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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

 

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES     EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

OR

 

¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES     EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number: 001-33881

MEDASSETS, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE    51-0391128

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

100 North Point Center East, Suite 200

Alpharetta, Georgia

   30022
(Address of principal executive offices)    (Zip Code)

Registrant’s telephone number, including area code: (678) 323-2500

(Former name, former address and former fiscal year, if changed since last report)

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      x  No        ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes        x  No        ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨
   

(Do not check if a smaller

      reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    ¨   No    x

As of April 24, 2015, the registrant had 60,364,700 shares of common stock, par value $0.01 per share, outstanding.


Table of Contents

MEDASSETS, INC.

FORM 10-Q

INDEX

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

  

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

     3   

Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014

     4   

Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March  31, 2015

     5   

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014

     6   

Notes to Condensed Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     32   

Item 4. Controls and Procedures

     32   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     33   

Item 1A. Risk Factors

     33   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     33   

Item 3. Defaults Upon Senior Securities

     33   

Item 4. Mine Safety Disclosures

     33   

Item 5. Other Information

     33   

Item 6. Exhibits

     33   

Signatures

  

 

2


Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MedAssets, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

     March 31, 2015      December 31, 2014  
     (In thousands, except share and per
share amounts)
 
ASSETS   

Current assets

     

Cash and cash equivalents

     $           18,974           $           12,100     

Accounts receivable, net of allowances of $2,651 and $2,641 as of March 31, 2015 and December 31, 2014, respectively

     123,955           127,741     

Deferred tax asset, current portion

     5,825           5,782     

Prepaid expenses and other current assets

     26,676           30,557     
  

 

 

    

 

 

 

Total current assets

     175,430           176,180     

Property and equipment, net

     167,266           170,318     

Other long term assets

     

Goodwill

     1,058,414           1,058,414     

Intangible assets, net

     261,351           276,407     

Other

     35,698           37,477     
  

 

 

    

 

 

 

Other long term assets

     1,355,463           1,372,298     
  

 

 

    

 

 

 

Total assets

     $      1,698,159           $      1,718,796     
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities

     

Accounts payable

     $           18,051           $           26,910     

Accrued revenue share obligation and rebates

     89,948           91,864     

Accrued payroll and benefits

     22,644           32,784     

Other accrued expenses

     16,276           9,040     

Deferred revenue, current portion

     77,464           76,034     

Current portion of notes payable

     23,313           29,583     

Current portion of finance obligation

     301           294     
  

 

 

    

 

 

 

Total current liabilities

     247,997           266,509     

Notes payable, less current portion

     519,417           526,417     

Bonds payable

     325,000           325,000     

Finance obligation, less current portion

     8,397           8,475     

Deferred revenue, less current portion

     16,947           15,418     

Deferred tax liability

     113,852           116,607     

Other long term liabilities

     14,596           13,883     
  

 

 

    

 

 

 

Total liabilities

     1,246,206           1,272,309     

Commitments and contingencies

     

Stockholders’ equity

     

Common stock, $0.01 par value, 150,000,000 shares authorized; 60,351,000 and 60,199,000 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively

     604           602     

Additional paid-in capital

     696,346           694,235     

Accumulated deficit

     (244,997)          (248,350)    
  

 

 

    

 

 

 

Total stockholders’ equity

     451,953           446,487     
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

     $      1,698,159           $      1,718,796     
  

 

 

    

 

 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

3


Table of Contents

MedAssets, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
March 31,
 
     2015      2014  
     (In thousands, except per
share amounts)
 

Revenue:

     

Administrative fees, net

    $     77,761          $ 76,246     

Other service fees

     107,820           94,621     
  

 

 

    

 

 

 

Total net revenue

     185,581           170,867     
  

 

 

    

 

 

 

Operating expenses:

     

Cost of revenue (inclusive of depreciation expense of $978 and $424 for the three months ended March 31, 2015 and 2014, respectively)

     42,933           37,431     

Product development expenses

     8,400           7,397     

Selling and marketing expenses

     19,511           15,193     

General and administrative expenses

     64,485           58,803     

Restructuring, acquisition and integration-related expenses

     4,439           1,697     

Depreciation

     13,347           11,540     

Amortization of intangibles

     15,056           14,026     
  

 

 

    

 

 

 

Total operating expenses

     168,171           146,087     
  

 

 

    

 

 

 

Operating income

     17,410           24,780     

Other income (expense):

     

Interest (expense)

     (11,869)          (11,173)    

Other income

     62           58     
  

 

 

    

 

 

 

Income before income taxes

     5,603           13,665     

Income tax expense

          2,250           5,987     
  

 

 

    

 

 

 

Net income

    $ 3,353          $ 7,678     
  

 

 

    

 

 

 

Basic and diluted income per share:

     

Basic net income per share

    $ 0.06          $ 0.13     
  

 

 

    

 

 

 

Diluted net income per share

    $ 0.06          $ 0.12     
  

 

 

    

 

 

 

Weighted average shares—basic

     59,736           60,648     

Weighted average shares—diluted

     60,530           61,681     

 

 

 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

MedAssets, Inc.

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

Three Months Ended March 31, 2015

 

     Common Stock      Additional
Paid-In

Capital
     Accumulated
Deficit
     Total
Stockholders’

Equity
 
             
     Shares      Par Value           
     (In thousands)  

Balances at December 31, 2014

     60,199           $        602           $    694,235           $    (248,350)          $      446,487     

Issuance of common stock from stock option and
SSAR exercises and restricted stock issuances, net

     347           4           596           -           600     

Shares surrendered to pay taxes on vesting of
restricted stock

     (195)          (2)          (3,759)          -           (3,761)    

Stock compensation expense

     -           -           5,732           -           5,732     

Tax deficit from equity award exercises, net

     -           -           (458)          -           (458)    

Net income

              3,353           3,353     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balances at March 31, 2015

     60,351           $        604           $    696,346           $    (244,997)          $      451,953     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

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MedAssets, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended March 31,  
     2015      2014  
     (In thousands)  

Operating activities

     

Net income

       $          3,353             $          7,678     

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

     

Depreciation

     14,325           11,964     

Amortization of intangibles

     15,056           14,026     

Loss (gain) on sale of assets

     54           (20)    

Noncash stock compensation expense

     5,732           4,302     

Excess tax benefit from exercise of equity awards

     (248)          (1,382)    

Amortization of debt issuance costs

             978           943     

Noncash interest expense, net

     98           105     

Deferred income tax benefit

     (2,863)          (2,451)    

Changes in assets and liabilities:

     

Accounts receivable

     3,786           (13,357)    

Prepaid expenses and other assets

     3,881           10     

Other long-term assets

     171           452     

Accounts payable

     (8,572)          (4,691)    

Accrued revenue share obligations and rebates

     (1,916)          (6,273)    

Accrued payroll and benefits

     (10,140)          (23,310)    

Other accrued expenses and long-term liabilities

     7,949           21,647     

Deferred revenue

     2,959           8,090     
  

 

 

    

 

 

 

Cash provided by operating activities

     34,603           17,733     
  

 

 

    

 

 

 

Investing activities

     

Purchases of property, equipment and software, net

     (1,322)          (1,748)    

Capitalized software development costs

     (10,054)          (8,383)    
  

 

 

    

 

 

 

Cash used in investing activities

     (11,376)          (10,131)    
  

 

 

    

 

 

 

Financing activities

     

Borrowings from revolving credit facility

     -           16,524     

Repayment of notes payable

     (13,271)          (13,875)    

Repayment of revolving credit facility

     -           (279)    

Repayment of finance obligation

     (169)          (169)    

Excess tax benefit from exercise of equity awards

     248           1,382     

Issuance of common stock, net

     600           1,756     

Purchase of treasury shares, including shares surrendered for tax withholdings

     (3,761)          (15,731)    
  

 

 

    

 

 

 

Cash used in financing activities

     (16,353)          (10,392)    
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     6,874           (2,790)    

Cash and cash equivalents, beginning of period

     12,100           2,790     
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

       $     18,974             $ -     
  

 

 

    

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

Unless the context indicates otherwise, references in this Quarterly Report to “MedAssets,” the “Company,” “we,” “our” and “us” mean MedAssets, Inc., and its subsidiaries and predecessor entities.

 

1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

We provide technology-enabled products and services that, together, deliver solutions designed to reduce total cost of care, enhance operational efficiency, align clinical delivery with advance care coordination and improve revenue performance for hospitals, health systems and other ancillary healthcare providers. Our customer-specific solutions are designed to efficiently analyze detailed information across the spectrum of cost, operations, clinical delivery and reimbursement. Our solutions integrate with existing operations and enterprise software systems of our customers and provide financial improvement with minimal upfront costs or capital expenditures. Our operations and customers are primarily located throughout the United States and to a limited extent, Canada.

The accompanying unaudited condensed consolidated financial statements, and condensed consolidated balance sheet as of December 31, 2014, derived from audited financial statements, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01 of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ materially from those estimates. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2015.

The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2014 included in our annual report on Form 10-K as filed with the SEC on March 2, 2015. These financial statements include the accounts of MedAssets, Inc. and our wholly owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation.

Use of Estimates

The preparation of the financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from those estimates. We believe that the estimates, assumptions and judgments involved in revenue recognition, allowances for doubtful accounts and returns, product development costs, share-based payments, business combinations, impairment of goodwill, intangible assets and long-lived assets, and accounting for income taxes have the greatest potential impact on our condensed consolidated financial statements.

Cash and Cash Equivalents

All of our highly liquid investments with original maturities of three months or less at the date of purchase are carried at cost which approximates fair value and are considered to be cash equivalents. Currently, our excess cash is voluntarily used to repay our swing line credit facility, if any, on a daily basis and applied against our revolving credit facility on a routine basis when our swing line credit facility is undrawn. In addition, we may periodically make voluntary repayments on our term loans.

Cash and cash equivalents were $18,974 and $12,100 as of March 31, 2015 and December 31, 2014, respectively. We had $152,000 outstanding on our revolving credit facility as of March 31, 2015 and December 31, 2014. In the event our cash balance is zero at the end of a period, any outstanding checks are recorded as accrued expenses. See Note 5 for immediately available cash under our revolving credit facility.

Additionally, we have a concentration of credit risk arising from cash deposits held in excess of federally insured amounts totaling $18,474 as of March 31, 2015.

 

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Table of Contents

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

Debt Issuance Costs

In April 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update relating to simplifying the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The update will be effective on January 1, 2016.

Going Concern

In August 2014, the FASB issued an accounting standard update relating to disclosure of uncertainties about an entity’s ability to continue as a going concern. The update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in the event that there is such substantial doubt. The update will be effective on January 1, 2016.

Share-Based Compensation

In June 2014, the FASB issued an accounting standard update relating to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The update will be effective on January 1, 2016.

