Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes thereto contained elsewhere in this Quarterly Report and together with the information included in the Company’s 2021 Annual Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties; the results described below are not necessarily indicative of the results to be expected in any future periods.
Cautionary Note Regarding Forward-looking Statements
All statements other than statements of historical fact included in this Quarterly Report including, without limitation, statements under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the next quarter and beyond. When used in this Quarterly Report, words such as “believes,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology represent forward-looking statements that include matters that are not historical facts. They may appear in a number of places throughout this Quarterly Report and these forward-looking statements reflect management’s expectations regarding our future growth, results of operations, operational and financial performance and business prospects and opportunities. Such forward-looking statements are based on available current market material and management’s expectations, beliefs and forecasts concerning future events impacting our business. Factors that may impact such forward-looking statements include:
•the impact of COVID-19 and its related effects on our projected results of operations, financial performance or other financial metrics;
•loss of our customers, particularly our largest customers;
•decreases in our existing market share or the size of our Preferred Provider Organization (“PPO”) networks;
•effects of competition;
•effects of pricing pressure;
•the inability of our customers to pay for our services;
•decreases in discounts from providers;
•the loss of our existing relationships with providers;
•the loss of key members of our management team;
•pressure to limit access to preferred provider networks;
•the ability to achieve the goals of our strategic plans and recognize the anticipated strategic, operational, growth and efficiency benefits when expected;
•our ability to identify, complete and successfully integrate acquisitions;
•changes in our industry;
•interruptions or security breaches of our information technology systems and other cyber security attacks;
•our ability to protect proprietary applications;
•our inability to expand our network infrastructure;
•our ability to maintain effective internal controls over financial reporting;
•our ability to continue to attract, motivate and retain a large number of skilled employees, and adapt to the effects of inflationary pressure on wages;
•changes in our regulatory environment, including healthcare law and regulations;
•the expansion of privacy and security laws;
•heightened enforcement and investigations activity by government agencies;
•our ability to pay interest and principal on our notes and other indebtedness;
•the possibility that we may be adversely affected by other political, economic, business, and/or competitive factors;
•other factors disclosed in this Quarterly Report; and
•other factors beyond our control.
The forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on our business. There can be no assurance that future developments affecting our business will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors referred to under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report or as described in our 2021 Annual Report. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Company Overview
MultiPlan is a leading provider of data analytics and technology-enabled solutions designed to bring affordability, efficiency and fairness to the United States healthcare industry. We do so through services focused on reducing medical cost and improving payment accuracy for the payors of healthcare, which are health insurers, self-insured employers and other health plan sponsors (typically through their health plan administrators), and, indirectly, the plan members who are the consumers of healthcare services.
Founded initially in 1980 as a New York-based hospital network, MultiPlan has evolved both organically and through acquisition into a national organization offering three categories of services:
•Analytics-Based Services: data-driven algorithms which detect claims over-charges and either negotiate or recommend fair reimbursement using a variety of data sources and pricing algorithms;
•Network-Based Services: contracted discounts with healthcare providers to form one of the largest independent preferred provider organizations ("PPO") in the United States with over 1.2 million under contract, as well as outsourced network development and/or management services; and
•Payment and Revenue Integrity Services: data, technology, and clinical expertise deployed to identify and remove improper and unnecessary charges before or after claims are paid, or to identify and help restore and preserve underpaid premium dollars.
Although the end beneficiary of our services are employers and other plan sponsors and their health plan members, our direct customers are mostly health plan administrators ("Payors"). We offer these Payors a single electronic gateway to a comprehensive set of services in each of the above three categories, which are used in combination or individually to reduce the medical cost burden on their health plan customers and members while fostering fair and efficient payments to the providers. These comprehensive offerings have enabled us to maintain long-term relationships with a number of our customers, including relationships of over 25 years with some of the nation's largest Payors. For the three months ended March 31, 2022 and year ended December 31, 2021 our comprehensive services identified approximately $5.6 billion and $21.7 billion in potential medical cost savings, respectively.
We believe our solutions provide a strong value proposition to Payors, their health plan customers and healthcare consumers, as well as to providers. Overall, our service offerings aim to reduce healthcare costs in a manner that is orderly, efficient and fair to all parties. In addition, because in most instances the fee for our services is directly linked to the savings we identify, our revenue model is aligned with the interests of our customers.
Uncertainty Relating to the COVID-19 Pandemic
As discussed above in Note 1 General Information and Basis of Accounting of the notes to the unaudited condensed consolidated financial statements included in this Quarterly Report, COVID-19 has negatively impacted our business, results of operations and financial condition since the first quarter of 2020.
Effects from COVID-19 began to impact our business in first quarter 2020 with various federal, state, and local governments and private entities mandating restrictions on travel, restrictions on public gatherings, closure of non-essential commerce, and shelter in place orders. We temporarily closed all of our offices and restricted travel in 2020 and 2021 due to concern for our employees’ health and safety and also in compliance with state orders. Most of our approximately 2,400 employees continue to work remotely. Other than these modifications, we have not experienced any material changes to our operations including receiving and processing transactions with our customers as a result of COVID-19.
For the three months ended March 31, 2022, the Company’s revenues continue to be negatively impacted as a result of the medical charges received on non-COVID claims from customers not yet reaching pre-COVID-19 pandemic levels due to fewer elective medical procedures and non-essential medical services. Such negative impacts, however, are to a lesser extent compared to the same period in 2020 and 2021, as vaccination rates have increased and restrictions on medical services have been lifted. The extent of the ultimate impact of COVID-19 will depend on the severity and duration of the evolving pandemic. Future developments remain uncertain, including the number of confirmed cases, the emergence of highly contagious variants, and any actions taken by federal, state and local governments such as economic relief efforts, as well as U.S. and global economies, consumer behavior and healthcare utilization patterns.
