Cotiviti Holdings Inc. (NYSE:COTV) (“Cotiviti”), a leading provider of payment accuracy and analytics-driven solutions primarily focused on the healthcare industry, today announced financial results for the three and nine months ended September 30, 2017, and authorization for a share repurchase of up to $100 million. Cotiviti will host a conference call on November 1, 2017 at 8:30 a.m. Eastern Time to discuss its results.

“Our third quarter performance reflects our track record of delivering significant value to both healthcare and retail clients,” said Doug Williams, Chief Executive Officer. “This value translated into solid revenue growth and profitability in the quarter. We continue to expand existing client adoption and, during the quarter, we generated revenue from two new cross-sell opportunities within existing clients.”

“We continue to make strategic, ongoing investments to ensure our business is optimally positioned for long-term financial success as the market continues to evolve,” said Doug Williams. “We believe the RowdMap acquisition and the addition of our new Chief Digital Officer reflect our focus on generating sustainable, long-term client value creation.”

“Third quarter results were very much in line with our expectations and Cotiviti’s business fundamentals are strong,” said Adrienne Calderone, Interim Chief Financial Officer. “As we look to the balance of the year, we are adjusting our full year guidance to reflect timing-related factors in both our prospective (PCA) and retrospective (RCA) claims accuracy solutions which are delaying revenue. As we communicated last quarter, we have experienced ongoing PCA implementation delays and RCA revenue conversion slowdowns due to system changes at specific clients. These delays are now expected to extend into the fourth quarter. As a result, we are adjusting our full year 2017 revenue guidance range to $678 to $683 million and are projecting Adjusted EBITDA to be in the range of $265 to $268 million.”

“We are pleased to announce that our Board approved a share repurchase program of up to $100 million to allow us the financial flexibility to opportunistically repurchase shares in the open market over the next 12 months using existing cash balances,” continued Calderone. “Our strong cash flow generation enabled us to reduce the net debt leverage ratio to 2.6 times at September 30, 2017. We believe that we can enhance shareholder value by continuing to invest in our organic growth opportunities, make strategic acquisitions and opportunistically buy back stock. Initiating a share repurchase plan demonstrates the Board’s confidence in the Company’s long-term strategy.”

Shares of common stock may be purchased under the program from time to time in the open market and in privately negotiated transactions subject to debt covenants, and other customary legal, contractual, regulatory and market considerations and may be discontinued at any time.

Third Quarter 2017 Financial Results

  • Total revenue for the quarter increased 11% to $174.2 million, compared to $156.2 million in the third quarter a year ago. Revenue growth was driven by a 13% increase in the Healthcare segment to $156.2 million, with the Global Retail and Other segment contributing $18.0 million, up 1% compared to the same period a year ago. Healthcare revenue benefitted from an increase in expanded adoption of solutions within Cotiviti’s existing healthcare clients and the addition of new clients and cross-sell wins with existing clients.
  • Net income increased 325% to $19.5 million, or $0.20 per diluted share for the quarter, compared to $4.6 million in the 2016 third quarter, or $0.05 per diluted share. Third quarter 2017 net income was favorably impacted by the 11% increase in total revenue, a 66% reduction in stock-based compensation expense year-over-year and a $9.3 million decline in loss on extinguishment of debt from a year ago.
  • Non-GAAP Adjusted EBITDA for the quarter was $68.4 million, a 11% increase compared to $61.6 million for the prior year.
  • Non-GAAP Adjusted Net Income for the quarter was $36.9 million, or $0.39 per diluted share, compared to $33.7 million, or $0.36 per diluted share for the prior year.

Nine Months 2017 Financial Results

  • Total revenue for the nine months ended September 30, 2017, increased 10% to $501.9 million compared to $457.3 million for the same period a year ago. Revenue growth was driven by a 11% increase in the Healthcare segment to $447.6 million, and reflects a Global Retail and Other segment increase of 1% to $54.4 million. The increasing scope of solutions within existing clients, the addition of new clients and the success of our cross-sell efforts were the primary contributors to Healthcare revenue growth for the period.
  • Net income increased 187% to $67.5 million, or $0.71 per diluted share for the nine months ended September 30, 2017, compared to $23.6 million, or $0.27 per diluted share in the comparable period a year ago. The increase in net income for the first nine months of 2017 was primarily driven by a 10% increase in revenue, a 52% decrease in stock-based compensation, a 35% decrease in interest expense and a $13.2 million decline in loss on extinguishment of debt partially offset by an 8% increase in SG&A expense related to investments in analytics, technology and go-to-market and $1.3 million increase in transaction related expense due to the acquisition of RowdMap.
  • Non-GAAP Adjusted EBITDA for the nine months ended September 30, 2017 was $190.3 million, compared to $175.3 million in the comparable period a year ago.
  • Non-GAAP Adjusted Net Income for the nine months ended September 30, 2017 was $104.8 million, or $1.10 per diluted share, compared to $87.1 million, or $1.00 per diluted share in the comparable period a year ago.