Revenue Recognition

In May 2014, the FASB issued an accounting standard update relating to revenue from contracts with customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The update will replace most existing revenue recognition guidance under GAAP when it becomes effective. The update is effective for us on January 1, 2017. Early application is not permitted. The update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that the update will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Discontinued Operations

In April 2014, the FASB issued an accounting standard update which revises what qualifies as a discontinued operation, changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. We adopted this update on January 1, 2015.

 

3. RESTRUCTURING, ACQUISITION AND INTEGRATION-RELATED EXPENSES

Restructuring Activities

Restructuring charges consist of exit costs and other costs associated with the reorganization of our operations, including employee termination costs, lease contract termination costs, impairment of assets, and any other qualifying exit costs. Costs associated with exit or disposal activities are generally recorded when the liability is incurred.

In the first quarter of 2015, our management approved and initiated a plan to restructure our operations that resulted in certain workforce reductions within the Company and changes in senior management that together resulted in costs of approximately $4,135. During the three months ended March 31, 2015 and 2014, we expensed total restructuring, acquisition and integration-related costs of $4,439 (inclusive of $304 of acquisition-related expenses) and $1,697, respectively. These costs are included within the restructuring, acquisition and integration-related expenses line on the accompanying condensed consolidated statements of operations. During the first quarter of 2015, cash payments related to restructuring and acquisition-related activities were approximately $3,178. As of March 31, 2015, we had $3,334 in accrued liabilities for these employee-related costs of which $2,108 is expected to be paid over the next twelve months.

 

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Table of Contents

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

4. DEFERRED REVENUE

Deferred revenue consists of unrecognized revenue related to advanced customer billing or customer payments received prior to revenue being realized and earned. Substantially all of our deferred revenue consists of: (i) deferred administrative fees, net; (ii) deferred service fees; (iii) deferred software and implementation fees; and (iv) other deferred fees, including receipts for our annual customer and vendor meeting prior to the event.

The following table summarizes the deferred revenue categories and balances as of:

 

     March 31,
2015
     December 31,
2014
 

Software and SaaS implementation fees

   $        54,338         $       55,152     

Service fees

     19,983           19,241     

Administrative fees

     12,884           15,715     

Other fees

     7,206           1,344     
  

 

 

    

 

 

 

Deferred revenue, total

     94,411           91,452     

Less: Deferred revenue, current portion

     (77,464)          (76,034)    
  

 

 

    

 

 

 

Deferred revenue, non-current portion

   $ 16,947         $ 15,418     
  

 

 

    

 

 

 

As of March 31, 2015 and December 31, 2014, deferred revenue included in our condensed consolidated balance sheets that was contingent upon meeting performance targets was $4,110 and $8,441, respectively. Advance billings on arrangements that include contingent performance targets are recorded in accounts receivable and deferred revenue when billed. Only certain contingent performance targets are billed in advance of meeting the target as determined by the customer arrangement.

 

5. NOTES AND BONDS PAYABLE

The balances of our notes and bonds payable are summarized as follows as of:

 

     March 31, 2015      December 31,
2014
 

Term A facility

   $        215,951         $       225,000     

Term B facility

     174,779           179,000     

Revolving credit facility

     152,000           152,000     
  

 

 

    

 

 

 

Total notes payable

     542,730           556,000     

Bonds payable

     325,000           325,000     
  

 

 

    

 

 

 

Total notes and bonds payable

     867,730           881,000     

Less: current portions

     (23,313)          (29,583)    
  

 

 

    

 

 

 

Total long-term notes and bonds payable

   $ 844,417         $ 851,417     
  

 

 

    

 

 

 

Notes Payable

As of March 31, 2015, our long-term notes payable consists of a Term A Facility, a Term B Facility and a revolving credit facility under a credit agreement with JP Morgan Chase Bank, N.A and other financial institutions named therein, dated December 13, 2012 (as amended from time to time, the “Credit Agreement”), each with an outstanding balance of $215,951, $174,779 and $152,000, respectively. We have classified the $152,000 outstanding balance on our revolving credit facility as a long term liability given the maturity date of December 13, 2017. No amounts were drawn on our swing line loan, which resulted in $147,000 of availability under our revolving credit facility (after giving effect to $1,000 of outstanding but undrawn letters of credit on such date and the increase in the revolving credit facility as discussed below) as of March 31, 2015. During the three months ended March 31, 2015, we made scheduled principal payments of $5,438 on our Term A Facility and Term B Facility in addition to payments of $7,833 relating to our 2014 excess cash flow payment ($4,362 on the Term A Facility and $3,471 on the Term B Facility). The applicable weighted average interest rates (inclusive of the applicable bank margin) on our Term A Facility, Term B Facility and Revolving Credit Facility at March 31, 2015 were 2.51%, 4.00% and 2.50%, respectively. On September 8, 2014, the Company entered into a First Increase Joinder to the Credit Agreement (the “First Increase Joinder”). The First Increase Joinder increased the revolving commitment amount under the Credit Agreement by $100,000 to $300,000. In connection with the First Increase Joinder, we incurred and capitalized approximately $615 of debt issuance costs which will be amortized into interest expense ratably over the remaining term of the revolving credit facility.

 

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MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

The Credit Agreement contains certain customary negative covenants, including but not limited to, limitations on the incurrence of debt, limitations on liens, limitations on fundamental changes, limitations on asset sales and sale leasebacks, limitations on investments, limitations on dividends or distributions on, or redemptions of, equity interests, limitations on prepayments or redemptions of unsecured or subordinated debt, limitations on negative pledge clauses, limitations on transactions with affiliates and limitations on changes to the Company’s fiscal year. The Credit Agreement also includes maintenance covenants of maximum ratios of consolidated total indebtedness (subject to certain adjustments) to consolidated EBITDA (subject to certain adjustments) and minimum cash interest coverage ratios. The Credit Agreement contains certain customary representations and warranties, affirmative covenants and events of default, including but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of insolvency or bankruptcy, material judgments, certain events under ERISA, actual or asserted failures of any guaranty or security document supporting the credit agreement to be in full force and effect and changes of control. The Company was in compliance with these covenants as of March 31, 2015. We are also required to prepay our debt obligations based on an excess cash flow calculation for the applicable fiscal year which is determined in accordance with the terms of the Credit Agreement. Our current portion of notes payable does not include an amount with respect to any 2015 excess cash flow payment. We will reclassify a portion of our long-term notes payable to a current classification at such time that any 2015 excess cash flow payment becomes estimable. We will be required to make any necessary cash flow payment within the first quarter of 2016.

All of the Company’s obligations under the Credit Agreement are unconditionally guaranteed by each of the Company’s existing and subsequently acquired or organized wholly-owned restricted subsidiaries, except that the following subsidiaries do not and will not provide guarantees: (a) unrestricted subsidiaries, (b) subsidiaries with tangible assets and revenues each having a value of less than 2.5% of the consolidated tangible assets and consolidated revenues of the Company (provided that all such immaterial subsidiaries, on a consolidated basis, shall not account for more than 5.0% of the consolidated EBITDA of the Company), (c) any subsidiary prohibited by applicable law, rule or regulation from providing a guarantee or which would require governmental (including regulatory) consent or approval or which would result in adverse tax consequences and (d) not-for-profit subsidiaries.

All of the Company’s obligations under the Credit Agreement are secured by substantially all of the Company’s assets and the assets of each guarantor (subject to certain exceptions), including but not limited to, (1) a perfected pledge of all of the equity securities of each direct wholly owned restricted subsidiary of the Company and of each subsidiary guarantor (which pledge, in the case of any foreign subsidiary, is limited to 65% of the equity securities of such foreign subsidiary) and (2) perfected security interests in, and mortgages on, substantially all tangible and intangible personal property and material fee-owned real property of the Company and each subsidiary guarantor (including but not limited to, accounts receivable, inventory, equipment, general intangibles (including contract rights), investment property, intellectual property, material intercompany notes and proceeds of the foregoing).

Loans under the Credit Agreement must be prepaid under certain circumstances, including with proceeds from certain future debt issuances, asset sales and a portion of excess cash flow for the applicable fiscal year. Loans under the Credit Agreement may be voluntarily prepaid at any time, subject to customary LIBOR breakage costs.

Bonds Payable

The Company has an aggregate principal amount of $325,000 of 8% senior notes due 2018 (the “Notes”) outstanding that have been registered under the Securities Act of 1933, as amended. The Notes are guaranteed on a senior unsecured basis by each of our existing domestic subsidiaries and each of our future domestic restricted subsidiaries in each case that guarantees our obligations under the Credit Agreement. Each of the subsidiary guarantors is 100% owned by us. The guarantees by the subsidiary guarantors are full and unconditional and joint and several. We have no independent assets or operations, and any subsidiaries of ours other than the subsidiary guarantors are minor. The Notes and the guarantees are senior unsecured obligations of the Company and the subsidiary guarantors, respectively.

The Notes were issued pursuant to an indenture dated as of November 16, 2010 (the “Indenture”) among the Company, its subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. Pursuant to the Indenture, the Notes will mature on November 15, 2018 and bear 8% annual interest. Interest on the Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2011.

The Indenture contains certain customary negative covenants, including but not limited to, limitations on the incurrence of debt, limitations on liens, limitations on consolidations or mergers, limitations on asset sales, limitations on certain restricted payments and limitations on transactions with affiliates. The Indenture does not contain any significant restrictions on the ability of the Company or any subsidiary guarantor to obtain funds from the Company or any other subsidiary guarantor by dividend or loan. The Indenture also contains customary events of default. The Company was in compliance with these covenants as of March 31, 2015.

The Company has the option to redeem all or a part of the Notes, at the following redemption prices:

 

Year

     Percentage         

2015

     102%          

2016 and thereafter

     100%          

 

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MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

The Notes also contain a redemption feature that would require the repurchase of 101% of the aggregate principal amount plus accrued and unpaid interest at the option of the holders upon a change in control.

As of March 31, 2015, the Notes were trading at 104.0% of par value (Level 1).

Debt Issuance Costs

As of March 31, 2015, we had approximately $13,097 of debt issuance costs related to the Credit Agreement and Notes which will be amortized into interest expense generally using the effective interest method until the applicable maturity date. For the three months ended March 31, 2015 and 2014, we recognized $978 and $943, respectively, in interest expense related to the amortization of debt issuance costs.

Debt Maturity Table

The following table summarizes our stated debt maturities and scheduled principal repayments as of March 31, 2015:

 

Year

   Term A
Facility
     Term B
Facility(2)
     Revolving
Credit
Facility
     Senior
Unsecured
Notes
     Total  

  2015(1)

     $         14,063         $ 2,250           $ -           $ -          $ 16,313     

  2016

     25,000         3,000           -           -           28,000     

  2017

     176,888         3,000           152,000         -           331,888     

  2018

     -           3,000           -           325,000         328,000     

  2019

     -           163,529           -           -           163,529     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     $         215,951         $         174,779           $         152,000           $         325,000         $         867,730     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Represents the remaining quarterly principal payments due during the fiscal year ending December 31, 2015 and the balance of the swing line component of our revolving credit facility, if any.

