8-K 2019-01-07 Regulation FD, Exhibits
8-K 2018-11-02 Earnings, Exhibits
8-K 2018-08-03 Earnings, Exhibits
8-K 2018-06-27 Enter Agreement, Exhibits
8-K 2018-05-25 Shareholder Rights, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-05-04 Earnings, Exhibits
8-K 2018-02-21 Earnings, Officers, Exhibits
8-K 2018-01-08 Regulation FD, Exhibits
MA Mastercard 287,144
CSGP Costar Group 22,440
LLNW Limelight Networks 264
LQDT Liquidity Services 244
MGI MoneyGram 237
GIG Gigcapital 192
NCTY The9 164
CTEK CynergisTek 33
CCC Churchill Capital 0
NEBU Nebula Acquisition 0
HMSY 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.2 a102nqsoagreement-empl.htm
EX-10.3 a103nqsoagreement-outs.htm
EX-10.4 a104rsuagreement-emplo.htm
EX-10.5 a105rsuagreement-outsi.htm
EX-31.1 hmsy-20190630xex3111.htm
EX-31.2 hmsy-20190630xex3121.htm
EX-32.1 hmsy-20190630xex3211.htm
EX-32.2 hmsy-20190630xex3221.htm

HMS Holdings Earnings 2019-06-30

HMSY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-50194
hmslogoregistration2colorrgb.jpg
HMS HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Delaware
 
 
11-3656261
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
5615 High Point Drive
Irving
TX
75038
(Address of principal executive offices)
 
 
(Zip Code)
(214) 453-3000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock $0.01 par value
HMSY
The Nasdaq Stock Market LLC
Nasdaq Global Select Market
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 every Interactive Data File required to be submitted 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 such files).  Yes   No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer
Accelerated filer
Non-accelerated filer
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 

As of July 31, 2019, there were approximately 87,353,476 shares of the registrant’s common stock outstanding.




HMS HOLDINGS CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Glossary
Throughout this Quarterly Report on Form 10-Q, the Company may use certain abbreviations, acronyms and terms which are described below:
ACA
Patient Protections and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act
ACO
Accountable Care Organization
ADR
Additional Documentation Request
ASC
Accounting Standards Codification
ASO
Administrative Service Only
ASU
Accounting Standards Update
CHIP
Children's Health Insurance Program
CMS
Centers for Medicare & Medicaid Services
CMS NHE
CMS National Health Expenditures
COB
Coordination of benefits
COSO
Committee of Sponsoring Organizations of the Treadway Commission
Credit Agreement
The Amended and Restated Credit Agreement dated as of May 3, 2013, as amended by Amendment  No. 1 to Amended and Restated Credit Agreement dated as of March 8, 2017, and as further amended by Amendment No. 2 to Amended and Restated Credit Agreement, dated as of December 19, 2017, by and among HMS Holdings Corp. the Guarantors party thereto, the Lenders party thereto and Citibank, N.A. as Administrative Agent
DSO
Days sales outstanding
ERISA
Employment Retirement Income Security Act of 1974
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
Form 10-Q
HMS Holdings Corp. Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019
HIPAA
Health Insurance Portability and Accountability Act of 1996
HITECH
Health Information Technology for Economic and Clinical Health Act
IRC
Internal Revenue Code
IRS
U.S. Internal Revenue Service
LIBO Rate
London Interbank Offered Rate (or any successor rate determined in accordance with the Credit Agreement)
MCO
Managed Care Organization
PBM
Pharmacy Benefit Manager
PHI
Protected health information
PHM
Population Health Management
PI
Payment Integrity
PMPM
Per Member Per Month
PMPY
Per Member Per Year
R&D Credit
U.S. Research and Experimentation Tax Credit pursuant to IRC Section 41

1



RAC
Recovery Audit Contractor
RFP
Request for proposal
ROU
Right-of-use
SEC
U.S. Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Section 199 Deduction
U.S. Production Activities Deduction pursuant to IRC Section 199
SG&A
Selling, general and administrative
TPL
Third-party liability
U.S. GAAP
United States Generally Accepted Accounting Principles
2006 Stock Plan
HMS Holdings Corp. Fourth Amended and Restated 2006 Stock Plan, as amended by Amendment No. 1 to the HMS Holdings Corp. Fourth Amended and Restated 2006 Stock Plan dated as of February 16, 2017
2016 Omnibus Plan
HMS Holdings Corp. 2016 Omnibus Incentive Plan
2017 Tax Act
Tax Cuts and Jobs Act of 2017
2018 Form 10-K
HMS Holdings Corp. Annual Report on Form 10-K for the year ended December 31, 2018
2019 Omnibus Plan
HMS Holdings Corp. 2019 Omnibus Incentive Plan
401(k) Plan
HMS Holdings Corp. 401(k) Plan