Factors Affecting Our Results of Operations
Medical Cost Savings
Our business and revenues are driven by the ability to lower medical costs through claims savings for our customers. The medical charges of those claims can influence our ability to generate claim savings.
The following table presents the medical charges processed and the potential savings identified for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | Change |
| (in millions) | | | | | 2022 | | 2021 | | |
Medical charges processed(1)(3) | | | | | $ | 31,692.1 | | | $ | 27,777.2 | | | 14.1 | % |
Potential medical cost savings(2)(3) | | | | | $ | 5,627.8 | | | $ | 5,159.6 | | | 9.1 | % |
While the medical charges processed on claims received from customers have increased, the medical charges on our non-COVID-19 services have not yet returned to pre-pandemic levels as a result of fewer elective medical procedures and non-essential medical services. A portion of this increase is the result of medical charges and related savings for COVID-19 services, such as COVID-19 testing, treatment, and vaccines, which were higher in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.
_____________________________
(1)Medical charges processed represent the aggregate dollar amount of claims processed by our cost management and payment accuracy solutions in the period presented. The dollar amount of the claim for purposes of this calculation is the dollar amount of the claim prior to any reductions that may be made as a result of the claim being processed by our solutions. Medical charges processed exclude medical charges processed by DHP in both time periods.
(2)Potential medical cost savings represent the aggregate amount of potential savings in dollars identified by our cost management and payment accuracy solutions in the period presented. Since certain of our fees are based on the amount of savings achieved by our customers, and our customers are the final adjudicator of the claims and may choose not to reduce claims or reduce claims by only a portion of the potential savings identified, potential medical cost savings may not directly correlate with the amount of fees earned in connection with the processing of such claims. Potential medical cost savings exclude potential medical cost savings identified by DHP in both time periods.
(3)Changes to previously reported medical charges processed and potential medical cost savings are due to claim development such as client claim resubmissions or cancellation of claims. Examples of these changes include, but are not limited to,
adjudication changes, billing changes, and elimination of claims that were later determined to be invalid. In second quarter 2021, we introduced a change in reporting methodology to exclude from the current and prior periods certain claims, the inclusion of which distorts the underlying trends in our core claim processing activities. We believe this change in methodology improves the comparability of current and prior periods. Medical charges processed and potential medical cost savings for the three months ended March 31, 2021 have been restated from $4.9 billion to $5.2 billion to reflect the development of claims and the change in methodology.
Components of Results of Operations
Revenues
We generate revenues from several sources including: (i) Network-Based Services that process claims at a discount compared to billed fee-for-service rates and by using an extensive network, (ii) Analytics-Based Services that use our leading and proprietary information technology platform to offer customers solutions to reduce medical costs, and (iii) Payment and Revenue Integrity Services that use data, technology, and clinical expertise to identify improper, unnecessary and excessive charges. Payors typically compensate us through either a PSAV achieved or a PEPM rate.
Costs of Services (exclusive of depreciation and amortization of intangible assets)
Costs of services (exclusive of depreciation and amortization of intangible assets) consist of all costs specifically associated with claims processing activities for customers, sales and marketing, and the development and maintenance of our networks, analytics-based services, and payment and revenue integrity services. Two of the largest components in costs of services are personnel expenses and access and bill review fees. Access and bill review fees include fees for accessing non-owned third-party provider networks, expenses associated with vendor fees for database access and systems technology used to reprice claims, and outsourced services. Third-party network expenses are fees paid to non-owned provider networks used to supplement our owned network assets to provide more network claim savings to our customers.
General and Administrative Expenses
General and administrative expenses include corporate management and governance functions composed of general management, legal, treasury, tax, real estate, financial reporting, auditing, benefits and human resource administration, communications, public relations, billing and information management. In addition, general and administrative expenses include taxes, insurance, advertising, transaction costs, and other general expenses.
Depreciation Expense
Depreciation expense consists of depreciation and amortization of property and equipment related to our investments in leasehold improvements, furniture and equipment, computer hardware and software, and internally generated capitalized software development costs. We provide for depreciation and amortization on property and equipment using the straight-line method to allocate the cost of depreciable assets over their estimated useful lives.
Amortization of intangible assets
Amortization of intangible assets includes amortization of the value of our customer relationships, provider network, technology, and trademarks which were identified in valuing the intangible assets in connection with the June 6, 2016 acquisition by H&F, as well as recent acquisitions of HST and DHP by the Company.
Interest expense
Interest expense consists of accrued interest and related interest payments on our outstanding long-term debt and amortization of debt issuance costs and discounts.
Interest income
Interest income consists primarily of bank interest.
Change in fair value of Private Placement Warrants and unvested founder shares
The Company remeasures at each reporting period the fair value of the Private Placement Warrants and unvested founder shares. The changes in fair value are primarily due to the changes in the stock price of the Company's Class A common stock, the expected stock volatility and the passage of time over the reporting period.
Income tax expense
Income tax expense consists of federal, state, and local income taxes.
Non-GAAP Financial Measures
We use EBITDA, Adjusted EBITDA and Adjusted EPS to evaluate our financial performance. EBITDA, Adjusted EBITDA and adjusted EPS are financial measures that are not presented in accordance with GAAP. We believe the presentation of these non-GAAP financial measures provides useful information to investors in assessing our financial condition and results of operations across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our financial operating results of our core business.
