HMS HOLDINGS CORP. The following Management's Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of HMS. You should read this discussion and analysis in conjunction with the other sections of this 2020 Form 10- K, including the Cautionary Note Regarding Forward-Looking Statements appearing prior to Part I, the information in Part I, Item 1A, and the Consolidated Financial Statements and Notes thereto in Part II, Item 8. The historical results set forth in Part II, Item 6, Item 7 and Item 8 of this 2020 Form 10-K should not be taken as necessarily indicative of our future operations or financial results. This section of this 2020 Form 10-K generally discusses 2020 and 2019 items and includes a year-to-year comparison of our results of operations and liquidity and capital resources between 2020 and 2019. For a discussion of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this 2020 Form 10-K, please refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 24, 2020 . Business Overview HMS is mission-driven to increase the value of healthcare so that it can benefit more people and improve the health of the population. Through our industry-leading technology, analytics and engagement solutions, we save billions of healthcare dollars annually while helping people lead healthier lives. We provide a broad range of coordination of benefits, payment integrity and population health management solutions through our operating subsidiaries that move healthcare forward. We are managed and operate as one business segment with a single management team that reports to the Chief Executive Officer. [[Image Removed: hmsy-20201231_g3.jpg]] We provide solutions that apply broadly across state and Federal government agencies, health plans and PBMs, employers, and at-risk providers. We also serve as a subcontractor for certain business outsourcing and technology firms. As ofDecember 31, 2020 , our customer base included the following: ?50+U.S. Federal and state government agencies; ?over 350 health plans, including 22 of the top 25 health plans nationally (based on membership) in support of their multiple lines of business, including Medicaid managed care, Medicare Advantage and group and individual health; ?over 160 employers; ?CMS, theCenters for Disease Control and Prevention and theDepartment of Veterans Affairs ; and ?PBMs, third-party administrators and other risk-bearing entities, including independent practice associations, hospital systems, ACOs and specialty care organizations. Trends and Outlook We have grown our business both organically, through internal innovation and the development of new solutions and services, as well as by acquisition of businesses whose core services strengthened our overall mission to make 43 -------------------------------------------------------------------------------- Table of Contents healthcare work better for everyone. Health plans were the largest growth contributor during 2020. In addition to cross-sales of our population health management solutions and other internal initiatives in 2020, various factors related to the macro healthcare environment are expected to provide opportunities for future growth, including: ?the rising and unsustainable costs of healthcare; ?increasing enrollment and rising expenditures for Medicare and Medicaid; ?the importance of treating the "whole person" with multi-dimensional analytics that provide a complete view of a person's coverage, health history and risks, enhanced with effective engagement solutions that impact behavior and improve outcomes; ?the transition to value-based care, and the overall complexity of the healthcare claims payment system in theU.S. ; and ?the growing importance of analytics to preemptively identify early and rising risks, measure outcomes, and improve health. To fuel our future growth, we plan to enter into new and adjacent markets, and add new customers and broaden the scope of our relationships with existing customers by capturing cross-selling opportunities and introducing innovative solutions and services that span the payment and care continuum. To advance these initiatives, we intend to increase internal product development and enhancement efforts to accelerate the launch of new offerings and capabilities that drive innovation and value for our customers. We have also renewed our focus on investing and deploying technology tools that leverage a big data environment to promote automation and greater operating efficiencies that will improve the quality, effectiveness and profitability of our offerings, increase customer satisfaction and identify revenue opportunities. We are subject to a number of significant risks in the operation of our business, including operational, strategic, financial and regulatory risks. These include risks related to legal compliance, financial performance and condition, protection of our information technology networks and systems and intellectual property, and other risks. With respect to cybersecurity, the effective operation of our information technology networks and systems, and the secure processing and maintenance of the confidential, proprietary and sensitive information and data we receive from our customers and other data suppliers are critical to our operations and business strategy. Although we have processes and procedures to attempt to mitigate many of the risks that we face, there can be no assurance that such