2



For purposes of this Form 10-Q, the terms “HMS,” “Company,” “we,” “us,” and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise. 
Cautionary Note Regarding Forward-Looking Statements
Included in this Form 10-Q are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements. Such statements relate to our current expectations, projections and assumptions about our business, the economy and future events or conditions. They do not relate strictly to historical or current facts.
We have tried to identify forward-looking statements by using words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “likely,” “may,” “outlook,” “plan,” “potential,” “project,” “seek,” “strategy,” “target,” “trend,” “will,” “would,” “could,” “should,” and similar expressions and references to guidance, although some forward-looking statements may be expressed differently. These statements include, among other things, information concerning our future growth, business strategy, strategic or operational initiatives, our future operating or financial performance, our ability to invest in and utilize our data and analytics capabilities to expand our solutions and services, the benefits and synergies to be obtained from completed and future acquisitions, the future performance of companies we have acquired, our future expenses, interest rates and tax rates, our ability to meet our future liquidity requirements, the impact of changes to U.S. healthcare legislation or healthcare spending affecting Medicare, Medicaid or other publicly funded or subsidized health programs, and other statements regarding our possible future actions, business plans, objectives and prospects.
Forward-looking statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual results may differ materially from past results and from those indicated by such forward-looking statements if known or unknown risks or uncertainties materialize, or if underlying assumptions prove inaccurate. These risks and uncertainties include, among other things:
our ability to execute our business plans or growth strategy;
our ability to innovate, develop or implement new or enhanced solutions or services;
the nature of investment and acquisition opportunities we are pursuing, and the successful execution of such investments and acquisitions;
our ability to successfully integrate acquired businesses and realize synergies;
significant competition for our solutions and services;
variations in our results of operations;
our ability to accurately forecast the revenue under our contracts and solutions;
our ability to protect our systems from damage, interruption or breach, and to maintain effective information and technology systems and networks;
our ability to protect our intellectual property rights, proprietary technology, information processes and know-how;
our failure to maintain a high level of customer retention or the unexpected reduction in scope or termination of key contracts with major customers;
customer dissatisfaction or our non-compliance with contractual provisions or regulatory requirements;
our failure to meet performance standards triggering significant costs or liabilities under our contracts;

3



our inability to manage our relationships with data sources and suppliers;
our reliance on subcontractors and other third party providers and parties to perform services;
our ability to continue to secure contracts and favorable contract terms through the competitive bidding process;
pending or threatened litigation;
unfavorable outcomes in legal proceedings;
our success in attracting and retaining qualified employees and members of our management team;
our ability to generate sufficient cash to cover our interest and principal payments under our credit facility;
unexpected changes in tax laws, regulations or guidance and unexpected changes in our effective tax rate;
unanticipated increases in the number or amount of claims for which we are self-insured;
accounting changes or revisions;
changes in the U.S. healthcare environment or healthcare financing system, including regulatory, budgetary or political actions that affect healthcare spending or the practices and operations of healthcare organizations;
our failure to comply with applicable laws and regulations governing individual privacy and information security or to protect such information from theft and misuse;
our ability to comply with current and future legal and regulatory requirements;
negative results of government or customer reviews, audits or investigations;
state or federal limitations related to outsourcing of certain government programs or functions;
restrictions on bidding or performing certain work due to perceived conflicts of interests;
the market price of our common stock and lack of dividend payments; and
anti-takeover provisions in our corporate governance documents.
These and other risks are discussed in this Form 10-Q and under the headings “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” of our 2018 Form 10-K, and in other documents we file with the SEC.
Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. We caution readers not to place undue reliance upon any of these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our reports and other filings with the SEC.
Market and Industry Data
This Form 10-Q may include market, industry and government data and forecasts that have been obtained from publicly available information, various industry publications, other published industry sources and our own internal data and estimates. We have not independently verified third-party information and cannot make any representation as to the accuracy or completeness of such information. None of the reports and other materials of third-party sources referred to in this Form 10-Q were prepared for use in, or in connection with, this Form 10-Q.
Trademarks and Trade Names

4



We have a number of registered trademarks, including HMS®, as well as the corresponding HMS + logo design mark, HMS IntegritySource®, Eliza®, Essette®, and Elli®. These and other trademarks of ours appearing in this Form 10-Q are our property. Solely for convenience, trademarks and trade names of ours referred to in this Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names. Other trademarks and trade names appearing in this Form 10-Q are the property of their respective owners. We do not intend our use or display of other companies' trademarks or trade names to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

5



PART I — FINANCIAL INFORMATION

Item 1. Financial Statements
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
June 30,
2019
 
December 31,
2018
Assets
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
268,677

 
$
178,946

Accounts receivable, net of allowance of $12,808 and $13,683, at June 30, 2019 and December 31, 2018, respectively
199,932

 
206,772

Prepaid expenses
20,348

 
19,970

Income tax receivable
9,431

 
18,817

Deferred financing costs, net
564

 
564

Other current assets
225

 
240

Total current assets
499,177

 
425,309

Property and equipment, net
86,607

 
94,435

Goodwill
487,617

 
487,617

Intangible assets, net
62,463

 
67,140

Operating lease right-of-use assets
18,940



Deferred financing costs, net
1,391

 
1,673

Other assets
3,544

 
2,344

Total assets
$
1,159,739

 
$
1,078,518


 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable, accrued expenses and other liabilities
$
71,330

 
$
74,902

Estimated liability for appeals
2,948

 
21,723

Total current liabilities
74,278

 
96,625

Long-term liabilities:
 
 
 
Revolving credit facility
240,000

 
240,000

Operating lease liabilities
17,245



Net deferred tax liabilities
23,073

 
18,485

Other liabilities
7,173

 
10,012

Total long-term liabilities
287,491

 
268,497

Total liabilities
361,769

 
365,122

Commitments and contingencies


 


Shareholders' equity:
 
 
 
Preferred stock -- $0.01 par value; 5,000,000 shares authorized; none issued

 

Common stock -- $0.01 par value; 175,000,000 shares authorized;101,014,406 shares issued and 87,350,498 shares outstanding at June 30, 2019; 98,924,501 shares issued and 85,261,664 shares outstanding at December 31, 2018
1,010

 
989

Capital in excess of par value
461,559

 
425,748

Retained earnings
470,977

 
422,235

Treasury stock, at cost: 13,663,194 shares at June 30, 2019 and December 31, 2018
(135,576
)
 
(135,576
)
Total shareholders' equity
797,970

 
713,396

Total liabilities and shareholders' equity
$
1,159,739

 
$
1,078,518

See accompanying Notes to the unaudited Consolidated Financial Statements.

