UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,, D.C. 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,June 30, 2018
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 00000-193640-19364
TIVITY HEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware | 62-1117144 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
701 Cool Springs Boulevard, Franklin, TN 37067
(Address of principal executive offices) (Zip code)
(615) 614-4929
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ | No ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
Yes ☒ | No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- acceleratednon-accelerated filer, or a smaller reporting company, or an emerging growth company.company. See the definitions of "large“large accelerated filer"filer”, "accelerated filer"“accelerated filer”, "smaller “smaller reporting company"company”, and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | Smaller reporting company | ☐ |
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ | No ☒ |
As of April 30,July 31, 2018,, there were outstanding 39,876,04140,006,661 shares of the registrant'sregistrant’s common stock, par value $.001 per share ("(“common stock"stock”).
Form 10-Q
Table of Contents
Page | |||
Item | 3 | ||
Item 2. | Management's Discussion andAnalysisof Financial Conditionand Results of Operations | 21 | |
Item 3. | Quantitative and | 29 | |
Item 4. | 29 | ||
Item | 30 | ||
Item | 30 | ||
Item | 31 |
TIVITY HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)thousands)
(Unaudited)
ASSETS
|
| June 30, 2018 |
|
| December 31, 2017 |
| ||
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 66,995 |
|
| $ | 28,440 |
|
Accounts receivable, net |
|
| 68,762 |
|
|
| 55,113 |
|
Prepaid expenses |
|
| 4,249 |
|
|
| 3,444 |
|
Other current assets |
|
| 4,746 |
|
|
| 2,180 |
|
Cash convertible notes hedges |
|
| 141,246 |
|
|
| 134,079 |
|
Income taxes receivable |
|
| 636 |
|
|
| 39 |
|
Total current assets |
|
| 286,634 |
|
|
| 223,295 |
|
|
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
| 10,396 |
|
|
| 10,384 |
|
Computer equipment and related software |
|
| 22,330 |
|
|
| 19,508 |
|
Furniture and office equipment |
|
| 8,193 |
|
|
| 8,194 |
|
Capital projects in process |
|
| 2,649 |
|
|
| 1,105 |
|
|
|
| 43,568 |
|
|
| 39,191 |
|
Less accumulated depreciation |
|
| (30,791 | ) |
|
| (28,533 | ) |
|
|
| 12,777 |
|
|
| 10,658 |
|
|
|
|
|
|
|
|
|
|
Other assets |
|
| 26,069 |
|
|
| 13,315 |
|
Long-term deferred tax asset |
|
| 9,912 |
|
|
| 25,166 |
|
Intangible assets, net |
|
| 29,049 |
|
|
| 29,049 |
|
Goodwill, net |
|
| 334,680 |
|
|
| 334,680 |
|
Total assets |
| $ | 699,121 |
|
| $ | 636,163 |
|
March 31, 2018 | December 31, 2017 | ||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 38,792 | $ | 28,440 | |||||
Accounts receivable, net | 67,582 | 55,113 | |||||||
Prepaid expenses | 3,485 | 3,444 | |||||||
Other current assets | 4,779 | 2,180 | |||||||
Cash convertible notes hedges | 157,143 | 134,079 | |||||||
Income taxes receivable | — | 39 | |||||||
Total current assets | 271,781 | 223,295 | |||||||
Property and equipment: | |||||||||
Leasehold improvements | 10,396 | 10,384 | |||||||
Computer equipment and related software | 21,022 | 19,508 | |||||||
Furniture and office equipment | 8,188 | 8,194 | |||||||
Capital projects in process | 1,461 | 1,105 | |||||||
41,067 | 39,191 | ||||||||
Less accumulated depreciation | (29,650 | ) | (28,533 | ) | |||||
11,417 | 10,658 | ||||||||
Other assets | 27,524 | 13,315 | |||||||
Long-term deferred tax asset | 18,076 | 25,166 | |||||||
Intangible assets, net | 29,049 | 29,049 | |||||||
Goodwill, net | 334,680 | 334,680 | |||||||
Total assets | $ | 692,527 | $ | 636,163 |
See accompanying notesaccompanying notes to the consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
| June 30, 2018 |
|
| December 31, 2017 |
| ||
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 26,622 |
|