 

  (2) The Term B Facility matures on December 13, 2019; however, the facility will mature in full on May 15, 2018 if our outstanding senior notes have not been repaid or refinanced in full by such date.

Total interest paid (net of amounts capitalized) on our notes and bonds payable during the three months ended March 31, 2015 and 2014 was approximately $4,289 and $3,484, respectively.

 

6. COMMITMENTS AND CONTINGENCIES

Performance Targets

In the ordinary course of contracting with our customers, we may agree to make some or all of our fees contingent upon the customer’s achievement of financial improvement targets from the use of our services and software. These contingent fees are not recognized as revenue until the customer confirms achievement of the performance targets. We generally receive customer acceptance as and when the performance targets are achieved. If we invoice contingent fees prior to customer confirmation that a performance target has been achieved, we record invoiced contingent fees as deferred revenue on our condensed consolidated balance sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs.

Legal Proceedings

From time to time, we become involved in legal proceedings arising in the ordinary course of business. As of March 31, 2015, we are not presently involved in any legal proceedings, the outcome of which, if determined adversely to us, would have a material adverse effect on our business, operating results or financial condition.

 

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MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

7. STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Common Stock

During the three months ended March 31, 2015, we issued approximately 359,000 shares of common stock in connection with employee stock option exercises, stock-settled stock appreciation rights (“SSARs”) exercises and the vesting of restricted stock units (“RSUs”) for net exercise proceeds of $600.

During the three months ended March 31, 2015, approximately 12,000 shares of restricted common stock were forfeited.

During the three months ended March 31, 2015, we received approximately 195,000 restricted shares that were surrendered from equity awards holders to settle their associated minimum statutory tax liability of $3,761 from shares that vested during the year.

Repurchase of Common Stock

In February 2015, our Board of Directors authorized an extension to our existing share repurchase program until February 29, 2016 and increased the total dollar amount available for the repurchase of shares of our common stock to $100,000 subject to certain restrictions under our Credit Agreement and Indenture. The following table shows the amount and cost of shares of common stock we repurchased for the three months ended March 31, 2015 and 2014 under the share repurchase program. The repurchased shares have not been retired and constitute authorized shares.

 

     Three Months Ended March 31,  
     2015      2014  

Number of shares repurchased

     -           640,000     

Cost of shares repurchased

   $         -         $ 16,061     

Share-Based Compensation

As of March 31, 2015, we had restricted common stock, RSUs, SSARs and common stock option equity awards outstanding under three share-based compensation plans. As of March 31, 2015, we had approximately 3,766,000 shares reserved (inclusive of equity award forfeitures) and available for grant under the 2008 MedAssets, Inc. Long-Term Performance Incentive Plan (“LTPIP”).

The total share-based compensation expense related to equity awards was $5,732 and $4,302 for the three months ended March 31, 2015 and 2014, respectively. The total income tax benefit recognized in the condensed consolidated statement of operations for share-based compensation arrangements related to equity awards was $2,143 and $1,602 for the three months ended March 31, 2015 and 2014, respectively. There were no capitalized share-based compensation expenses during the three months ended March 31, 2015.

Total share-based compensation expense (inclusive of restricted common stock, RSUs, SSARs and common stock options) for the three months ended March 31, 2015 and 2014 as reflected in our condensed consolidated statements of operations is as follows:

 

     Three Months Ended March 31,  
     2015      2014  

Cost of revenue

   $ 1,731         $ 1,166     

Product development

     435           244     

Selling and marketing

     1,034           527     

General and administrative

     2,532           2,365     
  

 

 

    

 

 

 

Total share-based compensation expense

   $ 5,732         $ 4,302     
  

 

 

    

 

 

 

Employee Stock Purchase Plan

In 2010, we established the MedAssets, Inc. Employee Stock Purchase Plan (the “Plan”). Under the Plan, eligible employees may purchase shares of our common stock at a discounted price through payroll deductions. The price per share of the common stock sold to participating employees will be 95% of the fair market value of our common stock on the applicable purchase date. The

 

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MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

Plan requires that all stock purchased be held by participants for a period of 18 months from the purchase date. A total of 500,000 shares of our common stock are authorized for purchase under the Plan. For the three months ended March 31, 2015 and 2014, we purchased approximately 15,000 shares and 11,000 shares of our common stock under the Plan which amounted to approximately $275 and $253, respectively.

Equity Award Grants

Information regarding equity awards for the three months ended March 31, 2015 is as follows:

Restricted Stock Unit Equity Awards

In March 2015, our Compensation Committee of our Board of Directors (the “Compensation Committee”) approved an equity grant for certain eligible employees consisting of service-based and performance-based RSUs. The purpose of the equity grant is to assist the Company in attracting, retaining, motivating, and rewarding certain individuals of the Company. The equity grant is intended to promote the creation of long-term value for stockholders of the Company by closely aligning the interests of such individuals with those of the stockholders. A summary of the total approved equity grant during the three months ended March 31, 2015 is as follows:

 

     Total RSUs     

Range of Grant
Date Fair Values

        

RSUs - Service

     785,608       $18.44 - $19.43       (1)   

RSUs - Performance

     1,008,530       $18.44 - $19.43       (2)   
  

 

 

    

 

    

Total RSUs granted

     1,794,138           

 

  (1) Service-based RSUs vest annually over three years of continuous service with the exception of certain equity awards granted to our Board that vest ratably each month through December 31, 2015;

 

  (2) Performance-based RSUs generally vest annually over three years of continuous service provided the performance metric is achieved and consist of a net revenue and a non-GAAP adjusted earnings per share (“EPS”) performance metric. The Company must achieve a minimum net revenue and non-GAAP adjusted EPS threshold before any performance-based RSUs begin vesting. If the minimum threshold is not met, the equity award holders will forfeit those awards.

 

8. INCOME TAXES

Income tax expense recorded during the three months ended March 31, 2015 and 2014 reflected an effective income tax rate of 40.2% and 43.8%, respectively.

 

9. INCOME PER SHARE

We calculate earnings per share (or “EPS”) in accordance with the GAAP relating to earnings per share. Basic EPS is calculated by dividing reported net income by the weighted-average number of common shares outstanding for the reported period following the two-class method. Diluted EPS reflects the potential dilution that could occur if our stock options, SSARs, unvested restricted stock, RSUs and shares that were purchasable pursuant to our employee stock purchase plan were exercised and converted into our common shares during the reporting periods.

 

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MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

A reconciliation of basic and diluted weighted average shares outstanding for basic and diluted EPS for the three months ended March 31, 2015 and 2014 is as follows:

 

     Three Months Ended March 31,  
     2015      2014  

Numerator for Basic and Diluted Income Per Share:

     

Net income

   $ 3,353         $ 7,678     

Denominator for basic income per share weighted average shares

     59,736,000           60,648,000     

Effect of dilutive securities:

     

Stock options

     135,000           285,000     

SSARs

     164,000           327,000     

Restricted stock and RSUs

     495,000           421,000     
  

 

 

    

 

 

 

Denominator for diluted income per share—adjusted weighted average shares and assumed conversions

     60,530,000           61,681,000     

Basic income per share:

     

Basic net income from continuing operations

   $ 0.06         $ 0.13     
  

 

 

    

 

 

 

Diluted net income per share:

     

Diluted net income from continuing operations

   $ 0.06         $ 0.12     
  

 

 

    

 

 

 

During the three months ended March 31, 2015 and 2014, the effect of certain dilutive securities have been excluded because the impact is anti-dilutive as a result of certain securities being “out of the money” with strike prices greater than the average market price during the periods presented. The following table provides a summary of those potentially dilutive securities that have been excluded from the above calculation of diluted EPS:

 

     Three Months Ended March 31,  
     2015      2014  

SSARs

     40,000                       -     

10. SEGMENT INFORMATION

We manage our business through two reportable business segments, Spend and Clinical Resource Management (or “SCM”) and Revenue Cycle Management (or “RCM”).

 

   

Spend and Clinical Resource Management. Our SCM segment provides a comprehensive suite of technology-enabled services that help our customers manage their expense categories. Our solutions lower supply and medical device pricing and utilization by managing the procurement process through our group purchasing organization (“GPO”) portfolio of contracts, consulting services and business intelligence tools.

 

   

Revenue Cycle Management. Our RCM segment provides a comprehensive suite of products and services spanning the hospital revenue cycle workflow — from patient access and financial responsibility, charge capture and integrity, pricing analysis, claims processing and denials management, payor contract management, revenue recovery and accounts receivable services. Our workflow solutions, together with our data management, compliance and audit tools, increase revenue capture and cash collections, reduce accounts receivable balances and increase regulatory compliance.

GAAP relating to segment reporting defines reportable segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing financial performance. The guidance indicates that financial information about segments should be reported on the same basis as that which is used by the chief operating decision maker in the analysis of performance and allocation of resources. Management of the Company, including our chief operating decision maker, uses what we refer to as Segment Adjusted EBITDA as its primary measure of profit or loss to assess segment performance and to determine the allocation of resources. We define Segment Adjusted EBITDA as segment net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization (“EBITDA”) as adjusted for other non-recurring, non-cash or non-operating items. Our chief operating decision maker uses Segment Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period. Segment Adjusted EBITDA includes expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of the segment. General and administrative corporate expenses that are not specific to the segments are not included in the calculation of Segment Adjusted EBITDA. These expenses include the costs to manage our corporate offices, interest expense on our credit facilities and expenses related to being a publicly-held company. All reportable segment revenues are presented net of inter-segment eliminations and represent revenues from external customers.

 

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MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

The following tables present Segment Adjusted EBITDA and financial position information as utilized by our chief operating decision maker. A reconciliation of Segment Adjusted EBITDA to consolidated net income is included. General corporate expenses are included in the “Corporate” line item. “RCM” represents the Revenue Cycle Management segment and “SCM” represents the Spend and Clinical Resource Management segment. Other assets and liabilities are included to provide a reconciliation to total assets and total liabilities.