Guidance

Cotiviti estimates full year 2017 results as follows:

  • Total revenue in a range of $678 million to $683 million;
  • Net income in a range of $91 million to $95 million;
  • Adjusted EBITDA in a range of $265 million to $268 million; and
  • Fully diluted weighted average shares of approximately 96 million, excluding any impact from share repurchases.

Adjusted EBITDA, Adjusted Net Income, and Adjusted Net Income per Diluted Share are non-GAAP financial measures. For an explanation of these as measures of the Company’s operating performance, refer to the reconciliation in “Non-GAAP Financial Measures.”

Conference Call Information

To participate in the conference call on November 1, domestic callers can dial (877) 883-0383 and international callers can dial (412) 902-6506 and provide the following conference passcode: 5419645. A webcast of the call will be accessible on the Investor page of Cotiviti’s website at http://investors.cotiviti.com.

Supplemental Financial Information

Supplemental financial information that is not part of this press release is available on the Investor page of Cotiviti’s website at http://investors.cotiviti.com.

About Cotiviti

Cotiviti is a leading provider of payment accuracy and analytics-driven solutions that helps payers, other risk-bearing healthcare organizations and retailers achieve their business objectives. Through a combination of analytics, technology and deep industry expertise, our solutions create insights that unlock value from the complex interactions between clients and their stakeholders. Cotiviti serves more than 20 of the top 25 U.S. healthcare payers and eight of the top 10 U.S. retailers. Cotiviti’s passion for creating unique client value drives our focus – Analytics. Insight. Value.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties. All statements other than statements of historical fact or relating to present facts or current conditions included in this press release are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “seek,” “plan,” “intend,” “believe,” “will,” “may,” “could,” “continue,” “likely,” “should,” and other words.

The forward-looking statements contained in this press release are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. These statements are not guarantees of performance or results. These assumptions and our future performance or results involve risks and uncertainties (many of which are beyond our control). Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following: our inability to successfully leverage our existing client base by expanding the volume of claims reviewed and cross-selling additional solutions; improvements to healthcare claims and retail billing processes reducing the demand for our solutions or rendering our solutions unnecessary; healthcare spending fluctuations; our clients declining to renew their agreements with us or renewing at lower performance fee levels; inability to develop new clients; delays in implementing our solutions; variations in our revenue between reporting periods due to timing issues; system interruptions or failures, including cyber-security breaches, identity theft or other disruptions that could compromise our information; our failure to innovate and develop new solutions for our clients; our failure to comply with applicable privacy, security and data laws, regulations and standards; changes in regulations governing healthcare administration and policies, including governmental restrictions on the outsourcing of functions such as those that we provide; loss of a large client; consolidation among healthcare payers or retailers; slow development of the healthcare payment accuracy market; negative publicity concerning the healthcare payment industry or patient confidentiality and privacy; significant competition for our solutions; our inability to protect our intellectual property rights, proprietary technology, information, processes and know-how; compliance with current and future regulatory requirements; declines in contracts awarded through competitive bidding or our inability to re-procure contracts through the competitive bidding process; our failure to accurately estimate the factors upon which we base our contract pricing; our inability to manage our growth; our inability to successfully integrate and realize synergies from any future acquisitions or strategic partnerships; the timing and magnitude of shares purchased under our share repurchase program; our failure to maintain or upgrade our operational platforms; our failure to reprocure our Medicare Recovery Audit Contractor program contract; litigation, regulatory or dispute resolution proceedings, including claims or proceedings related to intellectual property infringements; our inability to expand our retail business; our inability to manage our relationships with information suppliers, software vendors or utility providers; fluctuation in our results of operations; changes in tax rules; risks associated with international operations; our inability to realize the book value of intangible assets; our success in attracting and retaining qualified employees and key personnel; and general economic, political and market forces and dislocations beyond our control; risks related to our substantial indebtedness and holding company structure; volatility in bank and capital markets; our status as an emerging growth company; and provisions in our amended and restated certificate of incorporation. Additional factors or events that could cause our actual performance to differ from these forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual financial condition, results of operations, future performance and business may vary in material respects from the performance projected in these forward-looking statements.