processes or procedures will be successful. For a discussion of certain risks relating to the Company, see the information under the heading "Part I, Item 1A. Risk Factors." Proposed Transaction with Gainwell OnDecember 20, 2020 , we entered into the Merger Agreement. The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into HMS, with HMS continuing as the surviving corporation and a wholly owned subsidiary of Gainwell. Under the terms of the Merger Agreement, which has been unanimously approved by the HMS Board of Directors, HMS shareholders will receive$37.00 in cash per share. We have agreed to customary representations, warranties and covenants in the Merger Agreement, including covenants with respect to the operation of our business prior to the closing of the transaction or termination of the Merger Agreement, such as restrictions on making certain acquisitions and dispositions, entering into certain contracts, incurring certain indebtedness or expenditures, declaring dividends, repurchasing stock and taking other specified actions. The consummation of the Merger is subject to customary closing conditions, including, among others, the adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the shares of HMS's common stock outstanding and entitled to vote as well as the satisfaction of other customary closing conditions. The Merger is not conditioned upon receipt of financing by Gainwell. The Merger is anticipated to close in the first half of 2021; however, we cannot predict with certainty as to when all of the required closing conditions will be satisfied or if the Merger will close at all. Under certain specified circumstances, we may be required to pay Gainwell a termination fee of 44 -------------------------------------------------------------------------------- Table of Contents approximately 2.0% of the transaction value in the event the Merger Agreement is terminated. See Note 1 to the Consolidated Financial Statements in Part II, Item 8 for additional details. The Impact of COVID-19 on our Business InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. Since the beginning of the outbreak, COVID-19 has significantly reduced global economic activity and increased the level of uncertainty and volatility in financial markets throughout the world. It has also impacted our day-to-day operations and the operations of the vast majority of our customers, suppliers and partners. Although the Company's revenues increased for the year endedDecember 31, 2020 , as compared to the prior year periods, and the COVID-19 pandemic has not had a material adverse effect on our business to date, our future operational and financial performance may be negatively impacted by the effects of COVID-19, including those that may not be in our control. The extent of the impact will depend on future developments and their effects on our customers and contracts, which are highly uncertain and cannot be accurately predicted at this time. For example, due to the circumstances related to COVID-19, some of our customers temporarily suspended or reduced certain contract work over several months in 2020. As a result of the reduction in volume and services, we experienced lower revenues during the second quarter and continued to see an impact to our financial results in certain parts of our business in the third quarter. As COVID-19 continues to evolve, we will continue to closely monitor the impact of COVID-19 and its effects on all aspects of our business, including those on our customers and partners, and assess any potential impacts to our financial position and operating results, as well as adverse developments in our business. For further information regarding the effect of COVID-19 on the Company, please see the "Risk Factors" section set forth in Part I, Item 1A. of this 2020 Form 10-K, which is incorporated herein by reference. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. The future effects of the COVID-19 pandemic on economic and market conditions continue to remain uncertain and increase the subjectivity that will be involved in evaluating our estimates and assumptions underlying our critical accounting policies. The accounting policies that we believe to be the most critical to an understanding of our financial condition and results of operations and that require the most complex and subjective management judgments are as follows: 45 -------------------------------------------------------------------------------- Table of Contents Revenue Recognition
Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
The Company recognizes revenue Due to the range of solutions and
If we were to enter any new
when performance obligations services that HMS provides and the contracts with differing fee
under the terms of the contracts differing fee structures associated structures or performance
with our customers are satisfied. with each type of contract, revenue obligations or if we were to
may be recognized in irregular change any of the judgments or
increments. A portion of our estimates related to estimated
revenue is recorded net of an future revenue adjustments, it
estimate of future revenue could cause a material increase
adjustments, with an offsetting or decrease in the amount of
entry to accounts receivable, based revenue we report in a particular
on historical patterns of billing period.
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.