The following tables represent our results of operations, by segment, for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 
     2015      2014  

Revenue:

     

SCM

     

Net administrative fees

    $       77,761          $       76,246     

Other service fees(2)

     41,647           32,371     
  

 

 

    

 

 

 

Total SCM net revenue

     119,408           108,617     

RCM

     

Revenue cycle technology

     45,982           44,193     

Revenue cycle services

     20,191           18,057     
  

 

 

    

 

 

 

Total RCM net revenue

     66,173           62,250     
  

 

 

    

 

 

 

Total net revenue

     185,581           170,867     

Operating expenses:

     

SCM

     96,754           76,443     

RCM

     55,726           56,975     

Corporate

     15,691           12,669     
  

 

 

    

 

 

 

Total operating expenses

     168,171           146,087     
  

 

 

    

 

 

 

Operating income (loss):

     

SCM

     22,654           32,174     

RCM

     10,447           5,275     

Corporate

     (15,691)          (12,669)    
  

 

 

    

 

 

 

Total operating income

     17,410           24,780     
  

 

 

    

 

 

 

Interest (expense)

     (11,869)          (11,173)    

Other income

     62           58     
  

 

 

    

 

 

 

Income before income taxes

     5,603           13,665     

Income tax expense

     2,250           5,987     
  

 

 

    

 

 

 

Net income

    $ 3,353          $ 7,678     
  

 

 

    

 

 

 

Segment Adjusted EBITDA

     

SCM

    $ 44,988          $ 49,950     

RCM

     18,750           13,401     
  

 

 

    

 

 

 

Total Segment Adjusted EBITDA

    $ 63,738          $ 63,351     

Corporate

     (6,365)          (6,634)    
  

 

 

    

 

 

 

Total Adjusted EBITDA(1)

    $       57,373          $       56,717     

 

  (1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.
  (2) Other service fees primarily consists of consulting, services and technology fees.

 

     Three Months Ended
March 31,
 
     2015      2014  

Capital expenditures(1):

     

SCM

    $       4,010          $ 3,283     

RCM

     6,764           5,499     

Corporate

     602           1,349     

Total

    $       11,376          $ 10,131     

 

  (1) Capital expenditures consist of purchases of property and equipment and capitalized software development costs (internal and external use).

 

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MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

     March 31,      December 31,  
     2015      2014  

Financial Position:

     

Accounts receivable, net

     

SCM

    $ 70,867          $ 74,337     

RCM

     53,088           53,129     

Corporate

     -           275     
  

 

 

    

 

 

 

Total accounts receivable, net

     123,955           127,741     

Other assets

     

SCM

     1,056,884           1,067,039     

RCM

     438,135           439,333     

Corporate

     79,185           84,683     
  

 

 

    

 

 

 

Total other assets

     1,574,204           1,591,055     
  

 

 

    

 

 

 

Total assets

    $       1,698,159          $       1,718,796     

SCM accrued revenue share obligation

    $ 89,948          $ 91,864     

Deferred revenue

     

SCM

     53,523           51,958     

RCM

     40,888           39,494     
  

 

 

    

 

 

 

Total deferred revenue

     94,411           91,452     

Notes payable

     542,730           556,000     

Bonds payable

     325,000           325,000     

Other liabilities

     

SCM

     24,961           36,938     

RCM

     17,840           23,952     

Corporate

     151,316           147,103     
  

 

 

    

 

 

 

Total other liabilities

     194,117           207,993     
  

 

 

    

 

 

 

Total liabilities

    $ 1,246,206          $ 1,272,309     

GAAP for segment reporting requires that the total of the reportable segments’ measures of profit or loss be reconciled to the Company’s consolidated operating results. The following table reconciles Segment Adjusted EBITDA to consolidated net income for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended March 31,  
     2015      2014  

SCM Adjusted EBITDA

    $ 44,988          $ 49,950     

RCM Adjusted EBITDA

     18,750           13,401     
  

 

 

    

 

 

 

Total Segment Adjusted EBITDA

     63,738           63,351     

Depreciation

     (9,524)          (8,262)    

Depreciation (included in cost of revenue)

     (978)          (424)    

Amortization of intangibles

     (15,056)          (14,026)    

Income tax expense

     (14,195)          (16,390)    

Share-based compensation expense(1)

     (3,091)          (2,098)    

Purchase accounting adjustments(2)

     (461)          -     

Restructuring, acquisition and integration-related expenses(3)

     (1,665)          (1,131)    
  

 

 

    

 

 

 

Total reportable segment net income

     18,768           21,020     

Corporate net loss

     (15,415)          (13,342)    
  

 

 

    

 

 

 

Consolidated net income

    $ 3,353          $ 7,678     

 

  (1) Represents non-cash share-based compensation to both employees and directors. We believe excluding this non-cash expense allows us to compare our operating performance without regard to the impact of share-based compensation, which varies from period to period based on amount and timing of grants.

 

  (2) Represents the effect on revenue of adjusting Sg2’s acquired deferred revenue balance to fair value at the acquisition date.

 

  (3) Represents the amount attributable to restructuring, acquisition and integration-related costs which may include costs such as severance, retention, salaries relating to redundant positions, certain performance-related salary-based compensation, operating infrastructure costs and facility consolidation costs.

 

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MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

 

11. FAIR VALUE MEASUREMENTS

We measure fair value for financial instruments when a valuation is necessary, such as for impairment of long-lived and indefinite-lived assets when indicators of impairment exist in accordance with GAAP for fair value measurements and disclosures. This defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value.

In estimating our fair value disclosures for financial instruments, we use the following methods and assumptions:

 

   

Cash and cash equivalents. The carrying value reported in the condensed consolidated balance sheets for these items approximates fair value due to the high credit standing of the financial institutions holding these items and their liquid nature;

 

   

Accounts receivable, net. The carrying value reported in the condensed consolidated balance sheets is net of allowances for doubtful accounts which includes a degree of counterparty non-performance risk;

 

   

Accounts payable and current liabilities. The carrying value reported in the condensed consolidated balance sheets for these items approximates fair value, which is the likely amount for which the liability with short settlement periods would be transferred to a market participant with a similar credit standing as the Company;

 

   

Notes payable. The carrying value of our long-term notes payable reported in the condensed consolidated balance sheets approximates fair value since they bear interest at variable rates. Refer to Note 5 for further information; and

 

   

Bonds payable. The carrying value of our long-term bonds payable reported in the condensed consolidated balance sheets approximates fair value. Refer to Note 5 for further information.

12. RELATED PARTY TRANSACTION

We had an agreement with John Bardis, formerly our chief executive officer, for the use of an airplane owned by JJB Aviation, LLC, a limited liability company owned by Mr. Bardis. We paid Mr. Bardis at market-based rates for the use of the airplane for business purposes. The audit committee of the board of directors reviews such usage of the airplane annually. During the three months ended March 31, 2015 and 2014, we incurred charges of zero and $378, respectively, related to transactions with Mr. Bardis. On February 17, 2015, the Company entered into a Transition and Consulting Agreement (the “Transition Agreement”) with Mr. Bardis in connection with Mr. Bardis’s resignation from his positions with the Company. Pursuant to the Transition Agreement, the Company’s agreement to use the airplane owned by JJB Aviation, LLC was terminated effective as of January 1, 2015.

13. SUBSEQUENT EVENTS

We have evaluated subsequent events for recognition or disclosure in the condensed consolidated financial statements filed on Form 10-Q with the SEC and no events have occurred that require disclosure.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

NOTE ON FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” (as defined in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that reflect our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Words such as “anticipates,” “believes,” “plans,” “expects,” “intends,” “estimates,” “projects,” “targets,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying these statements. For purposes of this Quarterly Report on Form 10-Q, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements reflect our current beliefs and expectations and are based on information currently available to us. As such, no assurance can be given that our future growth, results of operations, performance and business prospects and opportunities covered by such forward-looking statements will be achieved. We have no intention or obligation to update or revise these forward-looking statements to reflect new events, information or circumstances.

A number of important factors could cause our actual results to differ materially from those indicated by such forward-looking statements, including those described herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 as filed with the SEC on March 2, 2015.

Overview

We are a financial and performance improvement company providing technology-enabled products and services which together help mitigate the increasing financial challenges faced by hospitals, health systems and other non-acute healthcare providers. Our solutions are designed to reduce the total cost of care delivery, enhance operational efficiency, align clinical delivery of physicians and staff to advance care coordination and improve revenue performance primarily for hospitals and health systems. We believe implementation of our full suite of solutions has the potential to decrease supply costs, improve clinical resource utilization and increase revenue capture and cash flow. Our operations and customers are primarily located throughout the United States and, to a limited extent, Canada.

Management’s primary metrics to measure the consolidated financial performance of the business are net revenue, non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin and non-GAAP diluted adjusted EPS.

The table below highlights our primary results of operations for the three months ended March 31, 2015 and 2014:

 

    Three Months Ended March 31,  
    2015     2014     Change    

 

 
    Amount     Amount     Amount     %  
    (Unaudited, in millions)  

Total net revenue

  $     185.6        $ 170.9        $ 14.7          8.6%     

Operating income

    17.4          24.8          (7.4)         (29.8)    

Net income

  $ 3.4        $ 7.7        $ (4.3)         (55.8%)    

Adjusted EBITDA(1)

  $ 57.4        $ 56.7        $ 0.7          1.2%     

Adjusted EBITDA margin(1)

    30.9%          33.2%         

Adjusted EPS(1)

  $ 0.31        $ 0.32        $ (0.01)          -3.1%     

 

  (1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

The increase in net revenue during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily attributable to:

 

   

growth in our SCM segment primarily driven by higher performance-related fee revenue and the contribution from Sg2 partially offset by lower consulting-related fees; and

 

   

growth in our RCM segment from an increase in our subscription services related to our revenue cycle technology tools, an increase in our revenue cycle services; and higher performance-related fee revenue.

The decrease in operating income during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was attributable to higher operating expenses related to increased compensation expense for new and existing personnel, inclusive of share-based compensation expense, higher cost of revenue attributable to a higher percentage of net revenue being derived from service-based engagements and higher restructuring, acquisition and integration-related expenses, partially offset by the growth in net revenue discussed above.

 

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For the three months ended March 31, 2015, the increase in consolidated non-GAAP adjusted EBITDA compared to the three months ended March 31, 2014 was primarily attributable to revenue growth including higher performance-related fee revenue earned during the quarter.

For the three months ended March 31, 2015, the decrease in consolidated non-GAAP adjusted EBITDA margin compared to the three months ended March 31, 2014 was primarily attributable to a higher proportion of lower margin services revenue and higher operating expenses.

Segment Structure and Revenue Streams

We deliver our solutions through two business segments, Spend and Clinical Resource Management (“SCM”) and Revenue Cycle Management (“RCM”). Management’s primary metrics to measure consolidated and segment financial performance are net revenue, non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP diluted adjusted EPS and Segment Adjusted EBITDA. All of our revenues are from external customers and inter-segment revenues have been eliminated. See Note 10 of the Notes to Condensed Consolidated Financial Statements herein for discussion on Segment Adjusted EBITDA and certain items of our segment results of operations and financial position.

Spend and Clinical Resource Management

Our SCM segment provides a comprehensive suite of technology-enabled services that help our customers manage their expense categories. Our solutions lower supply and medical device pricing and utilization by managing the procurement process through our group purchasing organization (“GPO”) portfolio of contracts, consulting services and business intelligence tools. Our SCM segment revenue consists of the following components:

 

   

Administrative fees and revenue share obligation. We earn administrative fees from manufacturers, distributors and other vendors (collectively referred to as “vendors”) of products and services with whom we have contracts under which our GPO customers may purchase products and services. Administrative fees represent a percentage, which we refer to as our administrative fee ratio, typically ranging from 0.25% to 3.00% of the purchases made by our GPO customers through contracts with our vendors.