These measurements of financial performance have important limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, they may not be comparable to other similarly titled measures of other companies. Some of these limitations are:
•such measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working capital needs;
•such measures do not reflect the significant interest expense, or cash requirements necessary to service interest or principal payments on our debt;
•such measures do not reflect any cash requirements for any future replacement of depreciated assets;
•such measures do not reflect the impact of stock-based compensation upon our results of operations;
•such measures do not reflect our income tax (benefit) expense or the cash requirements to pay our income taxes;
•such measures do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and
•other companies in our industry may calculate these measures differently from how we do, limiting their usefulness as a comparative measure.
In evaluating EBITDA, Adjusted EBITDA and Adjusted EPS, you should be aware that in the future we may incur expenses similar to those eliminated in the presentation.
EBITDA, Adjusted EBITDA, and Adjusted EPS are widely used measures of corporate profitability eliminating the effects of financing and capital expenditures from the operating results. We define EBITDA as net income adjusted for interest expense, interest income, income tax expense, depreciation, amortization of intangible assets, and non-income taxes. We define Adjusted EBITDA as EBITDA further adjusted to eliminate the impact of certain items that we do not consider to be indicative of our core business, including other expenses, change in fair value of Private Placement Warrants and unvested founder shares, transaction related expenses, gain on investments and stock-based compensation. See our unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding these adjustments. Adjusted EBITDA is used in our agreements governing our outstanding indebtedness for debt covenant compliance purposes. Our Adjusted EBITDA calculation is consistent with the definition of Adjusted EBITDA used in our debt instruments.
Adjusted EPS is used in reporting to our Board and executive management and as a component of the measurement of our performance. We believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate earnings performance on a comparable year-to-year basis. Adjusted EPS is defined as net income adjusted for amortization of intangible assets, stock-based compensation, transaction related expenses, gain on investments, other expense, change in fair value of Private Placement Warrants and unvested founder shares and tax effect of adjustments to arrive at Adjusted net income divided by our basic weighted average number of shares outstanding.
The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods presented:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| (in thousands) | | | | | 2022 | | 2021 |
| | | | | | | |
| Net income | | | | | $ | 43,978 | | | $ | 45,877 | |
| Adjustments: | | | | | | | |
| Interest expense | | | | | 71,445 | | | 63,717 | |
| Interest income | | | | | (12) | | | (4) | |
| Income tax provision | | | | | 14,255 | | | 13,050 | |
| Depreciation | | | | | 16,596 | | | 16,165 | |
| Amortization of intangible assets | | | | | 85,154 | | | 84,708 | |
| Non-income taxes | | | | | 553 | | | 513 | |
| EBITDA | | | | | $ | 231,969 | | | $ | 224,026 | |
| Adjustments: | | | | | | | |
| Other (income) expenses | | | | | (890) | | | 658 | |
| Integration expenses | | | | | 1,672 | | | 559 | |
| Change in fair value of Private Placement Warrants and unvested founder shares | | | | | (12,741) | | | (40,375) | |
| Transaction-related expenses | | | | | 2,555 | | | 5,225 | |
| Gain on investments | | | | | (289) | | | — | |
| | | | | | | |
| Stock-based compensation | | | | | 3,130 | | | 968 | |
| Adjusted EBITDA | | | | | $ | 225,406 | | | $ | 191,061 | |
Material differences between MultiPlan Corporation and MPH for the three months ended March 31, 2022 include differences in interest expense, change in fair value of Private Placement Warrants and unvested founder shares, and stock-based compensation. For the three months ended March 31, 2022, interest expense for MultiPlan Corporation is $20.5 million higher than interest expense for MPH, due to interest expense incurred by MultiPlan Corporation on the Senior Convertible PIK Notes (issued on October 8, 2020). For the three months ended March 31, 2022, the change in fair value of Private Placement Warrants and unvested founder shares, and stock-based compensation are recorded in the parent company MultiPlan Corporation and not in the MPH operating company and therefore represent differences between MultiPlan Corporation and MPH.
The following table presents a reconciliation of net income to Adjusted EPS for the periods presented:
| | | | | | | | | | | | | | | |
| ($ in thousands, except share and per share amounts) | | | Three Months Ended March 31, |
| | | | 2022 | | 2021 |
| | | | | | | |
| Net income | | | | | $ | 43,978 | | | $ | 45,877 | |
| Adjustments: | | | | | | | |
| Amortization of intangible assets | | | | | 85,154 | | | 84,708 | |
| Stock-based compensation | | | | | 3,130 | | | 968 | |
| Transaction-related expenses | | | | | 2,555 | | | 5,225 | |
| Gain on investments | | | | | (289) | | | — | |
| | | | | | | |
| Other (income) expenses | | | | | (890) | | | 658 | |
| Integration expenses | | | | | 1,672 | | | 559 | |
| Change in fair value of Private Placement Warrants and unvested founder shares | | | | | (12,741) | | | (40,375) | |
| Estimated tax effect of adjustments | | | | | (22,489) | | | (22,864) | |
| Adjusted net income | | | | | $ | 100,080 | | | $ | 74,756 | |
| | | | | | | |
| Weighted average shares outstanding – Basic | | | | | 638,497,587 | | 655,113,523 |
| | | | | | | |
| | | | | | | |
| Net income per share – basic | | | | | $ | 0.07 | | | $ | 0.07 | |
| | | | | | | |
| Adjusted EPS | | | | | $ | 0.16 | | | $ | 0.11 | |
Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods and may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.