6



HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
168,182

 
$
146,791

 
$
316,135

 
$
288,216

Cost of services:


 
 
 
 
 
 
Compensation
58,322

 
55,188

 
115,775

 
111,267

Direct project and other operating expenses
20,742

 
17,959

 
40,941

 
34,607

Information technology
12,316

 
14,240

 
25,420

 
26,503

Occupancy
4,052

 
4,014

 
8,131

 
8,397

Amortization of acquisition related software and intangible assets
4,166

 
9,621

 
8,332

 
17,753

Total cost of services
99,598

 
101,022

 
198,599

 
198,527

Selling, general and administrative expenses
28,036

 
26,532

 
57,282

 
58,530

Settlement expense

 
20,000

 

 
20,000

Total operating expenses
127,634

 
147,554

 
255,881

 
277,057

Operating income/(loss)
40,548

 
(763
)
 
60,254

 
11,159

Interest expense
(2,853
)
 
(3,034
)
 
(5,702
)
 
(5,682
)
Interest income
966

 
188

 
2,080

 
308

Income/(loss) before income taxes
38,661

 
(3,609
)
 
56,632

 
5,785

Income taxes
9,561

 
(242
)
 
7,890

 
2,761

Net income/(loss)
$
29,100

 
$
(3,367
)
 
$
48,742

 
$
3,024

 


 
 
 
 
 
 
Basic income per common share:


 
 
 
 
 
 
Net income/(loss) per common share -- basic
$
0.34

 
$
(0.04
)
 
$
0.56

 
$
0.04

Diluted income per common share:


 
 
 
 
 
 
Net income/(loss) per common share -- diluted
$
0.33

 
$
(0.04
)
 
$
0.55

 
$
0.04

Weighted average shares:


 
 
 
 
 
 
Basic
85,956

 
83,231

 
86,524

 
83,222

Diluted
87,858

 
83,231

 
88,843

 
84,837

See accompanying Notes to the unaudited Consolidated Financial Statements.

7



HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Common Stock and paid-in capital
 
 
 
 
 
 
 
Balance, beginning of period
$
454,087

 
$
376,737

 
$
426,737

 
$
369,686

Exercise of stock options
3,859

 
2,246

 
26,998

 
2,390

Stock-based compensation expense
4,802

 
4,714

 
15,781

 
14,208

Vesting of restricted stock units, net of shares withheld for employee tax
(179
)
 
(97
)
 
(6,947
)
 
(2,684
)
Balance, end of period
462,569

 
383,600

 
462,569

 
383,600

Retained earnings
 
 
 
 


 


Balance, beginning of period
441,877

 
373,982

 
422,235

 
366,164

Net income/(loss)
29,100

 
(3,367
)
 
48,742

 
3,024

Cumulative effect of accounting changes



 

 
1,427

Balance, end of period
470,977

 
370,615

 
470,977

 
370,615

Treasury stock
 
 
 
 


 


Balance, beginning of period
(135,576
)
 
(135,576
)
 
(135,576
)
 
(129,621
)
Purchase of treasury stock



 

 
(5,955
)
Balance, end of period
(135,576
)
 
(135,576
)
 
(135,576
)
 
(135,576
)
Total shareholders' equity
$
797,970

 
$
618,639

 
$
797,970

 
$
618,639

 
 
 
 
 


 


Shares issued
 
 
 
 


 


Balance, beginning of period
100,745,077

 
96,876,154

 
98,924,501

 
96,536,251

Exercise of stock options
242,723

 
141,991

 
1,686,408

 
151,034

Vesting of restricted stock units, net of shares withheld for employee tax
26,606

 
32,963

 
403,497

 
363,823

Balance, end of period
101,014,406

 
97,051,108

 
101,014,406

 
97,051,108

 
 
 
 
 


 


Treasury Stock
 
 
 
 


 


Balance, beginning of period
13,663,194

 
13,663,194

 
13,663,194

 
13,279,393

Purchase of treasury stock



 

 
383,801

Balance, end of period
13,663,194

 
13,663,194

 
13,663,194

 
13,663,194

See accompanying Notes to the unaudited Consolidated Financial Statements.

8



HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
48,742

 
$
3,024

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property, equipment and software
15,989

 
16,758

Amortization of intangible assets
4,677

 
12,774

Amortization of deferred financing costs
282

 
282

Stock-based compensation expense
15,781

 
14,208

Deferred income taxes
4,588

 
(3,900
)
Noncash lease expense
2,366



Release of estimated liability for appeals, net
(10,478
)

(8,436
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,062
)
 
(3,654
)
Prepaid expenses
(378
)
 
63

Other current assets
15

 
570

Other assets
(1,200
)
 
(29
)
Income taxes receivable
9,386

 
(5,324
)
Accounts payable, accrued expenses and other liabilities
(7,235
)
 
(2,546
)
Operating lease liabilities
(2,952
)


Estimated liability for appeals
605

 
(99
)
Net cash provided by operating activities
78,126

 
23,691

Investing activities:
 
 
 
Purchases of property and equipment
(945
)
 
(2,455
)
Investment in capitalized software
(7,465
)
 
(10,173
)
Net cash used in investing activities
(8,410
)
 
(12,628
)
Financing activities:
 
 
 
Proceeds from exercise of stock options
26,998

 
2,390

Payments of tax withholdings on behalf of employees for net-share settlements
(6,947
)
 
(2,684
)
Payments on capital lease obligations
(36
)


Purchases of treasury stock


(5,955
)
Net cash provided by/(used in) financing activities
20,015

 
(6,249
)
Net increase in cash and cash equivalents
89,731

 
4,814

Cash and Cash Equivalents
 
 
 
Cash and cash equivalents at beginning of year
178,946

 
83,313

Cash and cash equivalents at end of period
$
268,677

 
$
88,127

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash (refunds received)/paid for income taxes, net of refunds
$
(6,509
)
 
$
11,472

Cash paid for interest
$
5,524

 
$
4,916

 
 
 
 
Supplemental disclosure of non-cash activities:
 
 
 
Change in balance of accrued property and equipment purchases
$
250

 
$
1,082

See accompanying Notes to the unaudited Consolidated Financial Statements.