Any forward-looking statement made by us in this press release speaks only as of the date on which it is made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Non-GAAP Financial Measures

The Company defines Adjusted EBITDA as net income before depreciation and amortization, interest expense, other non-operating (income) expense such as foreign currency translation, income tax expense, transaction-related expenses and other and stock-based compensation. The Company defines Adjusted Net Income and Adjusted Net Income per Diluted Share as net income adjusted for non-cash and other non-recurring items.

Management believes Adjusted EBITDA is useful because it provides meaningful supplemental information about our operating performance and facilitates period-to-period comparisons without regard to our financing methods, capital structure or other items that we believe are not indicative of our ongoing operating performance. Management believes Adjusted Net Income is useful because it provides meaningful supplemental information about our operating performance and facilitates period-to-period comparisons without regard to non-cash expenses and other items that are one-time in nature. In order to assure that all investors have access to similar data the Company has determined that it is appropriate to provide these non-GAAP financial measures. Management believes we are enhancing investors’ understanding of our business and our results of operations, as well as assisting them in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA and Adjusted Net Income are intended as supplemental measures of our performance that is not required by, or presented in accordance with U.S. generally accepted accounting principles, or GAAP. Adjusted EBITDA and Adjusted Net Income are not determined in accordance with GAAP, and should not be considered in isolation or as an alternative to net income, income from operations, net cash provided by operating, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP.

         

Cotiviti Holdings, Inc.

Consolidated Balance Sheets

(In thousands)

 
 
September 30, December 31,
2017 2016
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 123,008 $ 110,635
Restricted cash 8,438 9,103

Accounts receivable, net of allowance for doubtful accounts of $113 and $851 at
September 30, 2017 and December 31, 2016, respectively; and net of
estimated allowance for refunds and appeals of $30,996 and $41,020 at
September 30, 2017 and December 31, 2016, respectively

83,462 67,735
Prepaid expenses and other current assets   16,985     14,957  
Total current assets 231,893 202,430
Property and equipment, net 78,414 67,640
Goodwill 1,251,325 1,196,024
Intangible assets, net 507,823 533,305
Other long-term assets   2,770     2,864  
TOTAL ASSETS $ 2,072,225   $ 2,002,263  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 18,000 $ 18,000
Customer deposits 8,438 9,103
Accounts payable and accrued other expenses 36,410 23,162
Accrued compensation costs 40,123 58,589
Estimated liability for refunds and appeals   57,971     62,539  
Total current liabilities 160,942 171,393
Long-term liabilities:
Long-term debt 753,592 762,202
Other long-term liabilities 5,656 8,799
Deferred tax liabilities   121,169     120,533  
Total long-term liabilities   880,417     891,534  
Total liabilities   1,041,359     1,062,927  
Commitments and contingencies (Note 7)
Stockholders' equity:

Common stock ($0.001 par value; 600,000,000 shares authorized, 92,368,654
and 90,748,740 issued, and 92,368,654 and 90,741,340 outstanding at
September 30, 2017 and December 31, 2016, respectively)

92 91
Additional paid-in capital 934,104 911,582
Retained earnings 101,452 33,917
Accumulated other comprehensive loss (4,782 ) (6,156 )
Treasury stock, at cost (7,400 shares at December 31, 2016)   —     (98 )
Total stockholders' equity   1,030,866     939,336  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,072,225   $ 2,002,263  
 
                 

Cotiviti Holdings, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands except per share data)

 
 
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Net revenue $ 174,188 $ 156,241 $ 501,932 $ 457,250

Cost of revenue (exclusive of depreciation and amortization, stated
separately below):

Compensation 58,405 58,517 173,563 167,263
Other costs of revenue   6,676     6,658     19,485     17,331  
Total cost of revenue 65,081 65,175 193,048 184,594

Selling, general and administrative expenses (exclusive of
depreciation and amortization, stated separately below):

Compensation 29,162 32,496 79,419 74,782
Other selling, general and administrative expenses   17,313     13,978     49,492     44,152  
Total selling, general and administrative expenses 46,475 46,474 128,911 118,934
Depreciation and amortization of property and equipment 6,070 5,218 17,541 14,864
Amortization of intangible assets 14,747 15,203 45,147 45,618
Transaction-related expenses   773     16     2,165     909  
Total operating expenses   133,146     132,086     386,812     364,919  
Operating income 41,042 24,155 115,120 92,331
Other expense (income):
Interest expense 9,101 9,625 26,060 40,345
Loss on extinguishment of debt — 9,349 3,183 16,417
Other non-operating (income) expense   (449 )   (113 )   (1,458 )   (771 )
Total other expense (income)   8,652     18,861     27,785     55,991  
Income before income taxes 32,390 5,294 87,335 36,340
Income tax expense   12,918     711     19,800     12,780  
Net income $ 19,472 $ 4,583 $ 67,535 $ 23,560
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 433 14 942 (657 )
Change in fair value of derivative instruments   301     (49 )   432     (615 )
Total other comprehensive income (loss)   734     (35 )   1,374     (1,272 )
Comprehensive income $ 20,206   $ 4,548   $ 68,909   $ 22,288  
 