Our GPO customers make purchases, and receive shipments, directly from the vendors. Generally on a monthly or quarterly basis, vendors provide us with a report describing the purchases made by our customers through our GPO vendor contracts, including associated administrative fees. We recognize revenue upon the receipt of these reports from vendors.

Some customer contracts require that a portion of our administrative fees be contingent upon achieving certain financial improvements, such as lower supply costs, which we refer to as performance targets. Contingent administrative fees are not recognized as revenue until we receive customer acceptance on the achievement of those contractual performance targets. Prior to receiving customer acceptance of performance targets, we record contingent administrative fees as deferred revenue on our consolidated balance sheets. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs. Should we fail to meet a performance target, we may be contractually obligated to refund some or all of the contingent fees. Additionally, in many cases, we are contractually obligated to pay a portion of the administrative fees to our hospital and health system customers. Typically this amount, which we refer to as our revenue share obligation, is calculated as a percentage of administrative fees earned on a particular customer’s purchases from our vendors. Our total net revenue on our consolidated statements of operations is shown net of the revenue share obligation.

 

   

Other service fees. The following items are included as “Other service fees” in our condensed consolidated statement of operations:

 

   

Consulting fees. We consult with our customers regarding the costs and utilization of medical devices and physician preference items (“PPI”) and the efficiency and quality of their key clinical service lines. Our consulting projects are typically fixed fee projects with an average duration of six to nine months, and the related revenues are earned as services are rendered. We generate revenue from consulting contracts that also include performance targets. The performance targets generally relate to committed financial improvement to our customers from the use and implementation of initiatives that result from our consulting services. Performance targets are measured as our strategic initiatives are identified and implemented, and the financial improvement can be quantified by the customer. Prior to receiving customer acceptance of performance targets, we record contingent consulting fees as deferred revenue on our consolidated balance sheets. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs. Should we fail to meet a performance target, we may be contractually obligated to refund some or all of the contingent fees.

 

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Subscription fees. We also offer technology-enabled services that provide spend management analytics and data services to improve operational efficiency, reduce supply costs, and increase transparency across spend management processes. We earn fixed subscription fees on a monthly basis for these Company-hosted SaaS-based solutions.

Revenue Cycle Management

Our RCM segment provides a comprehensive suite of products and services spanning the hospital revenue cycle workflow — from patient access and financial responsibility, charge capture and integrity, pricing analysis, claims processing and denials management, payor contract management, revenue recovery and accounts receivable services. Our workflow solutions, together with our data management, compliance and audit tools, increase revenue capture and cash collections, reduce accounts receivable balances and increase regulatory compliance. Our RCM segment revenue is listed under the caption “Other service fees” on our consolidated statements of operations and consists of the following components:

 

   

Subscription and implementation fees. We earn fixed subscription fees on a monthly or annual basis on multi-year contracts for customer access to our SaaS-based solutions. We may also charge our customers non-refundable upfront fees for implementation of our SaaS-based services. These non-refundable upfront fees are earned over the subscription period or estimated customer relationship period, whichever is longer.

We defer costs related to implementation services and expense these costs in proportion to the revenue earned over the subscription period or customer relationship period, as applicable.

In addition, we defer upfront sales commissions related to subscription and implementation fees and expense these costs ratably over the related contract term.

 

   

Transaction fees. For certain of our revenue cycle management solutions, we earn fees that vary based on the volume of customer transactions or enrolled members.

 

   

Service fees. For certain of our RCM solutions, we earn fees based on a percentage of cash remittances collected and fixed-fee consulting arrangements. The related revenues are earned as services are rendered.

Operating Expenses

We classify our operating expenses as follows:

 

   

Cost of revenue. Cost of revenue primarily consists of the direct labor costs incurred to generate our revenue. Direct labor costs consist primarily of salaries, benefits, incentive compensation and other direct costs and share-based compensation expenses related to personnel who provide services to implement our solutions for our customers (indirect labor costs for these personnel are included in general and administrative expenses). As the majority of our services are generated internally, our costs to provide these services are primarily labor-driven. A less significant portion of our cost of revenue consists of costs of third-party products and services and customer reimbursed out-of-pocket costs. Cost of revenue does not include certain expenses relating to hosting our services and providing support and related data center capacity (which is included in general and administrative expenses), and allocated amounts for rent, depreciation, amortization or other indirect operating costs because we do not consider the inclusion of these items in cost of revenue relevant to our business. However, cost of revenue does include the amortization for the cost of software to be sold, leased, or otherwise marketed. In addition, any changes in revenue mix between our SCM and RCM segments, including changes in revenue mix towards SaaS-based revenue and consulting services, may cause significant fluctuations in our cost of revenue and have a favorable or unfavorable impact on operating income.

 

   

Product development expenses. Product development expenses primarily consist of the salaries, benefits, incentive compensation and share-based compensation expense of the technology professionals who develop, support and maintain our software-related products and services. Product development expenses are net of capitalized software development costs for both internal and external use.

 

   

Selling and marketing expenses. Selling and marketing expenses consist primarily of costs related to marketing programs (including trade shows and brand messaging), personnel-related expenses for sales and marketing employees (including salaries, benefits, incentive compensation and share-based compensation expense), certain meeting costs and travel-related expenses.

 

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General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses for administrative employees and indirect time related to operational service-based employees (including salaries, benefits, incentive compensation and share-based compensation expense) and travel-related expenses, occupancy and other indirect costs, insurance costs, professional fees, and other general overhead expenses.

 

   

Restructuring, acquisition and integration-related expenses. Restructuring, acquisition and integration-related expenses may consist of: (i) costs incurred to complete acquisitions including due diligence, consulting and other related fees; (ii) integration type costs relating to our completed acquisitions; (iii) other management restructuring costs; and (iv) acquisition-related fees associated with unsuccessful acquisition attempts.

 

   

Depreciation. Depreciation expense consists primarily of depreciation of fixed assets and the amortization of software, including capitalized costs of software developed for internal use.

 

   

Amortization of intangibles. Amortization of intangibles includes the amortization of all identified intangible assets (with the exception of software), primarily resulting from acquisitions.

Results of Operations

Consolidated Tables

The following table sets forth our consolidated results of operations grouped by segment for the periods shown:

 

     Three Months Ended
March 31,
 
     2015      2014  
     (Unaudited, in thousands)  

Net revenue:

     

Spend and Clinical Resource Management

     

Net administrative fees

   $ 77,761       $ 76,246   

Other service fees

     41,647         32,371   
  

 

 

    

 

 

 

Total Spend and Clinical Resource Management

     119,408         108,617   

Revenue Cycle Management

     66,173         62,250   
  

 

 

    

 

 

 

Total net revenue

     185,581         170,867   

Operating expenses:

     

Spend and Clinical Resource Management

     96,754         76,443   

Revenue Cycle Management

     55,726         56,975   
  

 

 

    

 

 

 

Total segment operating expenses

     152,480         133,418   

Operating income

     

Spend and Clinical Resource Management

     22,654         32,174   

Revenue Cycle Management

     10,447         5,275   
  

 

 

    

 

 

 

Total segment operating income

     33,101         37,449   

Corporate expenses(1)

     15,691         12,669   
  

 

 

    

 

 

 

Operating income

     17,410         24,780   

Other income (expense):

     

Interest expense

     (11,869)         (11,173)   

Other income

     62         58   
  

 

 

    

 

 

 

Income before income taxes

     5,603         13,665   

Income tax expense

     2,250         5,987   
  

 

 

    

 

 

 

Net income

     3,353         7,678   

Reportable segment adjusted EBITDA(2):

     

Spend and Clinical Resource Management

     44,988         49,950   

Revenue Cycle Management

   $ 18,750       $ 13,401   

Reportable segment adjusted EBITDA margin(3):

     

Spend and Clinical Resource Management

     37.7%         46.0%   

Revenue Cycle Management

     28.3%         21.5%   

 

  (1) Represents the expenses of corporate office operations.

 

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  (2) Management’s primary metric of segment profit or loss is segment adjusted EBITDA. See Note 10 of the Notes to Condensed Consolidated Financial Statements.

 

  (3) Reportable segment adjusted EBITDA margin represents each reportable segment’s adjusted EBITDA as a percentage of each segment’s respective net revenue.

Comparison of the Three Months Ended March 31, 2015 and March 31, 2014

 

     Three Months Ended March 31,  
     2015      2014      Change  
     Amount      % of
Revenue
     Amount      % of
Revenue
     Amount      %  
     (Unaudited, in thousands)  

Net revenue:

                 

Spend and Clinical Resource Management

                 

Net administrative fees

   $     77,761            41.9%          $ 76,246             44.6%          $       1,515            2.0%      

Other service fees

     41,647            22.4            32,371         19.0            9,276            28.7      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Spend and Clinical Resource Management

     119,408            64.3            108,617         63.6            10,791            9.9      

Revenue Cycle Management

     66,173            35.7            62,250         36.4            3,923            6.3      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 185,581            100.0%          $ 170,867         100.0%          $ 14,714            8.6%      

Total net revenue. Total net revenue for the three months ended March 31, 2015 was $185.6 million, an increase of approximately $14.7 million, or 8.6%, from total net revenue of $170.9 million for the three months ended March 31, 2014. The increase in total net revenue was comprised of a $10.8 million increase in SCM revenue and a $3.9 million increase in RCM revenue. For the three months ended March 31, 2015 and 2014, performance-related fee revenue as a percentage of consolidated net revenue amounted to approximately 4.8% and 3.9%, respectively. Revenue may fluctuate materially from period to period based upon a number of factors including achieving and thereof receiving customer acknowledgement of the financial performance targets.

Spend and Clinical Resource Management net revenue. SCM net revenue for the three months ended March 31, 2015 was $119.4 million, an increase of $10.8 million, or 9.9%, from net revenue of $108.6 million for the three months ended March 31, 2014. The increase was the result of an increase in net administrative fees of $1.5 million, or 2.0%, due to the impact of increased performance fees under our GPO contracts and an increase in other service fees of $9.3 million, or 28.7%, primarily related to the revenue contribution by Sg2.

We may have fluctuations in our net administrative fee revenue in future periods that are attributable to (i) the timing and variability of vendor reporting and customer acknowledgement of achieved performance targets; (ii) changes in customer purchase volume under our GPO contracts; and (iii) fluctuations in our revenue share obligation based on the mix of customers who are entitled to a higher revenue share percentage due to increased purchasing volume in addition to an increase in the number of fixed-fee arrangements.