9



HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 and 2018
(unaudited)
1.     Business and Summary of Significant Accounting Policies
(a) Business
The terms “HMS,” “Company,” “we,” “us,” and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise. HMS is an industry-leading provider of cost containment solutions in the healthcare marketplace. We use healthcare data technology, analytics and engagement solutions, to deliver coordination of benefits, payment integrity and population health management solutions to help payers reduce costs, improve healthcare outcomes and enhance member experiences. We provide coordination of benefits services to government and commercial healthcare payers to ensure that the correct party pays the claim, and our payment integrity services promote accuracy by fighting fraud, waste and abuse. Our population health management solutions consist of population risk analytics and care management and consumer engagement services that provide risk-bearing organizations with reliable intelligence across their member populations to identify risks and improve patient engagement and outcomes. Together these various services help move the healthcare system forward for our customers. We currently operate as one business segment with a single management team that reports to the Chief Executive Officer.
The Consolidated Financial Statements and accompanying Notes in this Form 10-Q are unaudited. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. These statements include all adjustments (which include only normal recurring adjustments, except as disclosed) that management considers necessary to present a fair statement of the Company’s results of operations, financial position and cash flows. The results reported in these unaudited Consolidated Financial Statements should not be regarded as necessarily indicative of results that may be expected for the entire year. It is suggested that these unaudited Consolidated Financial Statements be read in conjunction with the Company’s consolidated financial statements and notes thereto as of and for the year ended December 31, 2018, which were filed with the SEC as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”). The consolidated balance sheet as of December 31, 2018 included herein was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
The preparation of the Company’s unaudited Consolidated Financial Statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, primarily accounts receivable, intangible assets, fixed assets, accrued expenses, estimated liability for appeals, the disclosure of contingent liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting periods. The Company’s actual results could differ from those estimates.
These unaudited Consolidated Financial Statements include HMS accounts and transactions and those of the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

10



(b) Summary of Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies that are referenced in the 2018 Form 10-K other than as described below with respect to leases.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires most lessees to recognize a majority of the company’s leases on the balance sheet, which increases reported assets and liabilities. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 including interim periods within such annual reporting periods with early adoption permitted. The Company adopted this guidance on January 1, 2019, utilizing the optional transition method approach with an effective date of January 1, 2019. Consequently, financial information prior to the effective date was not updated and the disclosures required under the new standard are not provided for dates and periods prior to the effective date. There were no cumulative effect adjustments to retained earnings as part of adoption. The Company elected the available practical expedients, including the practical expedient to not separate lease and non-lease components of its leases and the short-term lease practical expedient. The Company’s internal control framework did not materially change, but existing internal controls were modified due to certain changes to business processes and systems to support the new leasing standard as necessary. As the Company previously disclosed, the standard had a material impact on its consolidated balance sheets, the most significant impact being the recognition of approximately $21.3 million of ROU assets and $26.3 million lease liabilities on the effective date, but there was no impact on its consolidated income statements. The Company continues to expect that any impact from its adoption of the new standard will be immaterial to its net income and its internal control framework for future periods.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting, (“ASU 2018-07”). ASU 2018-07 requires entities to apply similar accounting for share-based payment transactions with non-employees as with share-based payment transactions with employees. ASU 2018-07 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2019. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 introduces the current expected credit losses methodology for estimating allowances for credit losses. ASU 2016-13 applies to all financial instruments carried at amortized cost and off-balance-sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credit, and financial guarantees. The new accounting standard does not apply to trading assets, loans held for sale, financial assets for which the fair value option

11



has been elected, or loans and receivables between entities under common control. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company continues to evaluate whether the adoption of this guidance will have any impact on the Company’s financial statements but does not expect that this guidance will have a material impact on the Company’s financial position, results of operations or internal control framework.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for which financial statements have not been
issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. This guidance is not expected to have a material impact on the Company’s financial position, results of operations or internal control framework.

2.     Revenue Recognition
The Company’s revenue disaggregated by solution for the three and six months ended June 30, 2019 and 2018 was as follows (in thousands):
 
Three Months Ended
Six Months Ended
 
June 30, 2019
 
June 30, 2018
June 30, 2019
 
June 30, 2018
Coordination of Benefits
$
105,094

 
$
100,755

$
210,945

 
$
192,507

Payment Integrity
49,121

 
31,192

76,847

 
69,833

Population Health Management
13,967

 
14,844

28,343

 
25,876

Total
$
168,182

 
$
146,791

$
316,135

 
$
288,216


Coordination of benefits revenue is derived from contracts with state governments and Medicaid managed care plans that can span years with the option to renew. Types of service contracts could include: (a) the identification of erroneously paid claims; (b) the delivery of verified commercial insurance coverage information; (c) the identification of paid claims where another third party is liable; and (d) the identification and enrollment of Medicaid members who have access to employer insurance. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance obligations is largely based on variable consideration where, based on the number of claims or amount of findings the Company identified, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation. The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key inputs and assumptions in determining variable consideration include identified pricing and expected recoveries and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when