DHP Acquisition
On February 26, 2021, the Company completed the acquisition of DHP, an analytics and technology company offering healthcare payment and revenue integrity services. The Company acquired 100 percent of the voting equity interest of DHP. The acquisition strengthens MultiPlan's service offering in the payment integrity market with new and complementary services to help its Payor customers manage the overall cost of care and improve their competitiveness. It also adds revenue integrity services for plans that receive premiums from the Centers for Medicare and Medicaid Services.
The results of operations and financial condition of DHP have been included in the Company's consolidated results from the date of acquisition. In 2021 and for the three months ended March 31, 2022, DHP's impact on revenues and net earnings was not material. In connection with the DHP acquisition, the Company incurred transaction costs of $0.1 million and $4.7 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The transaction-related expenses have been expensed as incurred and are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of income and comprehensive income.
Debt Refinancings, Repayments and Repricing
On August 24, 2021, MPH issued new senior secured credit facilities composed of $1,325.0 million of Term Loan B and $450.0 million of a Revolver B, and $1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes. MPH used the net proceeds from Term Loan B, issued with a discount of 1.00%, and the 5.50% Senior Secured Notes to repay all of the outstanding balance of its Term Loan G for a total redemption price of $2,354.6 million, and pay fees and expenses in connection therewith.
Interest on Term Loan B and Revolver B is calculated, at MPH’s option, as (a) LIBOR (or, with respect to Term Loan B only, 0.50%, if higher), plus the applicable margin, or (b) the highest rate of (1) the prime rate, (2) the federal funds effective rate, plus 0.50%, (3) the LIBOR for an interest period of one month, plus 1.00% and (4) 0.50% for Term Loan B and 1.00% for Revolver B, in each case, plus an applicable margin of 4.25% for Term Loan B and between 3.50% and 4.00% for Revolver B,
depending on MPH’s first lien debt to consolidated EBITDA ratio. The interest rate in effect for Term Loan B was 4.76% as of March 31, 2022 and the interest rate in effect for Term Loan G was 3.75% as of March 31, 2021.
The Company is obligated to pay a commitment fee on the average daily unused amount of Revolver B. The annual commitment fee can range from an annual rate of 0.25% to 0.50% based on the Company's first lien debt to consolidated EBITDA ratio, as defined in the agreement.
The interest rate on the 5.50% Senior Secured Notes is fixed at 5.50%, and is payable semi-annually on March 1 and September 1 of each year.
In connection with the issuance of our debt instruments, the Company incurred specific expenses, including commissions, fees and expenses of investment bankers and underwriters, registration and listing fees, accounting and legal fees pertaining to the financing and other external, incremental expenses paid to advisors that were directly attributable to realizing the proceeds of the debt issues. These costs were capitalized and are being amortized over the term of the related debt using the effective interest method. The amortization of the debt issuance costs and discounts are included in interest expense in the accompanying unaudited condensed consolidated statements of income and comprehensive income.
Stock-Based Compensation
Since the consummation of the Transactions, the Company has operated under the 2020 Omnibus Incentive Plan effective October 8, 2020. To date, awards granted under the 2020 Omnibus Incentive Plan have been in the form of Employee RS, Employee RSUs, Fixed Value RSUs, Employee NQSOs and Director RSUs. Stock-based compensation is measured at the grant date based on the fair value of the award.
During the three months ended March 31, 2022, the Company has granted 7.3 million Employee NQSOs and 3.9 million Employee RSUs under the 2020 Omnibus Incentive Plan. For the three months ended March 31, 2022 and 2021, the Company recorded stock-based compensation expense under the 2020 Omnibus Incentive Plan of $3.1 million and $1.0 million, respectively, in the accompanying unaudited condensed consolidated statements of income and comprehensive income.