Business Combinations
Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
We record assets acquired and In most instances there is not a The use of different valuation
liabilities assumed in a business readily defined or listed market techniques and assumptions are
combination based upon their price for individual assets and highly subjective and inherently
acquisition date fair values. liabilities acquired in connection uncertain and, as a result,
Goodwill is the excess of with a business, including actual results may differ
acquisition costs over the fair intangible assets. We determine materially from estimates.
values of assets and liabilities fair value through various
of acquired businesses. During the valuation techniques including
measurement period, which is up to discounted cash flow models, quoted
one year from the acquisition market values and third party
date, we may record adjustments to independent appraisals, as the assets acquired and
considered necessary. Significant
liabilities assumed, with the assumptions used in those
corresponding offset to goodwill. techniques include, but are not Upon the conclusion of the
limited to, growth rates, discount
measurement period, any subsequent rates, customer attrition rates,
adjustments are recorded to expected levels of revenues,
earnings. earnings, cash flows and tax rates.
46-------------------------------------------------------------------------------- Table of Contents Impairment ofGoodwill Description Judgments and Uncertainties
Effect if Actual Results Differ from Assumptions Goodwill is subject to a periodic The Company completed the
The results of the annual impairment assessment assessment for impairment. We
quantitative annual impairment
test provide that the fair value of the reporting
assess goodwill for impairment on as of
unit was significantly in excess of the
an annual basis as of June 30th of qualitative assessment as of June
Company's carrying value, including goodwill;
each year or more frequently if an 30, 2019 and in
therefore, no impairment was indicated.
event occurs or changes in elected to perform the qualitative If actual results are not consistent with
circumstances would more likely assessment. our estimates or assumptions, the Company may be than not reduce the fair value of
exposed to an impairment charge that could
a reporting unit below its When performing our quantitative materially adversely impact our
carrying amount. Assessment of analysis, the Company utilized a consolidated financial position and results of goodwill impairment is at the HMS weighting across three commonly
operations. There were no impairment charges
related to goodwill during the years ended
operate as a single reporting income approach, a guideline public December 31, 2020, 2019, or 2018.
unit. company approach, and a merger and
acquisition approach. Significant
We have the option to perform a assumptions in the income approach qualitative or quantitative
include income projections, a
assessment to determine if discount rate and a terminal growth
impairment is more likely than not value. The guideline public company to have occurred. If we can
approach and merger and acquisition
support the conclusion that it is approach are based on pricing more likely than not that the fair multiples observed for similar value of a reporting unit is
publicly traded companies or
greater than its carrying amount similar market companies that were
using the qualitative assessment, sold.
then the Company would not need to
perform the impairment test. If When the qualitative assessment of
the Company cannot support such a goodwill impairment is performed,
conclusion, or the Company does significant judgment is required in
not elect to perform the the assessment of qualitative
qualitative assessment, then the factors including but not limited goodwill impairment test is used to an evaluation of macroeconomic to identify potential impairment conditions as they relate to our by comparing the fair value of the business, industry and market reporting unit with its carrying trends, as well as the overall amount, including goodwill and
future financial performance of our
recognizing an impairment charge reporting units and future for the amount by which the
opportunities in the markets in
carrying amount exceeds the which they operate.
reporting unit's fair value, with
the understanding that the loss
recognized should not exceed the
total amount of goodwill allocated
to that reporting unit.
The Company's carrying amount of
goodwill was $594.6 million as of
December 31, 2020 .
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Impairment of Long-Lived and Intangible Assets
Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
Long-lived assets, including We use significant judgment in The Company's carrying amount of
property and equipment and assessing events or changes in long-lived assets, including
intangible assets, are reviewed circumstances which indicate that property and equipment and
for impairment whenever events or the carrying amount
of the asset intangible assets was
may not be recoverable. million as of December 31, 2020 .
that the carrying amount of the The Company did not recognize any
asset may not be recoverable. When impairment charges related to
indicators exist, recoverability long-lived and intangible assets
of assets is measured by a during the years ended December
comparison of the carrying value 31, 2020, 2019 or 2018. However,
of the asset group to the if actual results are not
estimated undiscounted future net consistent with our estimates or
cash flows expected to be assumptions, we may be exposed to
generated by the asset. If such an impairment charge that could
assets are considered to be materially adversely impact our
impaired, the impairment to be consolidated financial position
recognized and charged to earnings and results of operations.
is measured by the amount by which
the carrying value of the asset
group exceeds the fair value of
the assets.