12



our services are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Generally, coordination of benefit contract payment terms are not standardized within the respective contract; however, payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.
Analytical services revenue consists of revenue for our payment integrity services and population health management solutions. 
Payment integrity services revenue is derived from contracts with federal and state governments, commercial health plans and other at-risk entities that can span years with the option to renew. Types of service contracts could include: (a) services designed to ensure that healthcare payments are accurate and appropriate; and (b) the identification of over/under payments or inaccurate charges based on a review of medical records. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance obligations is largely based on variable consideration where, based on the amount of recovery findings the Company identifies, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation. The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key inputs and assumptions in determining variable consideration include identified pricing and expected recoveries and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when our services are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Generally, payment integrity contract payment terms are not standardized within the respective contract; however, invoice payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.
Population health management revenue is derived from contracts with health plans and other risk-bearing entities that can span years with the option to renew. Types of service contracts could include: (a) programs designed to improve member engagement; and (b) outreach services designed to improve clinical outcomes. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these services is largely based on consideration associated with prices per order/transfer and PMPM/PMPY fees. The Company believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. The Company has elected the right to invoice practical expedient for recognition of revenue related to its performance obligations when the amount we have the right to invoice the customer corresponds directly with the value to the customer. Additionally, certain population health management contracts have distinct performance obligations related to software license and implementation fees which have historically been recognized as revenue ratably over the life of the contract. Lastly, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Upon adoption of ASC 606, revenue for software licenses is recognized at the beginning of the license

13



period when control is transferred as the license is installed and revenue for implementation fees is recognized when control is transferred over time as the implementation is being performed. As the performance obligation is deemed to have been satisfied and control transferred to our customers for software licenses and implementation fees on or before December 31, 2017, the Company recorded a decrease to deferred revenue and an increase to opening retained earnings of $1.1 million, net of tax, as of January 1, 2018 for the cumulative adoption of ASC 606. Generally, population health management contract payment terms are stated within the contract and are due within an explicitly stated time period (e.g., 30, 45, 60 days) from the date of invoice. A portion of the payment received may relate to future performance obligations and will result in an increase to deferred revenue until the obligation has been met.
In connection with coordination of benefits and certain payment integrity services, lockboxes and their associated bank accounts are setup to support recoveries and remittances. Generally, these bank accounts are for the benefit of the Company’s customers.  Customer cash held in Company bank accounts for the benefit of the customer was approximately $4.9 million as of June 30, 2019.  This amount is included in cash and cash equivalents and other current liabilities on the accompanying consolidated balance sheet.  
The Company’s revenue disaggregated by market for the three and six months ended June 30, 2019 and 2018 was as follows (in thousands):
 
Three Months Ended
Six Months Ended
 
June 30, 2019
 
June 30, 2018
June 30, 2019
 
June 30, 2018
Commercial
$
79,044

 
$
80,493

$
155,303

 
$
152,278

State
65,180

 
58,815

126,922

 
113,435

Federal
23,958

 
7,483

33,910

 
22,503

Total
$
168,182

 
$
146,791

$
316,135

 
$
288,216


A portion of the Company’s services are deferred and revenue is recognized at a later time. Deferred revenue was approximately $5.9 million and $5.6 million as of June 30, 2019 and December 31, 2018, respectively, and is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. Approximately $2.8 million of the December 31, 2018 balance was recognized in revenue during the quarter ended June 30, 2019.
Contract modifications are routine in nature and often done to account for changes in the contract specifications or requirements. In most instances, contract modifications are for services that are not distinct, and, therefore, modifications are accounted for as part of the existing contract. The Company has elected to use the practical expedient to expense the incremental costs of obtaining a contract if the amortization period of the asset that the Company would have otherwise recognized is one year or less.

3.     Accounts Receivable and Accounts Receivable Allowance
The Company’s accounts receivable, net, consisted of the following (in thousands):

14



 
June 30,
2019
 
December 31,
2018
Accounts receivable
$
212,740

 
$
220,455

Allowance
(12,808
)
 
(13,683
)
Accounts receivable, net
$
199,932

 
$
206,772


We record an accounts receivable allowance based on historical patterns of billing adjustments, length of operating and collection cycle and customer negotiations, behaviors and payment patterns. Changes in these estimates are recorded to revenue in the period of change. The following is a summary of the activity in the accounts receivable allowance (in thousands)
 
June 30,
2019
 
December 31,
2018
Balance--beginning of period
$
13,683

 
$
14,799

Provision
7,717

 
20,453

Charge-offs
(8,592
)
 
(21,569
)
Balance--end of period
$
12,808

 
$
13,683



4.     Intangible Assets and Goodwill
Intangible assets consisted of the following (in thousands, except for weighted average amortization period):
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Weighted Average Amortization Period in Years
June 30, 2019
 
 
 
 
 
 
 
Customer relationships
$
68,290

 
$
(18,936
)
 
$
49,354

 
12.5
Intellectual property
21,700

 
(8,606
)
 
13,094

 
3.7
Trade names
136

 
(128
)
 
8

 
0.2
Restrictive covenants
133

 
(126
)
 
7

 
0.2
Total
$
90,259

 
$
(27,796
)
 
$
62,463

 
 
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
 
Weighted Average Amortization Period in Years
December 31, 2018
 
 
 
 
 
 
 
Customer relationships
$
156,790

 
$
(104,740
)
 
$
52,050

 
12.8
Intellectual property
21,700

 
(6,670
)
 
15,030

 
4.1
Trade names
16,246

 
(16,215
)
 
31

 
0.7
Restrictive covenants
263

 
(234
)
 
29

 
0.7
Total
$
194,999

 
$
(127,859
)
 
$
67,140

 
 

Amortization expense of intangible assets is expected to approximate the following (in thousands):

15



Year ending December 31,
Amortization

2019 (excluding the six months ended June 30, 2019)
$
4,568

2020
7,613

2021
7,197

2022
7,197

2023
4,822

Thereafter
31,066

Total
$
62,463


For the three months ended June 30, 2019 and 2018, amortization expense related to intangible assets was $2.3 million and $6.7 million, respectively. For the six months ended June 30, 2019 and 2018, amortization expense related to intangible assets was $4.7 million and $12.8 million, respectively.
There was no change in the carrying amount of goodwill for the six months ended June 30, 2019.