Results of Operations for the Three Months Ended March 31, 2022 and 2021
The following table provides the results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change |
| ($ in thousands) | | | | | | | | | 2022 | | 2021 | | $ | | % |
| Revenues | | | | | | | | | | | | | | | |
| Network-Based Services | | | | | | | | | $ | 68,624 | | | $ | 69,365 | | | $ | (741) | | | (1.1) | % |
| Analytics-Based Services | | | | | | | | | 196,118 | | | 157,160 | | | 38,958 | | | 24.8 | % |
| Payment and Revenue Integrity Services | | | | | | | | | 33,304 | | | 28,339 | | | 4,965 | | | 17.5 | % |
| Total Revenues | | | | | | | | | 298,046 | | | 254,864 | | | 43,182 | | | 16.9 | % |
| Costs of services (exclusive of depreciation and amortization of intangible assets shown below) | | | | | | | | | | | | | | | |
| Personnel expenses excluding stock-based compensation | | | | | | | | | 39,157 | | | 32,632 | | | 6,525 | | | 20.0 | % |
| Stock-based compensation | | | | | | | | | 600 | | | 10 | | | 590 | | | NM |
| Personnel expenses including stock-based compensation | | | | | | | | | 39,757 | | | 32,642 | | | 7,115 | | | 21.8 | % |
| Access and bill review fees | | | | | | | | | 3,758 | | | 3,715 | | | 43 | | | 1.2 | % |
| Other cost of services expenses | | | | | | | | | 3,557 | | | 3,373 | | | 184 | | | 5.5 | % |
| Total costs of services (exclusive of depreciation and amortization of intangible assets shown below) | | | | | | | | | 47,072 | | | 39,730 | | | 7,342 | | | 18.5 | % |
| General and administrative expenses excluding stock-based compensation and transaction-related expenses | | | | | | | | | 27,503 | | | 25,813 | | | 1,690 | | | 6.5 | % |
| Stock-based compensation | | | | | | | | | 2,530 | | | 958 | | | 1,572 | | | 164.1 | % |
| Transaction-related expenses | | | | | | | | | 2,555 | | | 5,225 | | | (2,670) | | | (51.1) | % |
| Total general and administrative expenses | | | | | | | | | 32,588 | | | 31,996 | | | 592 | | | 1.9 | % |
| Depreciation expense | | | | | | | | | 16,596 | | | 16,165 | | | 431 | | | 2.7 | % |
| Amortization of intangible assets | | | | | | | | | 85,154 | | | 84,708 | | | 446 | | | 0.5 | % |
| Operating income | | | | | | | | | 116,636 | | | 82,265 | | | 34,371 | | | 41.8 | % |
| Interest expense | | | | | | | | | 71,445 | | | 63,717 | | | 7,728 | | | 12.1 | % |
| Interest income | | | | | | | | | (12) | | | (4) | | | (8) | | | 200.0 | % |
| | | | | | | | | | | | | | | |
| Gain on investments | | | | | | | | | (289) | | | — | | | (289) | | | NM |
| Change in fair value of Private Placement Warrants and unvested founder shares | | | | | | | | | (12,741) | | | (40,375) | | | 27,634 | | | 68.4 | % |
| Net income before taxes | | | | | | | | | 58,233 | | | 58,927 | | | (694) | | | (1.2) | % |
| Provision for income taxes | | | | | | | | | 14,255 | | | 13,050 | | | 1,205 | | | 9.2 | % |
| Net income | | | | | | | | | $ | 43,978 | | | $ | 45,877 | | | $ | (1,899) | | | (4.1) | % |
_____________________
NM = Not meaningful
Revenues
The increase of $43.2 million, or 16.9%, in revenues for the three months ended March 31, 2022 as compared to revenues for the three months ended March 31, 2021 was driven by an increase in revenues of $37.4 million primarily related to higher medical charges processed on claims received from customers, resulting in higher savings for such customers. Revenues from the acquisition of DHP were $8.7 million for the three months ended March 31, 2022, as compared to $2.9 million for the three months ended March 31, 2021. This period-over-period increase of $5.8 million also contributed to the increase in total revenues for this period. Excluding the increase of revenue from the acquisition of DHP, revenue grew by 14.9% in the three months ended March 31, 2022 as compared to the same period in the prior year.
Network-Based Services revenues decreased $0.7 million, or 1.1%, in the three months ended March 31, 2022 as compared to revenues for the three months ended March 31, 2021, reflecting substantially consistent period over period performance for this service line.
Analytics-Based Services revenues increased $39.0 million, or 24.8%, for the three months ended March 31, 2022 as compared to revenues for the three months ended March 31, 2021 primarily driven by higher medical charges from customers, resulting in higher savings for such customers. The increase in medical charges processed reflects, in part, a favorable decline of the effects of the COVID-19 pandemic during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.
Payment and Revenue Integrity Services revenues increased $5.0 million, or 17.5%, for the three months ended March 31, 2022 as compared to revenues for the three months ended March 31, 2021 primarily due to the increase in revenues from the acquisition of DHP of $5.8 million as described above, offset by $0.8 million of declines in revenues in our pre-payment integrity service line.
Costs of Services (exclusive of depreciation and amortization of intangible assets)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change |
| ($ in thousands) | | | | | | | | | 2022 | | 2021 | | $ | | % |
| Costs of services excluding stock-based compensation | | | | | | | | | $ | 46,472 | | | $ | 39,720 | | | $ | 6,752 | | | 17.0 | % |
| Stock-based compensation | | | | | | | | | 600 | | | 10 | | | 590 | | | NM |
| Cost of services (exclusive of depreciation and amortization of intangible assets) | | | | | | | | | $ | 47,072 | | | $ | 39,730 | | | $ | 7,342 | | | 18.5 | % |
The increase of $7.3 million, or 18.5% in cost of services for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021 was primarily due to increases in personnel expenses, including stock-based compensation as explained below.
The increase in personnel expenses, including contract labor, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021 was primarily due to increases in stock-based compensation of $0.6 million and non-stock compensation related expenses of $6.5 million primarily due to $3.1 million increase in compensation related expenses from the acquisition of DHP which was acquired on February 26, 2021. The remaining $3.4 million increase in compensation related expenses was primarily related to increases in salaries of $2.6 million, bonus and commission of $0.3 million, and fringe benefit expenses of $0.5 million, partially due to increases in employee headcount. The remaining increase in cost of services was due to increases of $0.2 million related to access and bill review fees and other costs of services.