| $ | 26,804 |
|
Accrued salaries and benefits |
|
| 5,993 |
|
|
| 15,018 |
|
Accrued liabilities |
|
| 41,762 |
|
|
| 33,527 |
|
Other current liabilities |
|
| 3,792 |
|
|
| 984 |
|
Cash conversion derivative |
|
| 141,246 |
|
|
| 134,079 |
|
Current portion of debt |
|
| 150,007 |
|
|
| 145,959 |
|
Current portion of long-term liabilities |
|
| 2,244 |
|
|
| 2,262 |
|
Total current liabilities |
|
| 371,666 |
|
|
| 358,633 |
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
| 7,595 |
|
|
| 5,577 |
|
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding |
|
| — |
|
|
| — |
|
Common stock $.001 par value, 120,000,000 shares authorized, 39,963,683 and 39,729,580 shares outstanding, respectively |
|
| 40 |
|
|
| 40 |
|
Additional paid-in capital |
|
| 352,230 |
|
|
| 349,243 |
|
Accumulated deficit |
|
| (4,228 | ) |
|
| (49,148 | ) |
Treasury stock, at cost, 2,254,953 shares in treasury |
|
| (28,182 | ) |
|
| (28,182 | ) |
Total stockholders' equity |
|
| 319,860 |
|
|
| 271,953 |
|
Total liabilities and stockholders' equity |
| $ | 699,121 |
|
| $ | 636,163 |
|
See accompanying notes to the consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings (loss) per share data)
(Unaudited)
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Revenues |
| $ | 151,865 |
|
| $ | 138,914 |
|
| $ | 301,795 |
|
| $ | 279,884 |
|
Cost of services (exclusive of depreciation and amortization of $995, $648, $1,970 and $1,305, respectively, included below) |
|
| 109,022 |
|
|
| 99,071 |
|
|
| 217,299 |
|
|
| 201,470 |
|
Selling, general & administrative expenses |
|
| 7,756 |
|
|
| 8,176 |
|
|
| 16,334 |
|
|
| 16,538 |
|
Depreciation and amortization |
|
| 1,135 |
|
|
| 789 |
|
|
| 2,257 |
|
|
| 1,576 |
|
Restructuring and related charges |
|
| 118 |
|
|
| (52 | ) |
|
| 124 |
|
|
| 685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 33,834 |
|
|
| 30,930 |
|
|
| 65,781 |
|
|
| 59,615 |
|
Interest expense |
|
| 3,482 |
|
|
| 4,130 |
|
|
| 6,936 |
|
|
| 7,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
| 30,352 |
|
|
| 26,800 |
|
|
| 58,845 |
|
|
| 51,651 |
|
Income tax expense |
|
| 7,669 |
|
|
| 9,560 |
|
|
| 14,826 |
|
|
| 18,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
| 22,683 |
|
|
| 17,240 |
|
|
| 44,019 |
|
|
| 32,720 |
|
Income (loss) from discontinued operations, net of income tax |
|
| 901 |
|
|
| (3,673 | ) |
|
| 901 |
|
|
| (3,893 | ) |
Net income |
| $ | 23,584 |
|
| $ | 13,567 |
|
| $ | 44,920 |
|
| $ | 28,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.57 |
|
| $ | 0.44 |
|
| $ | 1.10 |
|
| $ | 0.84 |
|
Discontinued operations |
| $ | 0.02 |
|
| $ | (0.09 | ) |
| $ | 0.02 |
|
| $ | (0.10 | ) |
Net income (loss) |
| $ | 0.59 |
|
| $ | 0.35 |
|
| $ | 1.13 |
|
| $ | 0.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.52 |
|
| $ | 0.41 |
|
| $ | 1.01 |
|
| $ | 0.79 |
|
Discontinued operations |
| $ | 0.02 |
|
| $ | (0.09 | ) |
| $ | 0.02 |
|
| $ | (0.09 | ) |
Net income (loss) |
| $ | 0.54 |
|
| $ | 0.32 |
|
| $ | 1.03 |
|
| $ | 0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
| $ | 23,584 |
|
| $ | 17,957 |
|
| $ | 44,920 |
|
| $ | 33,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 39,899 |
|
|
| 39,246 |
|
|
| 39,841 |
|
|
| 39,158 |
|
Diluted |
|
| 43,284 |
|
|
| 42,369 |
|
|
| 43,437 |
|
|
| 41,456 |
|
See accompanying notes to the consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
| Six Months Ended June 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Net income |
| $ | 44,920 |
|
| $ | 28,827 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax |
|
| — |
|
|
| 1,458 |
|
Release of cumulative translation adjustment to loss from discontinued operations due to substantial liquidation of foreign entity |
|
| — |
|
|
| 3,044 |
|
Total other comprehensive income, net of tax |
| $ | — |
|
| $ | 4,502 |
|
Comprehensive income |
| $ | 44,920 |
|
| $ | 33,329 |
|
See accompanying notes to the consolidated financial statements.