Earnings per share:
Basic $ 0.21 $ 0.05 $ 0.74 $ 0.28
Diluted 0.20 0.05 0.71 0.27
 
         

Cotiviti Holdings, Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 
 
Nine Months Ended
September 30,
2017 2016
Cash flows from operating activities:
Net income $ 67,535 $ 23,560
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes (3,277 ) (8,682 )
Depreciation and amortization 62,688 60,482
Stock-based compensation expense 10,290 21,544
Amortization of debt issuance costs 2,367 3,618
Accretion of asset retirement obligations 146 138
Loss on extinguishment of debt 3,183 16,417
Changes in operating assets and liabilities:
Restricted cash 665 539
Accounts receivable (13,201 ) (4,489 )
Other assets (730 ) (1,141 )
Customer deposits (665 ) (539 )
Accrued compensation (18,673 ) (1,382 )
Accounts payable and accrued other expenses 1,144 (4,352 )
Estimated liability for refunds and appeals (4,568 ) 2,821
Other long-term liabilities 337 146
Other   (78 )   (335 )
Net cash provided by operating activities 107,163 108,345
Cash flows from investing activities:
Expenditures for property and equipment (23,610 ) (22,578 )
Business combinations, net of cash acquired (69,731 ) —
Other investing activities   —     1,181  
Net cash used in investing activities (93,341 ) (21,397 )
Cash flows from financing activities:
Net proceeds from issuance of common stock — 226,963
Proceeds from exercise of stock options 12,349 56
Proceeds from issuance of debt — 800,000
Dividends paid — (150,000 )
Payment of debt issuance costs (661 ) (6,327 )
Repayment of debt   (13,500 )   (1,062,850 )
Net cash used in financing activities (1,812 ) (192,158 )
Effect of foreign exchanges on cash and cash equivalents   363     (385 )
Net increase (decrease) in cash and cash equivalents   12,373     (105,595 )
Cash and cash equivalents at beginning of period   110,635     149,365  
Cash and cash equivalents at end of the period

$

123,008  

$

43,770  
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 22,357   $ 24,377  
Cash paid for interest   22,161     35,927  
Noncash investing activities (accrued property and equipment purchases)   12,611     12,000  
Noncash investing activities (business combinations)   286     —  
Noncash financing activities (accrued debt issuance costs)   —     979  
 
                         

Reconciliation of Net Income to Adjusted EBITDA

 
 
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
(unaudited, in thousands) 2017 2016 Change   2017 2016 Change
Net income $ 19,472 $ 4,583 325 % $ 67,535 $ 23,560 187 %
Adjustments to net income:
Depreciation and amortization 20,817 20,421 2 % 62,688 60,482 4 %
Interest expense 9,101 9,625 (5 ) % 26,060 40,345 (35 ) %
Other non-operating (income) expense(a) (449 ) (113 ) 299 % (1,458 ) (771 ) 89 %
Income tax expense 12,918 711 NM 19,800 12,780 55 %
Transaction-related expenses and other(b) 773 16 NM 2,165 909 138 %
Stock-based compensation(c) 5,752 17,042 (66 ) % 10,290 21,544 (52 ) %
Loss on extinguishment of debt(d)   —     9,349   (100 ) %   3,183     16,417   (81 ) %
Adjusted EBITDA $ 68,384   $ 61,634   11   % $ 190,263   $ 175,266   9   %
% of revenue 39.3 % 39.4 % 37.9 % 38.3 %

__________

(a)   Represents other non-operating (income) expense that consists primarily of interest income and gains and losses on transactions settled in foreign currencies. Income received for certain sub-leases is included herein.
(b) Represents transaction-related expenses that consist primarily of certain expenses associated with our secondary offerings and our Initial Public Offering and other offering costs in 2016 as well as certain corporate development activity, including the RowdMap Acquisition.
(c) Represents expense related to equity incentive awards granted to certain employees, officers and non-employee directors as long-term incentive compensation and restricted stock issued in connection with the RowdMap Acquisition. We recognize the related expense for these awards ratably over the vesting period or as achievement of performance criteria become probable.
(d) Represents loss on extinguishment of debt that consists primarily of fees paid and write-offs of unamortized debt issuance costs and original issue discount in connection with the 2017 repricing of our First Lien Term B Loan, the 2016 early repayment of a portion of our long-term debt and the 2016 refinancing of long-term debt.
 