General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change |
| ($ in thousands) | | | | | | | | | 2022 | | 2021 | | $ | | % |
| General and administrative expenses excluding stock-based compensation and transaction-related expenses | | | | | | | | | $ | 27,503 | | $ | 25,813 | | $ | 1,690 | | 6.5 | % |
| Stock-based compensation | | | | | | | | | 2,530 | | 958 | | 1,572 | | | 164.1 | % |
| Transaction-related expenses | | | | | | | | | 2,555 | | 5,225 | | (2,670) | | | (51.1) | % |
| General and administrative expenses | | | | | | | | | $ | 32,588 | | $ | 31,996 | | $ | 592 | | 1.9 | % |
| | | | | | | | | | | | | | | |
The increase of $0.6 million, or 1.9%, in general and administrative expenses for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021 was primarily due to an increase in personnel expenses of $4.8 million, an increase in integration expenses of $1.1 million primarily related to the acquisitions of HST and DHP, an increase in professional fees of $0.9 million including higher legal and consulting fees, an increase in insurance of $0.7 million primarily related to higher D&O insurance and Technology E&O insurance, and an increase in net other expenses of $0.1 million, offset by a decrease in transaction costs of $2.7 million and an increase in the capitalized software development offset of $4.3 million. The increase in personnel expenses of $4.8 million was due to an increase in compensation related expenses of $3.2 million, primarily in salaries, fringe benefits, and contract labor and an increase in stock-based compensation of $1.6 million.
Depreciation Expense
The increase of $0.4 million, or 2.7%, in depreciation expense for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 was due to purchases of property and equipment, including internally generated
capitalized software in the three months ended March 31, 2022 and year ended December 31, 2021, respectively, partially offset by assets that were written-off or became fully depreciated in the period.
Amortization of Intangible Assets
The increase of $0.4 million, or 0.5%, in the amortization of intangible assets for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021 was primarily due to the acquisition of DHP. This expense represents the amortization of intangible assets, as explained above and in the notes to the unaudited condensed consolidated financial statements.
Interest Expense
The increase of $7.7 million, or 12.1%, in interest expense for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021 was due to the increase in interest rates and the effect of the refinancing on August 24, 2021 where MPH issued new senior secured credit facilities composed of Term Loan B and Revolver B, and issued the 5.50% Senior Secured Notes, using the net proceeds to repay all of the outstanding balance of Term Loan G. As a result of this refinancing, our annualized weighted average cash interest rate increased by 0.6% across our total debt in the three months ended March 31, 2022 as compared to the same period in prior year.
As of March 31, 2022, our long-term debt was $4,878.4 million and included (i) $1,305.1 million Term Loan B, discount on Term Loan B of $12.4 million, excluding the current portion of Term Loan B of $13.3 million (ii) $1,050.0 million of 5.50% Senior Secured Notes, (iii) $1,300.0 million of 5.750% Senior Notes, (iv) $1,300.0 million of Senior Convertible PIK Notes, discount on Senior Convertible PIK Notes of $26.7 million, and (v) $0.1 million of long-term finance lease obligations, net of (vi) debt issue costs of $37.6 million. As of March 31, 2022, our total debt had an annualized weighted average cash interest rate of 5.5%. As of March 31, 2021, our total debt had an annualized weighted average cash interest rate of 4.9%.
As of December 31, 2021, our long-term debt was $4,879.1 million and included (i) $1,308.4 million Term Loan B, discount on Term Loan B of $12.9 million, excluding the current portion of Term Loan B of $13.3 million (ii) $1,050.0 million of 5.50% Senior Secured Notes, (iii) $1,300.0 million of 5.750% Senior Notes, (iv) $1,300.0 million of Senior Convertible PIK Notes, discount on Senior Convertible PIK Notes of $27.7 million, and (iv) $0.1 million of long-term finance lease obligations, net of (v) debt issue costs of $38.8 million. As of December 31, 2021, our total debt had a weighted average cash interest rate of 4.6%.
Change in fair value of Private Placement Warrants and unvested founder shares
The Company remeasures the fair value of the Private Placement Warrants and unvested founder shares at each reporting period. From December 31, 2021 to March 31, 2022, the fair value of the Private Placement Warrants and the unvested founder shares decreased by $8.7 million and $4.0 million, respectively. The decrease was primarily due to the decrease in the expected stock volatility and the passage of time over that period.
Provision for income taxes
Our effective tax rate of 24.5% for the three months ended March 31, 2022 differed from the statutory rate primarily due to a non-deductible mark-to-market liability and state tax expense. Our effective tax rate of 22.1% for the three months ended March 31, 2021 differed from the statutory rate primarily due to a non-deductible mark-to-market liability, impact of our acquisitions and changes in the Company's deferred state tax rate due to operations, and state tax expense.
Liquidity and Capital Resources
As of March 31, 2022, we had cash and cash equivalents of $350.8 million and $448.2 million of loan availability under the revolving credit facility. On August 24, 2021, the maturity of the revolving credit facility was extended from June 7, 2023 to August 24, 2026. As of March 31, 2022, we have three letters of credit totaling $1.8 million of utilization against the revolving credit facility. The three letters of credit are used to satisfy real estate lease agreements for three of our offices in lieu of security deposits.
Our primary sources of liquidity are internally generated funds combined with our borrowing capacity under our revolving credit facility. We believe that these sources will provide sufficient liquidity for us to meet our working capital, capital expenditure and other cash requirements for at least the next twelve months. We may from time to time at our sole discretion, purchase, redeem or retire our long-term debt, through tender offers, in privately negotiated or open market transactions or otherwise. We plan to finance our capital expenditures with cash from operations. Furthermore, our future liquidity and future ability to fund capital expenditures, working capital and debt requirements are also dependent upon our future financial
performance, which is subject to many economic, commercial, financial and other factors that are beyond our control, including the ability of financial institutions to meet their lending obligations to us. If those factors significantly change, our business may not be able to generate sufficient cash flow from operations or future borrowings may not be available to meet our liquidity needs. We anticipate that to the extent we require additional liquidity as a result of these factors or in order to execute our strategy, it would be financed either by borrowings under our senior secured credit facilities, by other indebtedness, additional equity financings or a combination of the foregoing. We may be unable to obtain any such additional financing on reasonable terms or at all.