5.     Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Accounts payable, trade
$
11,774

 
$
12,394

Accrued compensation and other
26,735

 
42,833

Accrued operating expenses
26,301

 
19,675

Current portion of lease liabilities
6,520



Total accounts payable, accrued expenses and other liabilities
$
71,330

 
$
74,902



6.     Income Taxes
The Company’s effective tax rate decreased to 13.9% for the six months ended June 30, 2019 from 47.7% for the six months ended June 30, 2018. The effective tax rate for the six months ended June 30, 2019 includes discrete tax benefits related to net equity compensation deductions offset by interest on uncertain tax benefits. For the six months ended June 30, 2019, the differences between the federal statutory rate and our effective tax rate are tax expense items related to state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.
Included in Other liabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits (net of the federal benefit for state issues) of approximately $5.3 million and $4.8 million, as of June 30, 2019 and December 31, 2018, respectively, that, if recognized, would favorably affect the Company’s future effective tax rate. Also included in Other liabilities on the Consolidated Balance Sheets, are accrued liabilities for interest expense and penalties related to unrecognized tax benefits of $1.0 million and $0.7 million as of June 30, 2019 and December 31, 2018, respectively. HMS includes interest expense and penalties in the provision for income taxes

16



in the unaudited Consolidated Statements of Income. The amount of interest expense (net of federal and state income tax benefits) and penalties in the unaudited Consolidated Statements of Income for the six months ended June 30, 2019 and 2018 was $0.3 million and $0.3 million, respectively. The Company believes it is reasonably possible that the amount of unrecognized tax benefits may decrease by $1.8 million over the next twelve months, due to the expiration of the statute of limitations in federal and various state jurisdictions.
HMS files income tax returns with the U.S. Federal government and various state and local jurisdictions. HMS is no longer subject to U.S. Federal income tax examinations for years before 2013. HMS operates in a number of state and local jurisdictions. Accordingly, HMS is subject to state and local income tax examinations based on the various statutes of limitations in each jurisdiction.

7.     Estimated Liability For Appeals
Under the Company’s contracts with certain commercial health plan customers and its Medicare Recovery Audit Contractor (“RAC”) contract with the Centers for Medicare & Medicaid Services (“CMS”) (included within the Company’s payment integrity services revenue), providers have the right to appeal HMS claim findings and to pursue additional appeals if the initial appeal is found in favor of HMS’s customer. The appeal process established under the Medicare RAC contracts with CMS includes five levels of appeals, and resolution of appeals can take substantial time to resolve. HMS records (a) a liability for findings which have been previously adjudicated in favor of providers and (b) an estimated liability based on the amount of revenue that is subject to appeals and which are probable of being adjudicated in favor of providers following their successful appeal. The Company’s estimate is based on the Company’s historical experience. To the extent the amount to be returned to providers following a successful appeal exceeds or is less than the amount recorded, revenue in the applicable period would be reduced or increased by such amount. Any future changes or modifications to the Company's Medicare RAC contract or commercial health plan customer contracts may force the Company to apply different assumptions, which could materially affect both the Company’s revenue and estimated liability for appeals in future periods.
The following roll-forward summarizes the activity in Estimated liability for appeals (in thousands):
 
Original
RAC contract
 
RAC 4
contract
 
Commercial contracts
 
Total
Balance at December 31, 2018
$
19,380

 
$
20

 
$
2,323

 
$
21,723

Provision


604

 
5,135

 
5,739

Appeals found in providers favor


(309
)
 
(4,825
)
 
(5,134
)
Release of liability
(19,380
)
 

 

 
(19,380
)
Balance at June 30, 2019
$

 
$
315

 
$
2,633

 
$
2,948


The Company’s original Medicare RAC contract with CMS expired on January 31, 2018. As a result of the original contract expiration, which historically had net settlement terms, the Company’s contractual obligation with respect to any appeals resolved in favor of providers subsequent to the expiration date ceased, and the Company released its estimated liability and increased revenue by $8.4 million during the first quarter of 2018. The Company has determined, based on communications, that there is no further contractual obligation to CMS with respect to the original Medicare RAC contract as of June 30, 2019. Accordingly, the Company released its remaining

17



estimated liability of $19.4 million and net receivables. As a result of the release, there was a $10.5 million increase to the Company's revenue for the three months ended June 30, 2019.

8.     Credit Agreement
In December 2017, the Company entered into an amendment to its Amended and Restated Credit Agreement, as amended (the “Credit Agreement”) which, among other things, extended the maturity of its then existing $500 million revolving credit facility by five years to December 2022 (the “Amended Revolving Facility”). The availability of funds under the Amended Revolving Facility includes sublimits for (a) up to $50 million for the issuance of letters of credit and (b) up to $25 million for swingline loans. In addition, the Company may increase the commitments under the Amended Revolving Facility and/or add one or more incremental term loan facilities, provided that such incremental facilities do not exceed in the aggregate the sum of (i) the greater of $120 million and 100% of Consolidated EBITDA (as defined in the Credit Agreement) and (ii) an additional amount so long as our first lien leverage ratio (as defined in the Credit Agreement) on a pro forma basis is not greater than 3.00:1.00, subject to obtaining commitments from lenders therefore and meeting certain other conditions.
As of June 30, 2019 and December 31, 2018, the outstanding principal balance due on the Amended Revolving Facility was $240 million. No principal payments were made against the Amended Revolving Facility during the six months ended June 30, 2019.
Borrowings under the Amended Revolving Facility bear interest at a rate equal to, at the Company’s election (except with respect to swingline borrowings, which will accrue interest based only at the base rate), either:
a base rate determined by reference to the greatest of (a) the prime or base commercial lending rate of the administrative agent as in effect on the relevant date, (b) the federal funds effective rate plus 0.50% and (c) the one-month London Interbank Offered Rate (or any successor rate determined in accordance with the Credit Agreement) (“LIBO Rate”) plus 1.00%, plus an interest margin ranging from 0.50% to 1.00% based on the Company’s consolidated leverage ratio for the applicable period; or
an adjusted LIBO Rate, equal to the LIBO Rate for the applicable interest period multiplied by the statutory reserve rate (equal to (x) one divided by (y) one minus the aggregate of the maximum reserve percentage (including any marginal, special, emergency or supplemental reserves) established by the Board of Governors of the Federal Reserve System of the United States), plus an interest margin ranging from 1.50% to 2.00% based on the Company’s consolidated leverage ratio for the applicable period.
In addition to paying interest on the outstanding principal, the Company is required to pay unused commitment fees on the Amended Revolving Facility during the term of the Credit Agreement ranging from 0.375% to 0.250% per annum based on the Company’s consolidated leverage ratio and letter of credit fees equal to 0.125% per annum on the aggregate face amount of each letter of credit, as well as customary agency fees. As part of a contractual agreement with a customer, the Company has an outstanding irrevocable letter of credit for $6.5 million, which is issued against its revolving credit facility and expires June 30, 2020.
The Amended Revolving Facility is secured, subject to certain customary carve-outs and exceptions, by a first priority lien and security interest in substantially all tangible and intangible