Valuation of Stock-Based Compensation
Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
The determination of the fair We estimate stock price volatility If we were to change any of these value of the options on the grant
based on the historical volatility judgments or estimates, it could date using the Black-Scholes
of the Company's common stock and cause a material increase or pricing model is affected by the
estimate the expected term of the decrease in the amount of stock Company's stock price, as well as
awards based on the Company's compensation expense we report in
assumptions regarding a number of historical option exercises for a particular period. For example,
complex and subjective variables. similar types of stock option if actual forfeitures vary from
Certain key variables include: the awards. The assumed risk-free estimates, a difference in
Company's expected stock price interest rate is based on the yield compensation expense will be
volatility over the expected term on the measurement date of a recognized in the period the
of the awards; a risk-free zero-coupon U.S.
a maturity period equal to the
dividends. The fair value of all option's expected term. The Company
awards also includes an estimate does not anticipate paying any cash
of expected forfeitures. dividends in the foreseeable future
and therefore, uses an expected
dividend yield of zero in the
option valuation models.
Forfeitures are estimated based on
historical experience.
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Income Taxes
Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
Income taxes are accounted for Deferred tax assets and To the extent that the final tax
under the asset and liability liabilities are measured using outcome of these matters is
method. Under this method, deferred enacted tax rates expected to different than the amounts
tax assets and liabilities are apply to taxable income in the recorded, such differences will
recognized for the future tax years in which those temporary affect the provision for income
consequences attributable to differences are expected to be taxes in the period in which such
temporary differences between the recovered or settled. The effect determination is made, and could
financial statement carrying on deferred tax assets and have a material impact on our
amounts of existing assets and liabilities of a change in tax financial condition and operating
liabilities and their respective rates is recognized as income or results.
tax bases. This method also expense in the period that
requires the recognition of future includes the enactment date. A
Although the Company believes that
tax benefits for net operating loss valuation allowance is provided it has adequately reserved for
carry-forwards against deferred tax assets to the uncertain tax positions (including
extent their realization is not interest and penalties), it can
more likely than not. provide no assurance that the final
tax outcome of these matters will
Uncertain income tax positions are not be materially different.
accounted for by prescribing a
minimum recognition threshold that
a tax position is required to meet
before being recognized in the
financial statements. We make
adjustments to these reserves in
accordance with the income tax
accounting guidance when facts and
circumstances change, such as the
closing of a tax audit or the
refinement of an estimate.
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Contingencies
Effect if Actual Results Differ
Description Judgments and Uncertainties from Assumptions
From time to time, we are involved We record accruals for outstanding Litigation is inherently in legal proceedings in the
legal matters when we believe it is unpredictable and is subject to
ordinary course of business. We probable that a loss will be significant uncertainties, some of
assess the likelihood of any incurred and the amount can be which are beyond the Company's
adverse judgments or outcomes to reasonably estimated. Significant control. The amount of reserves
these contingencies as well as judgment is required to determine required may change in future potential ranges or probable losses both probability and the estimated periods due to new developments in and establish reserves accordingly. amount. We review these provisions each matter or changes in approach
at least quarterly and adjust the to a matter such as a change in
provisions to reflect the impact of settlement strategy which could
negotiations, settlements, rulings, have a material impact on our
advice of legal counsel and updated financial condition and operating
information. results.
For further information on these critical accounting policies and all other
significant accounting policies, refer to the discussion under "Business and
Summary of Significant Accounting Policies" in our Note 1 to the Consolidated
Financial Statements in Part II, Item 8.