Cash Flow Summary
The following table is derived from our unaudited condensed consolidated statements of cash flows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (in thousands) | 2022 | | 2021 |
| Net cash flows provided by (used in): | | | |
| Operating activities | $ | 194,937 | | | $ | 170,907 | |
| Investing activities | $ | (24,165) | | | $ | (162,398) | |
| Financing activities | $ | (5,270) | | | $ | (232) | |
Cash Flows from Operating Activities
Cash flows from operating activities provided $194.9 million for the three months ended March 31, 2022 and $170.9 million for the three months ended March 31, 2021. This $24.0 million, or 14.1%, increase in cash flows from operating activities was primarily the result of an increase in adjustments for non-cash items of $41.1 million, offset by changes in net working capital of $15.2 million and a decrease in net income of $1.9 million.
The $41.1 million increase in non-cash items was primarily due to an increase in deferred income taxes of $11.7 million, an increase in the change in fair value of Private Placement Warrants and unvested founder shares of $27.6 million, an increase in stock-based compensation of $2.2 million, an increase in depreciation of $0.4 million, and an increase in amortization of intangible assets of $0.4 million, offset by a decrease in loss on disposal of property and equipment of $0.6 million, a decrease in non-cash interest costs of $0.3 million including decreases in debt issue costs, a decrease in amortization of right of use asset of $0.1 million, and a gain on equity investments of $0.3 million.
During the three months ended March 31, 2022, $90.1 million was provided by changes in net working capital including an increase in accounts payable and accrued expenses and other expenses of $61.4 million primarily related to the timing of tax and interest payments throughout the year which increased our liabilities by $42.0 million and $22.5 million, respectively, a decrease in net accounts receivable of $21.7 million primarily due to timing of collections, a decrease in prepaid expenses and other assets of $3.6 million, and a decrease in prepaid taxes of $5.1 million, offset by a decrease in operating lease obligations of $1.6 million.
During the three months ended March 31, 2021, $105.3 million was provided by changes in net working capital including decreases in net accounts receivable of $12.0 million primarily due to timing of collections and increases in accounts payable and accrued expenses and other of $97.1 million primarily due to increases in accrued interest of $38.2 million and accrued taxes of $57.4 million, offset by increases in prepaid expenses and other assets of $3.6 million and decreases in operating lease obligations of $0.2 million.
Cash Flows from Investing Activities
For the three months ended March 31, 2022, net cash of $24.2 million was used in investing activities including $24.5 million for purchases of property and equipment and capitalization of software development. For the three months ended March 31, 2021, net cash of $162.4 million was used in investing activities including $149.9 million for the acquisition of DHP and $18.1 million for purchases of property and equipment and capitalization of software development, offset by proceeds from the sale of an investment of $5.6 million.
Cash Flows from Financing Activities
Cash flows used in financing activities for the three months ended March 31, 2022 were $5.3 million consisting of repayments of Term Loan B of $3.3 million and $2.0 million of taxes paid on net settlement of vested share awards.
Cash flows used in financing activities for the three months ended March 31, 2021 were $0.2 million primarily consisting of taxes paid on net settlement of vested share awards of $0.3 million.
Term Loans and Revolvers
On August 24, 2021, MPH issued new senior secured credit facilities composed of $1,325.0 million of Term Loan B, $450.0 million of Revolver B, and $1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes. MPH used the net proceeds from Term Loan B, issued with a discount of 1.00%, and the 5.50% Senior Secured Notes to repay all of the outstanding balance of its Term Loan G of $2,341.0 million, and pay fees and expenses in connection therewith.
Interest on Term Loan B and Revolver B is calculated, at MPH's option, as (a) LIBOR (or, with respect to Term Loan B only, 0.50%, if higher), plus the applicable margin, or (b) the highest rate of (1) the prime rate, (2) the federal funds effective rate, plus 0.50%, (3) the LIBOR for an interest period of one month plus 1.00% and (4) 0.50% for Term Loan B and 1.00% for Revolver B, in each case, plus an applicable margin of 4.25% for Term Loan B and between 3.50% and 4.00% for Revolver B, depending on MPH's first lien debt to consolidated EBITDA ratio. The interest rate in effect for Term Loan B was 4.76% as of March 31, 2022 and the interest rate in effect for Term Loan G was 3.75% as of March 31, 2021.
Term Loan B matures on September 1, 2028 and Revolver B matures on August 24, 2026.
For all our debt agreements with an interest rate dependent on LIBOR, we are currently assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect us past 2023.
We are obligated to pay a commitment fee on the average daily unused amount of our revolving credit facility. The annual commitment fee rate was 0.375% at March 31, 2022 and 0.50% at December 31, 2021. The fee can range from an annual rate of 0.25% to 0.50% based on our leverage ratio, as defined in the agreement.
Senior Notes
On October 8, 2020, the Company issued $1,300.0 million in aggregate principal amount of Senior Convertible PIK Notes. The Senior Convertible PIK Notes were issued with a 2.5% discount with a maturity date of October 15, 2027.
The Senior Convertible PIK Notes are convertible into shares of Class A common stock based on a $13.00 conversion price, subject to customary anti-dilution adjustments. The interest rate on the Senior Convertible PIK Notes is fixed at 6% in cash and 7% in kind, and is payable semi-annually on April 15 and October 15 of each year.