Revenue Cycle Management net revenue. RCM net revenue for the three months ended March 31, 2015 was $66.2 million, an increase of $3.9 million, or 6.3%, from net revenue of $62.3 million for the three months ended March 31, 2014. The increase was attributable to a $2.1 million increase in revenue from our comprehensive revenue cycle service engagements, inclusive of performance-related fee revenue, and a $1.8 million increase in revenue from our revenue cycle technology tools. As we engage new customers, renew with existing customers and complete existing contracts, we may experience fluctuations in our revenue cycle services financial performance as the business is characterized by a relatively small number of agreements, which each relate to large amounts of revenue.

 

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Total Operating Expenses

 

     Three Months Ended March 31,  
     2015      2014      Change  
     Amount      % of
Revenue
     Amount      % of
Revenue
     Amount      %  
     (Unaudited, in thousands)  

Operating expenses:

                 

Cost of revenue

   $ 42,933           23.1%         $ 37,431           21.9%         $ 5,502           14.7%     

Product development expenses

     8,400           4.5           7,397           4.3           1,003           13.6     

Selling and marketing expenses

     19,511           10.5           15,193           8.9           4,318           28.4     

General and administrative expenses

     64,485           34.7           58,803           34.4           5,682           9.7     

Restructuring, acquisition and integration-related expenses

     4,439           2.4           1,697           1.0           2,742           161.6     

Depreciation

     13,347           7.2           11,540           6.8           1,807           15.7     

Amortization of intangibles

     15,056           8.1           14,026           8.2           1,030           7.3     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     168,171           90.6           146,087           85.5           22,084           15.1     

Operating expenses by segment:

                 

Spend and Clinical Resource Management

     96,754           52.1           76,443           44.7           20,311           26.6     

Revenue Cycle Management

     55,726           30.0           56,975           33.3           (1,249)          (2.2)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total segment operating expenses

     152,480           82.2           133,418           78.1           19,062           14.3     

Corporate expenses

     15,691           8.5           12,669           7.4           3,022           23.9     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $       168,171            90.6%         $     146,087             85.5%         $       22,084             15.1%     

Cost of revenue. Cost of revenue for the three months ended March 31, 2015 was $42.9 million, or 23.1% of total net revenue, an increase of $5.5 million, or 14.7%, from cost of revenue of $37.4 million, or 21.9% of total net revenue, for the three months ended March 31, 2014. The increase was primarily attributable to the previously discussed revenue contribution of Sg2 resulting in an increase in labor costs associated with service-related engagements in our SCM segment. In addition, for our engagements that include achieving financial performance targets, we recognize revenue based on when the financial performance targets are achieved and such achievement is acknowledged by our customers. There are instances during a reporting period where we incur a higher amount of direct costs with no associated revenue for these types of engagements. Also, we may record revenue in a reporting period where the direct costs have been recorded in a previous period. These events may affect period over period comparability.

Product development expenses. Product development expenses for the three months ended March 31, 2015 were $8.4 million, or 4.5% of total net revenue, an increase of approximately $1.0 million, or 13.6%, from product development expenses of $7.4 million, or 4.3% of total net revenue, for the three months ended March 31, 2014. The increase was attributable to a $0.8 million increase in compensation expense and a $0.2 million increase in share-based compensation. Our product development capitalization rate for the three months ended March 31, 2015 and 2014 was 54.5% and 53.1%, respectively.

Selling and marketing expenses. Selling and marketing expenses for the three months ended March 31, 2015 were $19.5 million, or 10.5% of total net revenue, an increase of $4.3 million, or 28.4%, from selling and marketing expenses of $15.2 million, or 8.9% of total net revenue, for the three months ended March 31, 2014. The increase was attributable to a $3.2 million increase in compensation expense; a $0.5 million increase in share-based compensation; a $0.3 million increase in advertising expense; and a $0.3 million increase in other operating infrastructure expense.

General and administrative expenses. General and administrative expenses for the three months ended March 31, 2015 were $64.5 million, or 34.7% of total net revenue, an increase of $5.7 million, or 9.7%, from general and administrative expenses of $58.8 million, or 34.4% of total net revenue, for the three months ended March 31, 2014. The increase was attributable to a $3.1 million increase in compensation expense; a $1.4 million increase in telecommunications expense; a $0.7 million increase in professional fees; a $0.7 million increase in rent expense; and a $0.7 million increase in other operating infrastructure expense. The increase was partially offset by a $0.9 million decrease in transportation expense.

Restructuring, acquisition and integration-related expenses. Restructuring, acquisition and integration-related expenses for the three months ended March 31, 2015 were $4.4 million, an increase of $2.7 million from restructuring, acquisition and integration-related expenses of $1.7 million for the three months ended March 31, 2014. The increase was attributable to the costs associated with certain workforce reductions within the Company and to senior management changes during the period. Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for further details.

Depreciation. Depreciation expense for the three months ended March 31, 2015 was $13.3 million, or 7.2% of total net revenue, an increase of $1.8 million, or 15.7%, from depreciation of $11.5 million, or 6.8% of total net revenue, for the three months ended March 31, 2014. The increase was attributable to depreciation resulting from purchases of property and equipment inclusive of increases to capitalized software development. As a result of our capital investments, we expect our depreciation expense to increase in future periods.

 

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Amortization of intangibles. Amortization of intangibles for the three months ended March 31, 2015 was $15.0 million, or 8.1% of total net revenue, an increase of $1.0 million, or 7.3%, from amortization of intangibles of $14.0 million, or 8.2% of total net revenue, for the three months ended March 31, 2014. The increase in amortization expense compared to the prior year was due to incremental amortization expense associated with acquisitions that occurred in the prior year partially offset by certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization.

Segment Operating Expenses

Spend and Clinical Resource Management expenses. SCM operating expenses for the three months ended March 31, 2015 were $96.7 million, or 52.1% of total net revenue, an increase of $20.3 million, or 26.6%, from approximately $76.4 million, or 44.7% of total net revenue for the three months ended March 31, 2014. As a percentage of SCM segment net revenue, segment expenses were 81.0% and 70.4% for the three months ended March 31, 2015 and 2014, respectively.

The increase was primarily attributable to a $6.9 million increase in cost of revenue in connection with higher direct labor costs; a $6.6 million increase in compensation expense, mostly related to employees of Sg2 (acquired near the end of the third quarter of 2014) and increased service and sales resources; a $1.5 million increase in the amortization of intangibles; a $1.2 million increase in telecommunications expense; a $1.0 million increase in professional fees; a $0.8 million increase in share-based compensation expense; a $0.7 million increase in restructuring, acquisition and integration-related costs; a $0.6 million increase in depreciation expense; a $0.5 million increase in rent expense; and a $0.5 million increase in other operating infrastructure expense.

Revenue Cycle Management expenses. RCM operating expenses for the three months ended March 31, 2015 were $55.7 million, or 30.0% of total net revenue, a decrease of $1.3 million, or 2.2%, from $57.0 million, or 33.3% of total net revenue, for the three months ended March 31, 2014. As a percentage of RCM segment net revenue, segment expenses were 84.2% and 91.5% for the three months ended March 31, 2015 and 2014, respectively.

The decrease was attributable to a $1.9 million decrease in cost of revenue primarily within revenue cycle services that was impacted by a large business process outsourcing agreement that ended at the end of 2014; and a $0.5 million decrease in amortization of intangibles as certain intangible assets reached the end of their useful life. The decrease was partially offset by a $0.7 million increase in depreciation expense; a $0.2 million increase in share-based compensation expense; and a $0.2 million increase in other operating infrastructure expense.

Corporate expenses. Corporate expenses for the three months ended March 31, 2015 were $15.7 million, an increase of $3.0 million, or 23.9%, from $12.7 million for the three months ended March 31, 2014, or 8.5% and 7.4% of total net revenue, respectively. The increase in corporate expenses was attributable to a $2.2 million increase in restructuring, acquisition and integration-related costs associated with the reduction in workforce and to certain changes in senior management during the period; a $0.5 million increase in depreciation expense; a $0.4 million increase in share-based compensation expense; a $0.3 million increase in telecommunications expense; and a $0.2 million increase in compensation expense. The increase was partially offset by a $0.6 million decrease in transportation expense.

Non-operating Expenses

Interest expense. Interest expense for the three months ended March 31, 2015 was $11.9 million, an increase of $0.7 million from interest expense of $11.2 million for the three months ended March 31, 2014. The increase in interest expense was primarily due to a higher level of indebtedness compared to the prior year. As of March 31, 2015, we had total indebtedness of $867.7 million compared to $766.9 million as of March 31, 2014. As a result of our higher debt balance, we expect interest expense to increase in future periods. See Note 5 of the Notes to Condensed Consolidated Financial Statements herein for more details.

Other income. Other income for the three months ended March 31, 2015 and 2014 was approximately $0.1 million comprised mainly of rental income.

Income tax expense. Income tax expense for the three months ended March 31, 2015 was $2.3 million, a decrease of $3.7 million from an income tax expense of $6.0 million for the three months ended March 31, 2014, which was primarily attributable to decreased income before taxes. Income tax expense recorded during the three months ended March 31, 2015 and 2014 reflected an effective income tax rate of 40.2% and 43.8%, respectively. The decrease in our effective tax rate was primarily driven by a decrease in state income tax expense. However, we expect our effective tax rates to increase in future periods due to state legislative changes pertaining to tax rates and apportionment of our taxable income.

 

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Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. We base our estimates and judgments on historical experience and other assumptions that we find reasonable under the circumstances. Actual results may differ materially from such estimates under different conditions.

Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Liquidity and Capital Resources

Our primary cash requirements involve payment of ordinary expenses, working capital fluctuations, debt service obligations and capital expenditures. Our capital expenditures typically consist of software purchases, internal product development capitalization and computer hardware purchases. Historically, the acquisition of complementary businesses has resulted in a significant use of cash. Our principal sources of funds have primarily been cash provided by operating activities and borrowings under our credit facilities.

We believe we currently have adequate cash flow from operations, capital resources, available credit facilities and liquidity to meet our cash flow requirements including the following near term obligations (next 12 months): (i) our working capital needs; (ii) our debt service obligations; (iii) planned capital expenditures; (iv) our revenue share obligation and rebate payments; and (v) estimated federal and state income tax payments.

We expect our cash tax liability to increase in 2015 and in the future, primarily attributable to exhausting all of our federal net operating loss and tax credit carryforwards.

We have not historically utilized borrowings available under our credit agreement to fund operations. We implemented an auto-borrowing plan pursuant to which all excess cash on hand is used to repay our swing line credit facility on a daily basis. As a result, any excess cash on hand will be used to repay our swing line balance, if any, on a daily basis. See Note 5 of the Notes to Condensed Consolidated Financial Statements for further details.