                         

Reconciliation of Net Income to Adjusted Net Income

 
 
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
(unaudited, in thousands) 2017 2016 Change 2017 2016 Change
Net income $ 19,472 $ 4,583 325 % $ 67,535 $ 23,560 187 %
Adjustments to net income:
Amortization of acquired intangible assets - non tax deductible 11,191 10,402 8 % 31,995 31,206 3 %
Amortization of acquired intangible assets - tax deductible 3,556 4,801 (26 ) % 13,152 14,412 (9 ) %
Loss on extinguishment of debt(a) — 9,349 (100 ) % 3,183 16,417 (81 ) %
Transaction-related expenses and other(b) 773 16 NM 2,165 909 138 %
Stock-based compensation - tax deductible(c) 1,786 17,042 (90 ) % 6,324 21,544 (71 ) %
Stock-based compensation - non tax deductible(d) 3,966 — NM 3,966 — NM
Tax effect of above adjustments(e) (2,030 ) (12,476 ) (84 ) % (8,611 ) (20,949 ) (59 ) %
Tax benefit related to stock option exercises   (1,833 )   —   NM     (14,874 )   —   NM  
Adjusted Net Income $ 36,881   $ 33,717   9   % $ 104,835   $ 87,099   20   %
 
Weighted average shares of common stock - Diluted (000s) 95,266 93,954 1 % 95,151 86,858 10 %
 
Adjusted Net Income per diluted share $ 0.39 $ 0.36 8 % $ 1.10 $ 1.00 10 %

__________

(a)   Represents loss on extinguishment of debt that consists primarily of fees paid and write-offs of unamortized debt issuance costs and original issue discount in connection with the 2017 repricing of our First Lien Term B Loan, the 2016 early repayment of a portion of our long-term debt and the 2016 refinancing of long-term debt.
(b) Represents transaction-related expenses that consist primarily of certain expenses associated with our secondary offerings and our Initial Public Offering and other offering costs in 2016 as well as certain corporate development activity, including the RowdMap Acquisition.
(c) Represents expense related to equity incentive awards granted to certain employees, officers and non-employee directors as long-term incentive compensation. We recognize the related expense for these awards ratably over the vesting period.
(d) Represents expense related to restricted stock issued in connection with the RowdMap Acquisition. We recognize the related expense for these awards ratably over the vesting period or as achievement of performance criteria become probable.
(e) This line represents the tax impact of the amortization of acquired intangible assets - tax deductible, loss on extinguishment of debt and stock-based compensation – tax deductible. The tax rate assumed is 38% and 40% for the three months and nine months ended September 30, 2017 and 2016, respectively.
 
         

Adjusted EBITDA 2017 Guidance Reconciliation

(unaudited, in millions)

 
 
2017 Guidance Range
Low High
Net income $ 91 $ 95
Adjustments to net income:
Depreciation and amortization 85 83
Interest expense 35 35
Other non-operating (income) expense(a) (2 ) (3 )
Income tax expense(b) 34 36
Transaction-related expenses and other(c) 2 2
Stock-based compensation(d) 17 17
Loss on extinguishment of debt(e)   3     3  
Adjusted EBITDA $ 265   $ 268  

__________

(a)   Represents other non-operating (income) expense that consists primarily of interest income and gains and losses on transactions settled in foreign currencies. Income received for certain sub-leases is included herein.
(b) Income tax expense for 2017 assumes an effective tax rate of approximately 38% excluding the impact of the benefit related to stock option exercises that have actually occurred through September 30, 2017.
(c) Represents transaction-related expenses that consist primarily of certain expenses associated with our secondary offerings and our Initial Public Offering and other offering costs in 2016 as well as certain corporate development activity, including the RowdMap Acquisition.
(d) Represents expense related to equity incentive awards granted to certain employees, officers and non-employee directors as long-term incentive compensation and restricted stock issued in connection with the RowdMap Acquisition. We recognize the related expense for these awards ratably over the vesting period or as achievement of performance criteria become probable.
(e) Represents loss on extinguishment of debt that consists primarily of fees paid and write-offs of unamortized debt issuance costs and original issue discount in connection with the 2017 repricing of our First Lien Term B Loan, the 2016 early repayment of a portion of our long-term debt and the 2016 refinancing of our long-term debt.