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Table of Contents Results of Operations 2020 Highlights ?Revenue growth of 7.5% ?Operating income decrease of 9.5% ?Cash flow from operations of$99.0 million ?Net income decrease of 19.6%
Comparison of 2020 to 2019 and 2019 to 2018
(dollars in millions) Years ended December 31, $ Change % Change $ Change % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018
Revenue $ 673.3 $ 626.4 $ 598.3 $ 46.9 7.5% $ 28.1 4.7%
Cost of services:
Compensation 261.2 231.3 224.9 29.9 12.9 6.4 2.8
Direct project and other
operating expenses 96.2 90.1 74.3 6.1 6.8 15.8 21.3
Information technology 61.4 53.9 53.4 7.5 13.9 0.5 0.9
Occupancy 16.5 16.4 16.0 0.1 0.6 0.4 2.5
Amortization of acquisition
related software and intangible
assets 22.0 17.0 33.0 5.0 29.4 (16.0) (48.5)
Total cost of services 457.3 408.7 401.6 48.6 11.9 7.1 1.8
Selling, general and
administrative expenses 122.8 114.7 113.5 8.1 7.1 1.2 1.1
Settlement expense - - 20.0 - - (20.0) (100.0)
Total operating expenses 580.1 523.4 535.1 56.7 10.8 (11.7) (2.2)
Operating income 93.2 103.0 63.2 (9.8) (9.5) 39.8 63.0
Interest expense (7.6) (11.0) (11.3) 3.4 (30.9) 0.3 (2.7)
Interest income 0.2 4.1 1.1 (3.9) (95.1) 3.0 272.7
Other income 1.4 8.2 - (6.8) (82.9) 8.2 100.0
Income before income taxes 87.2 104.3 53.0 (17.1) (16.4) 51.3 96.8
Income taxes 17.1 17.1 (2.0) 0.0 0.0 19.1 (955.0)
Net income $ 70.1 $ 87.2 $ 55.0 $ (17.1) (19.6)% $ 32.2 58.5%
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Revenue (in millions)
[[Image Removed: hmsy-20201231_g5.jpg]]
2020 vs 2019
During the year ended December 31, 2020 , revenue was $673.3 million , an increase
of $46.9 million or 7.5% compared to $626.4 million for the year ended
December 31, 2019 .
§ By solution:
o Coordination of benefits revenue increased $65.1 million or 16.1% largely
driven by Accent related revenue of $43.3 million , and incremental services and
yield increases provided to non-Accent customers primarily related to cost
avoidance and direct bill solutions.
o Payment integrity revenue decreased $10.2 million or 6.3%, primarily related
to $10.5 million of revenue recognized in the prior year period resulting from
the release of the Company's remaining estimated liability and net receivables
in connection with the original Medicare RAC contract in 2019.
o Population health management revenue decreased $8.0 million or 13.3%,
primarily resulting from decreased transactional revenue and lower program
volume due to circumstances related to COVID-19.
§ By market:
o Commercial health plan market revenue increased $48.1 million or 15.9%, which
was primarily due to Accent related revenue of $43.3 million , and incremental
services and yield increases provided to non-Accent customers primarily relating
to cost avoidance and direct bill solutions.
o State government market revenue increased $18.4 million or 7.1%, which was
attributable to expanded scopes and yield improvements.
o Federal government market and other revenue decreased $19.6 million or 29.6%
compared to the prior year period due to a reduction in volume as a result of
COVID-19 impacts, and $10.5 million of revenue in the prior year period related
to the release of the Company's remaining estimated liability and net
receivables as described above.
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Cost of Services (in millions)
[[Image Removed: hmsy-20201231_g6.jpg]]
2020 vs 2019
During the year ended December 31, 2020 , total cost of services was $457.3
million , an increase of $48.6 million or 11.9%, compared to $408.7 million for
the year ended December 31, 2019 .
?Compensation expense increased by $29.9 million , primarily due to the payroll
related costs incurred in connection with the acquisitions of VitreosHealth and
Accent during the second half of 2019.
?Information technology expense increased by $7.5 million due to increases in
the amortization of capitalized software and equipment costs in connection with
the acquisitions of VitreosHealth and Accent during the second half of 2019, and
other software, computer and equipment related costs.
?Direct project and other operating costs increased by $6.1 million due to
increased labor and professional fees utilized to support acquisition and
operational related activities, partially offset by a decrease in travel related
costs.
?Amortization of acquisition related software and intangibles assets increased
by $5.0 million due to an increase in intangible assets following the
acquisitions of VitreosHealth and Accent during the second half of 2019.