18



assets of the Company and certain subsidiaries of the Company. The Amended Revolving Facility contains certain restrictive covenants, which affect, among other things, the ability of the Company and its subsidiaries to incur indebtedness, create liens, make investments, sell or otherwise dispose of assets, engage in mergers or consolidations with other entities, and pay dividends or repurchase stock. The Company is also required to comply, on a quarterly basis, with two financial covenants: (i) a minimum interest coverage ratio of 3:00:1:00, and (ii) a maximum consolidated leverage ratio of 4.75:1.00 through December 2019 and 4.25:1.00 from and after January 2020. The consolidated leverage ratio is subject to a step-up to 5.25:1.00 for four full consecutive fiscal quarters following a permitted acquisition or similar investment. As of June 30, 2019, the Company was in compliance with all terms of the Credit Agreement.
Interest expense and the commitment fees on the unused portion of the Company’s Amended Revolving Facility were as follows (in thousands):
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2019
 
2018
2019
 
2018
Interest expense
$
2,524

 
$
2,627

$
5,050

 
$
4,697

Commitment fees
160

 
239

316

 
477


As of June 30, 2019 and December 31, 2018, the unamortized balance of deferred origination fees and debt issuance costs was $2.0 million and $2.2 million, respectively. For the six month periods ended June 30, 2019 and 2018, HMS amortized $0.3 million and $0.3 million, respectively, of interest expense related to the Company’s deferred origination fees and debt issue costs.

9.     Earnings Per Share
The following table reconciles the basic to diluted weighted average common shares outstanding using the treasury stock method (in thousands, except per share amounts):
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2019
 
2018
2019
 
2018
Net income/(loss)
$
29,100

 
$
(3,367
)
$
48,742

 
$
3,024

 
 
 
 
 
 
 
Weighted average common shares outstanding-basic
85,956

 
83,231

86,524

 
83,222

Plus: net effect of dilutive stock options and restricted stock units
1,902

 

2,319

 
1,615

Weighted average common shares outstanding-diluted
87,858

 
83,231

88,843

 
84,837

Net income/(loss) per common share -- basic
$
0.34

 
$
(0.04
)
$
0.56

 
$
0.04

Net income/(loss) per common share -- diluted
$
0.33

 
$
(0.04
)
$
0.55

 
$
0.04


For the three months ended June 30, 2019, 588,379 stock options and restricted stock units representing 227,604 shares of the Company's common stock were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive. For the three months ended June 30, 2018, the Company incurred a net loss. As a result, there was no difference

19



between the Company's basic and diluted earnings per share and 2,552,862 stock options and restricted stock units representing 626,341 shares of the Company's common stock were excluded from consideration in the calculation of diluted net loss per share because the effect would have been anti-dilutive.
For the six months ended June 30, 2019 and 2018, (i) 394,886 and 2,738,783 stock options, respectively, and (ii) restricted stock units representing 151,279 and 106,501 shares of common stock, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.

10.     Stock-Based Compensation
(a) Long-Term Incentive Award Plans
The Company grants stock options and restricted stock units to HMS employees and non-employee directors of the Company under the HMS Holdings Corp. 2019 Omnibus Incentive Plan (the “2019 Omnibus Plan”), as approved by the Company’s shareholders on May 22, 2019. The 2019 Omnibus Plan replaces and supersedes the HMS Holdings Corp. 2016 Omnibus Incentive Plan. Awards granted under the 2019 Omnibus Plan generally vest over one to four years. Subject to certain exceptions, the exercise price of stock options granted under the 2019 Omnibus Plan may not be less than the fair market value of a share of stock on the grant date, which is determined based on the closing price of the Company’s common stock reported on the Nasdaq Global Select Market on that date, and the term of a stock option may not exceed ten years.
(b) Stock-Based Compensation Expense
Total stock-based compensation expense in the Company’s unaudited Consolidated Statements of Income related to the Company’s long-term incentive award plans was as follows (in thousands):
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2019
 
2018
2019
 
2018
Cost of services-compensation
$
2,720

 
$
1,673

$
6,843

 
$
4,236

Selling, general and administrative
2,082

 
3,041

8,938

 
9,972

Total
$
4,802

 
$
4,714

$
15,781

 
$
14,208


(c) Stock Options
For the three months ended June 30, 2019 and 2018, stock-based compensation expense related to stock options was approximately $2.0 million and $2.1 million, respectively. For the six months ended June 30, 2019 and 2018, stock-based compensation expense related to stock options was approximately $6.8 million and $6.1 million, respectively.
Presented below is a summary of stock option activity for the six months ended June 30, 2019 (in thousands, except for weighted average exercise price and weighted average remaining contractual terms):