On October 29, 2020, the Company issued $1,300.0 million in aggregate principal amount of the 5.750% Notes. The 5.750% Notes are guaranteed on a senior unsecured basis jointly and severally by the Company and its subsidiaries and have a maturation date of November 1, 2028. The 5.750% Notes were issued at par. The interest rate on the 5.750% Notes is fixed at 5.750%, and is payable semi-annually on May 1 and November 1 of each year.
On August 24, 2021 MPH issued $1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes with a maturation date of September 1, 2028. The interest rate on the 5.50% Senior Secured Notes is fixed at 5.50%, and is payable semi-annually on March 1 and September 1 of each year. The 5.50% Senior Secured Notes are guaranteed and secured as described below under "Guarantees and Security".
Debt Covenants and Events of Default
We are subject to certain affirmative and negative debt covenants under the debt agreements governing our indebtedness that limit our and/or certain of our subsidiaries' ability to engage in specific types of transactions. These covenants limit our and/or certain of our subsidiaries' ability to, among other things:
•incur additional indebtedness or issue disqualified or preferred stock;
•pay certain dividends or make certain distributions on capital stock or repurchase or redeem capital stock;
•make certain loans, investments or other restricted payments;
•transfer or sell certain assets;
•incur certain liens;
•place restrictions on the ability of its subsidiaries to pay dividends or make other payments to us;
•guarantee indebtedness or incur other contingent obligations;
•prepay junior debt and make certain investments;
•consummate any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or dispose of all or substantially all of its business units, assets or other properties; and
•engage in transactions with our affiliates.
Certain covenants related to the 5.50% Senior Secured Notes will cease to apply to the 5.50% Senior Secured Notes for so long as such notes have investment grade ratings from both Moody’s Investors Service, Inc. and S&P Global Ratings.
In connection with the Refinancing, the Revolver Ratio was amended such that, if, as of the last day of any fiscal quarter of MPH, the aggregate amount of loans under the revolving credit facility, letters of credit issued under the revolving credit facility (to the extent not cash collateralized or backstopped or, in the aggregate, in excess of $10.0 million) and swingline loans are outstanding and/or issued in an aggregate amount greater than 35% of the total commitments in respect of the revolving credit facility at such time, the revolving credit facility will require MPH to maintain a maximum first lien secured leverage ratio of 6.75 to 1.00. Our consolidated first lien debt to consolidated EBITDA ratio is 2.32 times, 3.15 times, and 2.61 times as of March 31, 2022, March 31, 2021, and December 31, 2021, respectively.
As of March 31, 2022 and December 31, 2021 we were in compliance with all of the debt covenants.
The debt agreements governing the new senior secured credit facilities, Term Loan G, the Revolver G, the 5.750% Notes and the 5.50% Senior Secured Notes contain customary events of default, subject to grace periods and exceptions, which include, among others, payment defaults, cross-defaults to certain material indebtedness, certain events of bankruptcy, material judgments, in the case of the debt agreements governing the new senior secured credit facilities and the 5.50% Senior Secured Notes, failure of a guarantee on the liens on material collateral to remain in effect, in the case of the debt agreements governing the new senior secured credit facilities, Term Loan G and the Revolver G, any change of control. Upon the occurrence of an event of default under such debt agreements, the lenders and holders of such debt will be permitted to accelerate the loans and terminate the commitments, as applicable, thereunder and exercise other specified remedies available to the lenders and holders thereunder.
See the footnotes to the EBITDA and Adjusted EBITDA reconciliation table provided above under "Non-GAAP Financial Measures" for material differences between the financial information of MultiPlan and MPH.
Guarantees and Security
All obligations under the debt agreements governing Term Loan B, Revolver B and the 5.50% Senior Secured Notes are unconditionally guaranteed by MPH Acquisition Corp. 1, the direct holding company parent of MPH, and each existing and subsequently acquired or organized direct or indirect wholly owned U.S. organized restricted subsidiary of MPH (subject to certain exceptions). All such obligations, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by a first priority lien shared between the senior secured credit facilities and the 5.50% Senior Secured Notes on substantially all of MPH’s and the subsidiary guarantors’ tangible and intangible property, and a pledge of all of the capital stock of each of their respective subsidiaries.
Critical Accounting Policies
In preparing our Unaudited Condensed Consolidated Financial Statements, we are required to make judgments, assumptions and estimates, which we believe are reasonable and prudent based on the available facts and circumstances. These judgments, assumptions and estimates affect certain of our revenues and expenses and their related balance sheet accounts and disclosure of our contingent liabilities. We base our assumptions and estimates primarily on historical experience and consider known and projected trends. On an ongoing basis, we re-evaluate our selection of assumptions and the method of calculating our estimates. Actual results, however, may materially differ from our calculated estimates, and this difference would be reported in our current operations.
For a detailed description of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 in our 2021 Annual Report. For a detailed discussion of our significant accounting policies, see Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data” in our 2021 Annual Report. As of March 31, 2022, our critical accounting policies and estimates have not changed from those described in our 2021 Annual Report.
Customer Concentration
Three customers individually accounted for 34%, 19% and 10% of revenues for the year ended December 31, 2021. The loss of the business of one or more of our larger customers could have a material adverse effect on our results of operations. For further discussion on our customer concentration, please refer to Item 1A. “Risk Factors” in our 2021 Annual Report.
Recent Accounting Pronouncements
See Note 1 General Information and Basis of Accounting of the Notes to the unaudited condensed consolidated financial statements included in this Quarterly Report for additional information.