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Selling, General and Administrative Expenses (in millions)
[[Image Removed: hmsy-20201231_g7.jpg]]
2020 vs 2019
During the year ended December 31, 2020 , SG&A expense was $122.8 million , an
increase of $8.1 million or 7.1% compared to $114.7 million for the year ended
December 31, 2019 .
§ Compensation expense increased $5.8 million primarily as a result of
increases in payroll related costs and stock compensation expense benefits.
§ Information technology expense increased $2.4 million primarily due to an
increase in software related costs.
§ Other costs decreased $0.1 million , which included a decrease in travel and
employee related of $3.6 million , offset by an increase in professional fees of
$3.5 million .
Other income
2020 vs 2019
During the year ended December 31, 2020 , Other income was $1.4 million , a
decrease of $6.8 million or 82.9% compared to the prior year period. The Other
income recognized in 2020 was due to a change in the fair value of ordinary
shares of MedAdvisor Limited acquired during the fourth quarter of 2019. In
addition, during the year ended December 31, 2019 , a third party acquired one
hundred percent of the outstanding stock of InstaMed Holdings, Inc. ("InstaMed")
including the Company's cost based investment in InstaMed of $2.1 million . As a
result, the Company received proceeds of $9.8 million from the sale of the
investment and recognized a $7.7 million gain in Other income for the year ended
December 31, 2019 .
Income Taxes
2020 vs 2019
During the year ended December 31, 2020 , we recorded an income tax expense of
$17.1 million , the expense is unchanged compared to an income tax expense of
$17.1 million for the year ended December 31, 2019 .
§ Our effective tax rate was 19.6% for the year ended December 31, 2020
compared to an effective tax rate of 16.4% for the year ended December 31, 2019 .
The low 2019 effective tax rate is primarily due to equity compensation,
favorable tax benefits related to current credits, prior year state tax
apportionment changes, and uncertain tax position releases.
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§ Our normalized effective tax rate of 23.4% for 2020 decreased from our
normalized effective tax rate of 27.8% for 2019. The 2020 normalized effective
tax rate excludes tax benefits related to stock compensation net windfalls,
prior year credit adjustments, and reversal of prior years' uncertain tax
benefits of (0.2%), (1.8%) and (1.8%), respectively.
On March 27, 2020 , the CARES Act was enacted in response to the COVID-19
pandemic, which provides numerous tax provisions and other stimulus measures.
The Company claimed benefits relating to technical corrections of tax
depreciation methods for qualified improvement property. The benefits did not
have a material impact for the year ended December 31, 2020 .
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Liquidity and Capital Resources
The following tables should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, in Part II, Item 8 of this 2020 Form
10-K.
Our cash and cash equivalents, working capital and available borrowings under
our credit facility (based upon the borrowing base and financial covenants in
our Credit Agreement) were as follows (in thousands):
Years ended December 31,
2020 2019
Cash and cash equivalents $ 207,124 $ 139,268
Working capital $ 397,368 $ 296,093
Available borrowings under credit facility
A summary of our cash flows was as follows (in thousands):
Years ended
2020 2019 2018
Net cash provided by operating activities$ 99,048 $ 133,232 $ 96,457 Net cash used in investing activities (29,748) (205,059) (30,413) Net cash (used in)/provided by financing activities (1,444) 32,149 29,589 Net increase / (decrease) in cash and cash equivalents$ 67,856 $ (39,678) $ 95,633 Our cash and cash equivalents and our working capital increased as ofDecember 31, 2020 as compared toDecember 31, 2019 , primarily as a result of the cash used in investing activities in 2019 and an increase in accounts receivable as ofDecember 31, 2020 . Our principal source of cash has been our cash flow from operations and our$500 million five-year revolving credit facility. Other sources of cash include proceeds from exercise of stock options and tax benefits associated with stock option exercises. The primary uses of cash include, but are not limited to, acquisitions, strategic investments, capital investments, compensation expenses, data processing, direct project and other operating costs, SG&A expenses and other expenses. We believe that expected cash flows from operations, available cash and cash equivalents, and funds available under our revolving credit facility will be sufficient to meet our liquidity requirements for the following year, which include: ?the working capital requirements of our operations; ?investments in our business; and 55 -------------------------------------------------------------------------------- Table of Contents ?business development activities. Any projections of future earnings and cash flows are subject to substantial uncertainty, particularly in light of the rapidly changing market and economic conditions created by the COVID-19 pandemic. We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to meet working capital requirements, fund acquisitions or investments or repay our indebtedness under the Credit Agreement. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions as well as our financial condition and results of operations at the time we seek additional financing. Although we believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our operations for the foreseeable future, the challenges posed by COVID-19 on our business are expected to continue to shift rapidly. Consequently, we will continue to assess our liquidity needs and anticipated capital requirements in light of future developments, particularly those relating to COVID-19. Under the Merger Agreement with Gainwell, we have agreed to various customary covenants and agreements, including, among others, covenants to conduct our business, in all material respects, in the ordinary course of business during the interim period between the execution of the Merger Agreement and the consummation of the Merger. Outside of certain limited exceptions, we may not engage in or take specified actions during this period unless agreed to in writing by Gainwell, which include, among others: ?acquiring entities, including any business or divisions thereof; ?entering into new lines of business; ?disposing of material assets or properties; ?making capital expenditures above specified thresholds; ?incurring any indebtedness for borrowed money; ?granting or issuing new stock options for additional shares of common stock; and ?repurchasing shares of our common stock. We do not believe these restrictions will prevent us from funding our ongoing cost of services and other operating costs or satisfying our working capital and capital expenditure requirements. Cash Flows from Operating Activities Net cash provided by operating activities for the year endedDecember 31, 2020 was$99.0 million , a$34.2 million decrease from net cash provided by operating activities of$133.2 million for the year endedDecember 31, 2019 . The decrease was primarily due to a$17.1 million decrease in net income in 2020, a$7.7 million gain on the sale of a cost-basis investment in 2019, the release of an estimated liability for appeals, net of$10.5 million in 2019, a decrease in deferred income taxes of$14.0 million in 2020, and a net increase in operating assets and liabilities of approximately$26.2 million in 2020. Our DSO calculation can be derived by dividing total net accounts receivable at the end of period, by the daily average of the current quarter's annualized revenue. For the year endedDecember 31, 2020 , revenue was$673.3 million , an increase of$46.9 million compared to revenue of$626.4 million for the year endedDecember 31, 2019 . DSO was 123 days as ofDecember 31, 2020 , the same as compared toDecember 31, 2019 . We do not currently anticipate collection issues with our accounts receivable, however, nor do we currently expect that any extended collections will materially impact our liquidity. The majority of our customer relationships have been in place for several years. Our future operating cash flows could be adversely affected by a decrease in a demand for our services, delayed payments from customers or if one or more contracts with our largest customers is terminated or not renewed. Cash Flows from Investing Activities 56 -------------------------------------------------------------------------------- Table of Contents Net cash used in investing activities for the year endedDecember 31, 2020 was$29.7 million , a$175.4 million decrease compared to net cash used in investing activities of$205.1 million for the year endedDecember 31, 2019 . This decrease was primarily attributable to a reduction in net cash used in the acquisition of a business of$187.3 million in 2020 and a reduction in the investment in common stock of$4.0 million in 2020. These decreases were partially offset by a decrease in proceeds from the sale of our cost basis investment inInstaMed of$9.8 million in 2019 and an increase in purchases of property and equipment and investment in capitalized software of$6.3 million year over year. We currently expect to incur capital expenditures of approximately$35 million during the year endedDecember 31, 2021 . Cash Flows from Financing Activities Net cash used in financing activities for the year endedDecember 31, 2020 was$(1.4) million , a$33.5 million decrease from net cash provided by financing activities of$32.1 million for the year endedDecember 31, 2019 . The decrease was primarily related to a$33.1 million decrease in proceeds from the exercise