20



 
Number of Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average-
Remaining
Contractual
Terms
 
Aggregate
Intrinsic
Value
Outstanding balance at December 31, 2018
4,402

 
$
17.07

 
 
 
 
Granted
622

 
38.72

 
 
 
 
Exercised
(1,686
)
 
16.01

 
 
 
 
Forfeitures
(140
)
 
19.31

 
 
 
 
Expired




 
 
 
Outstanding balance at June 30, 2019
3,198

 
$
21.79

 
6.86
 
$
37,514

Expected to vest at June 30, 2019
1,045

 
$
28.12

 
8.98
 
$
7,507

Exercisable at June 30, 2019
1,728

 
$
16.91

 
5.13
 
$
26,745


During the three months ended June 30, 2019 and 2018, the Company received proceeds of $3.9 million and $2.2 million, respectively, for the issuance of 242,723 and 87,230 shares of common stock upon the exercise of outstanding stock options, respectively. The total intrinsic value of stock options exercised during the three months ended June 30, 2019 and 2018 was $3.7 million and $0.8 million, respectively. During the six months ended June 30, 2019 and 2018, the Company received proceeds of $27.0 million and $2.4 million, respectively, for the issuance of 1,686,408 and 151,034 shares of common stock upon the exercise of outstanding stock options, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2019 and 2018 was $29.4 million and $0.8 million, respectively.
As of June 30, 2019, there was approximately $6.4 million of total unrecognized compensation cost related to stock options outstanding, which is expected to be recognized over a weighted average period of 1.3 years.
The weighted-average grant date fair value per share of the stock options granted during the six months ended June 30, 2019 and 2018 was $13.82 and $7.52, respectively. HMS estimated the fair value of each stock option grant on the date of grant using a Black-Scholes option pricing model and weighted–average assumptions set forth in the following table:
 
Six Months Ended
June 30,
 
2019
 
2018
Expected dividend yield
0
%
 
0
%
Risk-free interest rate
2.5
%
 
2.7
%
Expected volatility
40.9
%
 
42.4
%
Expected life (years)
6.35

 
6.00


The total tax benefits recognized on stock-based compensation related to stock options for the six months ended June 30, 2019 and 2018 was $12.4 million and $2.5 million, respectively. 
(d) Restricted Stock Units
For the three months ended June 30, 2019 and 2018, stock-based compensation expense related to restricted stock units was approximately $2.8 million and $2.6 million, respectively. For the six

21



months ended June 30, 2019 and 2018, stock-based compensation expense related to restricted stock units was approximately $8.9 million and $8.1 million, respectively.
Presented below is a summary of restricted stock units activity for the six months ended June 30, 2019 (in thousands, except for weighted average grant date fair value per unit):
 
Number of
Units
 
Weighted Average
Grant Date Fair
Value per Unit
Outstanding balance at December 31, 2018
1,488

 
$
17.60

Granted
460

 
34.10

Vesting of restricted stock units, net of units withheld for taxes
(403
)
 
16.49

Units withheld for taxes
(200
)
 
16.49

Forfeitures
(82
)
 
18.92

Outstanding balance at June 30, 2019
1,263

 
$
25.74



For the three months ended June 30, 2019 and 2018, HMS granted 51,546 and 62,259 restricted stock units, respectively, with an aggregate fair market value of $1.6 million and $0.9 million, respectively. For the six months ended June 30, 2019 and 2018, HMS granted 459,985 and 761,083 restricted stock units, respectively, with an aggregate fair market value of $15.7 million and $12.7 million, respectively.
As of June 30, 2019, 1,003,051 restricted stock units remained unvested and there was approximately $14.3 million of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average vesting period of 1.38 years.

11.     Leases
The Company determines if an arrangement is a lease at inception. Operating leases are reported on the Company’s consolidated balance sheet within Operating lease right-of-use assets, Operating lease liabilities and Accounts payable, accrued expenses and other liabilities. Finance leases are reported on the Company’s consolidated balance sheets within Other assets, Other liabilities and Accounts payable, accrued expenses and other liabilities. 
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the information available at the lease’s commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For certain real estate and equipment leases, the Company has lease agreements with lease and non-lease components, which are generally accounted for as a single component.
The Company primarily leases real estate, information technology equipment and data centers on terms that expire on various dates through 2026, some of which include options to extend the lease

22



for up to 10 years. We evaluate whether to include the option period in the calculation of the ROU asset and lease liability on a lease-by-lease basis. 
As of June 30, 2019, all operating and finance leases that create significant rights and obligations for the Company have commenced. 
The components of lease expense for the three and six months ended June 30, 2019 were as follows (in thousands):
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
 
 
 
Operating lease cost
$
1,658

 
$
3,314

 
 
 
 
Finance lease cost:
 
 
 
Amortization of right-of-use assets
$
30

 
$
38

Interest on lease liabilities
$
4

 
$
5

Total finance lease cost
$
34

 
$
43


Supplemental cash flow and other information related to leases for the six months ended June 30, 2019 were as follows (in thousands):
 
Six Months Ended
June 30, 2019
 
 
Cash paid for amounts included in measurement of lease liabilities:
 
Operating cash flows from operating leases
$
3,700

Operating cash flows from finance leases
$
4

Financing cash flows from finance leases
$
36

Right-of-use assets obtained in exchange for new lease liabilities:
 
Operating leases
$
163

Finance leases
$
331



23



Supplemental balance sheet information related to leases as of June 30, 2019 consisted of the following (in thousands):
 
June 30, 2019
Operating Leases
 
Operating lease right-of-use assets
$
18,940

 
 
Other current liabilities
$
6,301

Operating lease liabilities
$
17,245