As of March 31, 2015, we had $152.0 million drawn on our revolving credit facility resulting in $147.0 million of availability under our revolving credit facility inclusive of the swing line component (after giving effect to $1.0 million of outstanding but undrawn letters of credit on such date). We may observe fluctuations in cash flows provided by operations from period to period. Certain events may cause us to draw additional amounts under our swing line or revolving facility and may include the following:

 

   

changes in working capital due to inconsistent timing of cash receipts and payments for major recurring items such as trade accounts payable, revenue share obligation, incentive compensation, changes in deferred revenue, and other various items;

 

   

acquisitions; and

 

   

unforeseeable events or transactions.

We may continue to pursue other acquisitions or investments in the future. We may also increase our capital expenditures consistent with our anticipated growth in infrastructure, software solutions, and personnel, and as we expand our market presence.

Cash provided by operating activities may not be sufficient to fund such expenditures. Accordingly, in addition to the use of our available revolving credit facility, we may need to engage in additional equity or debt financings to secure additional funds for such purposes. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters including higher interest costs, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain required financing on terms satisfactory to us, our ability to continue to support our business growth and to respond to business challenges could be limited.

 

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Discussion of Cash Flow

As of March 31, 2015 and December 31, 2014, we had cash and cash equivalents of $19.0 million and $12.1 million, respectively.

Operating Activities.

The following table summarizes the cash provided by operating activities for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended March 31,  
     2015      2014      Change  
         Amount              Amount              Amount          %  
     (Unaudited, in millions)  

Net income

   $ 3.4         $ 7.7         $ (4.3)           (55.8%)     

Non-cash items

     33.1           27.4           5.7           20.8     

Net changes in working capital

     (1.9)           (17.4)           15.5           89.1     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by operations

   $       34.6         $ 17.7         $ 16.9           95.5%     

Net income represents the income attained during the periods presented and is inclusive of certain non-cash expenses. These non-cash expenses include bad debt expense, depreciation for fixed assets, amortization of intangible assets, share-based compensation expense, deferred income tax expense, excess tax benefit from the exercise of stock options, (gain) loss on sale of assets, amortization of debt issuance costs and non-cash interest expense. Refer to our condensed consolidated statement of cash flows for details regarding these non-cash items. The total for these non-cash expenses was $33.1 million and $27.4 million for the three months ended March 31, 2015 and 2014, respectively. The increase in non-cash expenses for the three months ended March 31, 2015 compared to March 31, 2014 was primarily attributable to: (i) a $2.4 million increase in depreciation expense; (ii) a $1.1 million decrease in the excess tax benefit from exercise of equity awards; (iii) a $1.4 million increase in share-based compensation; and (iv) a $1.0 million increase in the amortization of intangibles. The decrease was partially offset by a $0.4 million increase in our deferred income tax benefit. Refer to our Management Discussion and Analysis for more detail.

Working capital is a measure of our liquid assets. Changes in working capital are included in the determination of cash provided by operating activities. For the three months ended March 31, 2015, the working capital changes resulting in a decrease to cash flow from operations of $1.9 million primarily consisted of the following:

Decrease to cash flow

 

   

a $8.6 million working capital decrease in trade accounts payable due to the timing of various payment obligations;

 

   

a $1.9 million decrease in accrued revenue share obligation and rebates due to the timing of cash payments and customer purchasing volume for our GPO; and

 

   

a $10.1 million decrease in accrued payroll and benefits due to payroll cycle timing and the payment of our 2014 performance-based compensation expense.

The working capital changes resulting in decreases to cash flow from operations discussed above were partially offset by the following changes in working capital resulting in increases to cash flow:

Increase to cash flow

 

   

a decrease in accounts receivable of $3.8 million primarily related to the timing of invoicing and cash collections;

 

   

a decrease in prepaid expenses and other assets of $3.9 million primarily related to a decrease in prepaid taxes;

 

   

a $7.9 million increase in other accrued expenses and long-term liabilities primarily attributable to the increase in accrued interest relating to the timing of our semi-annual bond interest payment; and

 

   

an increase in deferred revenue of $3.0 million for cash receipts not yet recognized as revenue.

 

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For the three months ended March 31, 2014, the working capital changes resulting in a decrease to cash flow from operations of $17.4 million primarily consisted of the following:

Decrease to cash flow

 

   

an increase in accounts receivable of $13.3 million primarily related to the timing of invoicing and cash collections;

 

   

a $4.7 million working capital decrease in trade accounts payable due to the timing of various payment obligations;

 

   

a $6.3 million decrease in accrued revenue share obligation and rebates due to the timing of cash payments and customer purchasing volume for our GPO; and

 

   

a $23.3 million decrease in accrued payroll and benefits due to payroll cycle timing and the payment of our 2013 performance-based compensation expense.

Increase to cash flow

 

   

a $21.6 million increase in other accrued expenses and long-term liabilities primarily related to the $14.8 million reclassification of the cash book overdraft; and

 

   

an increase in deferred revenue of $8.1 million for cash receipts not yet recognized as revenue.

Investing Activities.

Investing activities used $11.4 million of cash for the three months ended March 31, 2015 which included $10.1 million for investment in software development and $1.3 million of capital expenditures.

Investing activities used $10.1 million of cash for the three months ended March 31, 2014 which included $8.4 million for investment in software development and $1.7 million of capital expenditures.

We believe that cash used in investing activities will continue to be materially impacted by continued growth in investments in property and equipment and capitalized software. Our property, equipment, and software investments consist primarily of SaaS-based technology infrastructure to provide capacity for expansion of our customer base, including computers and related equipment and software purchased or implemented by outside parties. Our software development investments consist primarily of company-managed design, development, testing and deployment of new application functionality. In addition, cash used in investing activities may be materially impacted by future acquisitions.

Financing Activities.

Financing activities used $16.4 million of cash for the three months ended March 31, 2015. We made payments on our Term Loan Facility of $13.3 million consisting of $5.5 million in scheduled principal payments and $7.8 million relating to our annual excess cash flow payments. We also made payments of $0.2 million on our finance obligation (discussed below). We also settled the tax liability relating to shares surrendered for tax withholdings totaling $3.8 million. This was partially offset by receipt of $0.6 million from the issuance of common stock and $0.3 million from the excess tax benefit from the exercise of stock options. As of March 31, 2015, the Credit Agreement requires an assessment of excess cash flow for our fiscal year ended December 31, 2015. We would be required to make any excess cash flow payment during the first quarter of 2016.

Financing activities used $10.4 million of cash for the three months ended March 31, 2014. We made payments on our Term Loan Facility of $13.9 million consisting of $3.9 million in scheduled principal payments and a $10.0 million voluntary prepayment and we also made payments of $0.3 million on our swing line and $0.2 million on our finance obligation. In addition, we purchased 640,000 shares of common stock under our share repurchase program totaling $13.1 million and settled the tax liability relating to shares surrendered for tax withholdings totaling $2.6 million. This was partially offset by $16.5 million received from borrowings on our swing line; $1.8 million received from the issuance of common stock and $1.4 million from the excess tax benefit from the exercise of stock options.

Off-Balance Sheet Arrangements and Commitments

We have provided a $1.0 million letter of credit to guarantee our performance under the terms of a ten-year lease agreement. The letter of credit is associated with the capital lease of a building located in Cape Girardeau, Missouri under a finance obligation. We do not believe that this letter of credit will be drawn.

 

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We lease office space and equipment under operating leases. Some of these operating leases include rent escalations, rent holidays, and rent concessions and incentives. However, we recognize lease expense on a straight-line basis over the minimum lease term utilizing total future minimum lease payments. Our consolidated future minimum rental payments under our operating leases with initial or remaining non-cancelable lease terms of at least one year are as follows as of March 31, 2015 for each respective year (Unaudited, in thousands):

 

         Amount      

2015

     $         10,219(1)   

2016

     8,683    

2017

     8,956    

2018

     9,962    

2019

     8,855    

Thereafter

     69,796    
  

 

 

 

Total future minimum rental payments

     $ 116,471    
  

 

 

 

  (1) Represents the remaining rental payments due during the fiscal year ending December 31, 2015.

As of March 31, 2015, we did not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future significant effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Use of Non-GAAP Financial Measures

In order to provide investors with greater insight, promote transparency and allow for a more comprehensive understanding of the information used by management and the Board in its financial and operational decision-making, we supplement our condensed consolidated financial statements presented on a GAAP basis herein with the following non-GAAP financial measures: EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted diluted earnings per share.

These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We compensate for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only supplementally. We provide reconciliations of non-GAAP measures to their most directly comparable GAAP measures, where possible. Investors are encouraged to carefully review those reconciliations. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us, may differ from and may not be comparable to similarly titled measures used by other companies.

EBITDA, adjusted EBITDA and adjusted EBITDA margin. We define: (i) EBITDA as net income before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) adjusted EBITDA as net income before net interest expense, income tax expense (benefit), depreciation and amortization and other non-recurring, non-cash or non-operating items; and (iii) adjusted EBITDA margin as adjusted EBITDA as a percentage of net revenue. We use EBITDA, adjusted EBITDA and adjusted EBITDA margin to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the Board and may be useful to investors in comparing our operating performance consistently over time as it removes the impact of our capital structure (primarily interest charges and amortization of debt issuance costs), asset base (primarily depreciation and amortization) and items outside the control of the management team (taxes), as well as other non-cash (purchase accounting adjustments and imputed rental income) and non-recurring items, from our operational results. Adjusted EBITDA also removes the impact of non-cash share-based compensation expense, goodwill impairment, and certain restructuring, acquisition and integration-related charges.

Our Board and management also use these measures as: i) one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and ii) as a performance evaluation metric in determining achievement of certain executive incentive compensation programs, as well as for incentive compensation plans for employees generally.

Additionally, research analysts, investment bankers and lenders may use these measures to assess our operating performance. For example, our credit agreement requires delivery of compliance reports certifying compliance with financial covenants certain of which are, in part, based on an adjusted EBITDA measurement that is similar to the adjusted EBITDA measurement reviewed by our management and our Board. The principal difference is that the measurement of adjusted EBITDA considered by our lenders under our credit agreement allows for certain adjustments (e.g., inclusion of interest income, franchise taxes and other non-cash expenses, offset by the deduction of our capitalized lease payments for one of our office leases) that result in a higher adjusted EBITDA than the adjusted EBITDA measure reviewed by our Board and management and disclosed in our Annual Report on Form 10-K. Additionally, our credit agreement contains provisions that utilize other measures, such as excess cash flow, to measure liquidity.

 

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EBITDA, adjusted EBITDA and adjusted EBITDA margin are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities. Despite the advantages regarding the use and analysis of these measures as mentioned above, EBITDA, adjusted EBITDA and adjusted EBITDA margin, as disclosed herein, have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA are:

 

   

EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our credit agreement;

 

   

EBITDA does not reflect income tax payments we are required to make; and

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.

Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, we encourage you to review the GAAP financial statements included elsewhere herein, and not rely on any single financial measure to evaluate our business. We also strongly urge you to review the reconciliation of net income to adjusted EBITDA in this section, along with our condensed consolidated financial statements included elsewhere herein.

The following table sets forth a reconciliation of EBITDA and adjusted EBITDA to net income, a comparable GAAP-based measure. All of the items included in the reconciliation from net income to EBITDA to adjusted EBITDA are either: (i) non-cash items (e.g., depreciation and amortization, impairment of intangibles and share-based compensation expense) or (ii) items that management does not consider in assessing our on-going operating performance (e.g., income taxes, interest expense and expenses related to the cancellation of an interest rate swap and acquisition and integration-related expenses). In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other non-recurring items, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.

The following table reconciles net income to Adjusted EBITDA for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended March 31,  

Adjusted EBITDA Reconciliation

   2015      2014  
     (Unaudited, in thousands)  

Net income

     $ 3,353           $ 7,678      

Depreciation

     13,347           11,540      

Depreciation (included in cost of revenue)

     978           424      

Amortization of intangibles

     15,056           14,026      

Interest expense, net of interest income(1)

     11,867           11,173      

Income tax expense

     2,250           5,987      
  

 

 

    

 

 

 

EBITDA

     46,851           50,828      

Share-based compensation expense(2)

     5,732           4,302      

Rental income from capitalizing building lease(3)

     (110)          (110)     

Purchase accounting adjustments(4)

     461           -      

Restructuring, acquisition and integration-related expenses(5)

     4,439           1,697      
  

 

 

    

 

 

 

Adjusted EBITDA

     $ 57,373         $ 56,717      

 

  (1) Interest income is included in other income (expense) and is not netted against interest expense in our condensed consolidated statement of operations.

 

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  (2) Represents non-cash share-based compensation to both employees and directors. We believe excluding this non-cash expense allows us to compare our operating performance without regard to the impact of share-based compensation expense, which varies from period to period based on the amount and timing of grants.

 

  (3) The imputed rental income recognized with respect to a capitalized building lease is deducted from net income (loss) due to its non-cash nature. We believe this income is not a useful measure of continuing operating performance.

 

  (4) Represents the effect on revenue of adjusting the acquired deferred revenue balance associated with the Sg2 Acquisition to fair value at the acquisition date.

 

  (5) Represents the amount attributable to restructuring, acquisition and integration-related costs which may include costs such as severance, retention, salaries relating to redundant positions, certain performance-related salary-based compensation, operating infrastructure costs and facility consolidation costs.

Adjusted Net Income and Diluted Adjusted Earnings Per Share. The Company defines: i) adjusted net income as net income excluding non-cash acquisition-related intangible amortization and depreciation, and non-recurring expense items on a tax-adjusted basis, non-cash share-based compensation and certain restructuring, acquisition and integration-related expenses on a tax-adjusted basis; purchase accounting adjustments on a tax-adjusted basis; and ii) diluted adjusted EPS as earnings per share excluding non-cash acquisition-related intangible amortization and depreciation, and non-recurring expense items, non-cash share-based compensation and certain restructuring, acquisition and integration-related expenses on a tax-adjusted basis. Adjusted net income and diluted adjusted EPS are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities. Diluted adjusted EPS growth has been used historically by the Company as the financial performance metric that determines whether certain equity awards granted pursuant to the Company’s LTPIP will vest. Use of these measures allows management and the Board to analyze the Company’s operating performance on a consistent basis by removing the impact of certain non-cash and non-recurring items from our operations and assess organic growth and accretive business transactions. As a significant portion of senior management’s incentive-based compensation historically has been based on the achievement of certain diluted adjusted EPS growth over time, which is intended to reward them for organic growth and accretive business transactions, investors may find such information useful; however, as non-GAAP financial measures, adjusted net income and diluted adjusted EPS are not the sole measures of the Company’s financial performance and may not be the best measures for investors to gauge such performance.

 

     Three Months Ended March 31,  
          2015              2014      
     (Unaudited, in thousands)  

Net income

     $ 3,353           $ 7,678     

Pre-tax non-cash, acquisition-related intangible amortization and depreciation

     15,056           14,026     

Pre-tax non-cash, share-based compensation(1)

     5,732           4,302     

Pre-tax restructuring, acquisition and integration related expenses(2)

     4,439           1,697     

Pre-tax non-cash, purchase accounting adjustment(3)

     461           -     

Tax effect on pre-tax adjustments(4)

     (10,275)          (8,010)    
  

 

 

    

 

 

 

Non-GAAP adjusted net income

     $ 18,766           $ 19,693     
  

 

 

    

 

 

 

 

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     Three Months Ended March 31,  
Per share data        2015              2014      
     (Unaudited)  

EPS - diluted

    $         0.06           $         0.12     

Pre-tax non-cash, acquisition-related intangible amortization and depreciation

     0.25           0.23     

Pre-tax non-cash, share-based compensation(1)

     0.09           0.07     

Pre-tax restructuring, acquisition and integration related expenses(2)

     0.07           0.03     

Pre-tax non-cash, purchase accounting adjustment(3)

     0.01           -     

Tax effect on pre-tax adjustments(4)

     (0.17)          (0.13)    
  

 

 

    

 

 

 

Non-GAAP adjusted EPS - diluted

     $ 0.31           $ 0.32     
  

 

 

    

 

 

 

Weighted average shares - diluted (in 000s)

     60,530           61,681     

 

  (1) Represents the amount and the per share impact, on a pre-tax basis, of non-cash share-based compensation to employees and directors. We believe excluding this non-cash expense allows us to compare our operating performance without regard to the impact of share-based compensation expense, which varies from period to period based on the amount and timing of grants.

 

  (2) Represents the amount and the per share impact, on a pre-tax basis, of restructuring, acquisition and integration-related costs which may include costs such as severance, retention, salaries relating to redundant positions, certain performance-related salary-based compensation, operating infrastructure costs and facility consolidation costs. We consider these charges to be non-operating expenses and unrelated to our underlying results of operations.

 

  (3) Represents the amount and the per share impact, on a pre-tax basis, of the effect on revenue of adjusting the acquired deferred revenue balance associated with the Sg2 Acquisition to fair value at the acquisition date.

 

  (4) Reflects the tax impact on the adjustments used to derive Non-GAAP diluted adjusted EPS. We used a tax rate of 40.0% for the three months ended March 31, 2015 and 2014 since we believe the 40% will be our normalized long-term tax rate. The effective tax rate for the three months ended March 31, 2015 and 2014 was 40.2% and 43.8%, respectively.

New Pronouncements

Debt Issuance Costs

In April 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update relating to simplifying the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The update will be effective on January 1, 2016.

Going Concern

In August 2014, the FASB issued an accounting standard update relating to disclosure of uncertainties about an entity’s ability to continue as a going concern. The update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in the event that there is such substantial doubt. The update will be effective on January 1, 2016.

Share-Based Compensation

In June 2014, the FASB issued an accounting standard update relating to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The update will be effective on January 1, 2016.

 

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Revenue Recognition

In May 2014, the FASB issued an accounting standard update relating to revenue from contracts with customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The update will replace most existing revenue recognition guidance under GAAP when it becomes effective. The update is effective for us on January 1, 2017. Early application is not permitted. The update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that the update will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Discontinued Operations

In April 2014, the FASB issued an accounting standard update which revises what qualifies as a discontinued operation, changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. We adopted this update on January 1, 2015.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign currency exchange risk. Certain of our contracts are denominated in Canadian dollars. As our Canadian sales have not historically been significant to our operations, we do not believe that changes in the Canadian dollar relative to the U.S. dollar will have a significant impact on our financial condition, results of operations or cash flows. We currently do not transact any other business in any currency other than the U.S. dollar. As we continue to grow our operations, we may increase the amount of our sales to foreign customers. Although we do not expect foreign currency exchange risk to have a significant impact on our future operations, we will assess the risk on a case-specific basis to determine whether any forward currency hedge instrument would be warranted.

Interest rate risk. We had outstanding borrowings on our Term Loan Facility and Revolving Credit Facility of $542.7 million as of March 31, 2015. The Term A Facility and the Revolving Credit Facility bear interest at LIBOR plus an applicable margin. The Term B Facility bears interest at LIBOR, subject to a floor of 1.25% plus an applicable margin. We also had an aggregate principal amount of our Notes of $325.0 million outstanding as of March 31, 2015, which bears interest at 8% per annum.

To the extent we do not hedge our variable rate debt, interest rates and interest expense could increase significantly.

A hypothetical 100 basis point increase in LIBOR, which would represent potential interest rate change exposure on our outstanding term loans, would have resulted in an approximate $1.0 million increase to our interest expense for the three months ended March 31, 2015.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any control and procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship regarding the potential utilization of certain controls and procedures. In September 2014, we completed our acquisition of Sg2 (see Note 5 to the 2014 Consolidated Financial Statements filed on Form 10-K). We are not required to include an assessment of the disclosure controls and procedures of a newly acquired entity in our evaluation of disclosure controls and procedures for MedAssets pursuant to guidance supplied by the SEC to companies regarding the treatment of business combinations. In accordance with our integration efforts, we have initiated the process of incorporating Sg2’s operations into our disclosure controls and procedures program and plan to include them in our formal evaluation process in the future within the time period provided by applicable SEC rules and regulations.

As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our chief executive officer and chief financial officer, evaluated the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting for the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we become involved in legal proceedings arising in the ordinary course of our business. We are not presently involved in any legal proceedings, the outcome of which, if determined adversely to us, would have a material adverse effect on our business, operating results or financial condition.

Item 1A. Risk Factors

There have been no material changes in the risk factors as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

 

Exhibit
No.
  

Description of Exhibit

    
31.1*    Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Executive Officer   
31.2*    Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer   
32.1*    Sarbanes-Oxley Act of 2002, Section 906 Certification for Chief Executive Officer and Chief Financial Officer   
101.INS*    XBRL Instance Document   
101.SCH*    XBRL Taxonomy Extension Schema Document   
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document   
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document   
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document   
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document   

* Filed herewith

 

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Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Signature

  

Title

  

Date

    

/s/ R. HALSEY WISE

  

 

Chairman and Chief Executive Officer

   May 1, 2015   
Name: R. Halsey Wise    (Principal Executive Officer)      

/s/ ANTHONY COLALUCA, JR.

   Chief Financial Officer    May 1, 2015   
Name: Anthony Colaluca, Jr.    (Principal Financial Officer)      

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit
No.
  

Description of Exhibit

    
31.1*    Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Executive Officer   
31.2*    Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer   
32.1*    Sarbanes-Oxley Act of 2002, Section 906 Certification for Chief Executive Officer and Chief Financial Officer   
101.INS*    XBRL Instance Document   
101.SCH*    XBRL Taxonomy Extension Schema Document   
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document   
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document   
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document   
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document   

* Filed herewith

 

35