of stock options, net of payments of tax withholdings in 2020. Share Repurchase Program During the year endedDecember 31, 2020 , we did not repurchase any shares of our common stock. See the discussion under "Repurchases of Shares of Common Stock" under Part II, Item 5 and "Equity" in Note 10 to the Consolidated Financial Statements under Part II, Item 8 for additional information regarding share repurchases. Credit Agreement InMay 2013 , we entered into the Credit Agreement with certain lenders andCitibank, N.A . as administrative agent. The Credit Agreement originally provided for an initial$500 million five-year revolving credit facility maturing onMay 3, 2018 . OnDecember 19, 2017 , we entered into an amendment to the Credit Agreement that, among other things, provided for an extension of the maturity date of our then-existing senior secured revolving credit facility toDecember 19, 2022 , which includes a$50 million sublimit for the issuance of letters of credit and a$25 million sublimit for swingline loans. In addition, the Credit Agreement includes an accordion feature that permits us to increase the revolving credit facility up to the sum of (a) the greater of$120 million and 100% of Consolidated EBITDA (as defined in the Credit Agreement) and (b) additional amounts 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, in each case subject to obtaining commitments from lenders therefor and meeting certain other conditions. The obligations and amounts due under the Credit Agreement are secured by a first security priority interest in all or substantially all of our tangible and intangible assets and our material 100% owned subsidiaries' assets. The Credit Agreement contains customary representations and warranties, affirmative and negative covenants, including financial covenants, and events of default. As ofDecember 31, 2020 , the outstanding principal balance under our revolving credit facility was$240.0 million . 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 our revolving credit facility and expiresJune 30, 2021 . As ofDecember 31, 2020 , we were in compliance with all terms of the Credit Agreement. See Note 9 to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding our Credit Agreement. Contractual Obligations 57 -------------------------------------------------------------------------------- Table of Contents The following table represents the scheduled maturities of our contractual cash obligations and other commitments: Payments
Due by Period (in thousands)
Total Less than 1 year 1 - 3 years 3 -5 years More than 5
Contractual Obligations (1) years
Operating leases (2) $ 16,456 $ 4,816 $ 7,152 $ 4,147 $ 341
Revolving credit facility (3) 240,000 - 240,000 - -
Interest expense (4) 9,811 5,546 4,265 - -
Commitment fee (5) 1,288 651 637 - -
Capital leases (6) 2,246 1,185 1,061 - -
Letter of Credit fee (7) 53 53 - - -
Purchase obligations and commitments 18,333 12,609 5,724 - -
(8)
Total $ 288,187 $ 24,860 $ 258,839 $ 4,147 $ 341
(1)The Company has excluded long-term unrecognized tax benefits, net of interest
and penalties, of $4.5 million from the amounts presented as the timing of these
obligations is uncertain.
(2)Represents the future minimum lease payments under non-cancelable operating
leases. See Note 16 to the Consolidated Financial Statements in Part II, Item 8
for additional information regarding Leases.
(3)Represents scheduled repayments of principal on the revolving credit facility
under the terms of our Credit Agreement. See Note 9 to the Consolidated
Financial Statements in Part II, Item 8 for additional information regarding the
Credit Agreement.
(4)Represents estimates of amounts due on the revolving credit facility based on
the interest rate as of December 31, 2020 and on scheduled repayments of
principal. See Note 9 to the Consolidated Financial Statements in Part II, Item
8 for additional information regarding the Credit Agreement.
(5)Represents the commitment fee due on the revolving credit facility. See Note
9 to the Consolidated Financial Statements in Part II, Item 8 for additional
information regarding the Credit Agreement.
(6)Represents the future minimum lease payments under capital leases. See Note
16 to the Consolidated Financial Statements in Part II, Item 8 for additional
information regarding Leases.
(7)Represents the fees for the letter of credit issued against the revolving
credit facility. See Note 9 to the Consolidated Financial Statements in Part II,
Item 8 for additional information regarding the Credit Agreement.
(8)Represents future purchases related to outstanding purchase orders and
supplier requisitions.
Recently Issued Accounting Pronouncements
The information set forth under the caption "Summary of Significant Accounting
Policies" in Note 1 to the Consolidated Financial Statements in Part II, Item 8
is incorporated herein by reference.
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