6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2018
(In thousands)
(Unaudited)
|
| Preferred Stock |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Deficit |
|
| Treasury Stock |
|
| Total |
| ||||||
Balance, December 31, 2017 |
| $ | — |
|
| $ | 40 |
|
| $ | 349,243 |
|
| $ | (49,148 | ) |
| $ | (28,182 | ) |
| $ | 271,953 |
|
Comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 44,920 |
|
|
| — |
|
|
| 44,920 |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| 1,135 |
|
|
| — |
|
|
| — |
|
|
| 1,135 |
|
Tax withholding for share-based compensation |
|
| — |
|
|
| — |
|
|
| (1,398 | ) |
|
| — |
|
|
| — |
|
|
| (1,398 | ) |
Share-based employee compensation expense |
|
| — |
|
|
| — |
|
|
| 3,250 |
|
|
| — |
|
|
| — |
|
|
| 3,250 |
|
Balance, June 30, 2018 |
| $ | — |
|
| $ | 40 |
|
| $ | 352,230 |
|
| $ | (4,228 | ) |
| $ | (28,182 | ) |
| $ | 319,860 |
|
March 31, 2018 | December 31, 2017 | |||||||
Current liabilities: | ||||||||
Accounts payable | $ | 26,941 | $ | 26,804 | ||||
Accrued salaries and benefits | 6,661 | 15,018 | ||||||
Accrued liabilities | 44,971 | 33,527 | ||||||
Other current liabilities | 750 | 984 | ||||||
Cash conversion derivative | 157,143 | 134,079 | ||||||
Current portion of debt | 147,831 | 145,959 | ||||||
Current portion of long-term liabilities | 1,709 | 2,262 | ||||||
Total current liabilities | 386,006 | 358,633 | ||||||
Other long-term liabilities | 11,946 | 5,577 | ||||||
Stockholders' equity: | ||||||||
Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding | — | — | ||||||
Common stock $.001 par value, 120,000,000 shares authorized, 39,847,047 and 39,729,580 shares outstanding, respectively | 40 | 40 | ||||||
Additional paid-in capital | 350,529 | 349,243 | ||||||
Accumulated deficit | (27,812 | ) | (49,148 | ) | ||||
Treasury stock, at cost, 2,254,953 shares in treasury | (28,182 | ) | (28,182 | ) | ||||
Total stockholders' equity | 294,575 | 271,953 | ||||||
Total liabilities and stockholders' equity | $ | 692,527 | $ | 636,163 |
See accompanying notes to the consolidated financial statements.
Three Months Ended | |||||||||
March 31, | |||||||||
2018 | 2017 | ||||||||
Revenues | $ | 149,930 | $ | 140,970 | |||||
Cost of services (exclusive of depreciation and amortization of $975 and $657, respectively, included below) | 108,277 | 102,399 | |||||||
Selling, general & administrative expenses | 8,583 | 8,361 | |||||||
Depreciation and amortization | 1,123 | 787 | |||||||
Restructuring and related charges | — | 737 | |||||||
Operating income | 31,947 | 28,686 | |||||||
Interest expense | 3,454 | 3,834 | |||||||
Income before income taxes | 28,493 | 24,852 | |||||||
Income tax expense | 7,157 | 9,371 | |||||||
Net income from continuing operations | 21,336 | 15,481 | |||||||
Loss from discontinued operations, net of income tax benefit | — | (220 | ) | ||||||
Net income | $ | 21,336 | $ | 15,261 | |||||
Earnings (loss) per share - basic: | |||||||||
Continuing operations | $ | 0.54 | $ | 0.40 | |||||
Discontinued operations | $ | — | $ | (0.01 | ) | ||||
Net income | $ | 0.54 | $ | 0.39 | |||||
Earnings (loss) per share - diluted: | |||||||||
Continuing operations | $ | 0.49 | $ | 0.38 | |||||
Discontinued operations | $ | — | $ | (0.01 | ) | ||||
Net income (1) | $ | 0.49 | $ | 0.38 | |||||
Comprehensive income | $ | 21,336 | $ | 15,372 | |||||
Weighted average common shares | |||||||||
and equivalents: | |||||||||
Basic | 39,783 | 39,069 | |||||||
Diluted | 43,589 | 40,541 | |||||||
(1) Figures may not add due to rounding. |
Three Months Ended March 31, | |||||||||
2018 | 2017 | ||||||||
Net income | $ | 21,336 | $ | 15,261 | |||||
Other comprehensive income, net of tax: | |||||||||
Foreign currency translation adjustment, net of tax | — | 111 | |||||||
Total other comprehensive income, net of tax | $ | — | $ | 111 | |||||
Comprehensive income | $ | 21,336 | $ | 15,372 | |||||
Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Treasury Stock | Total | |||||||||||||||||||
Balance, December 31, 2017 | $ | — | $ | 40 | $ | 349,243 | $ | (49,148 | ) | $ | (28,182 | ) | $ | 271,953 | ||||||||||
Comprehensive income | — | — | — | 21,336 | — | 21,336 | ||||||||||||||||||
Exercise of stock options | — | — | 770 | — | — | 770 | ||||||||||||||||||
Tax withholding for share-based compensation | — | — | (894 | ) | — | — | (894 | ) | ||||||||||||||||
Share-based employee compensation expense | — | — | 1,410 | — | — | 1,410 | ||||||||||||||||||
Balance, March 31, 2018 | $ | — | $ | 40 | $ | 350,529 | $ | (27,812 | ) | $ | (28,182 | ) | $ | 294,575 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| Six Months Ended June 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 44,019 |
|
| $ | 32,720 |
|
Income (loss) from discontinued operations |
|
| 901 |
|
|
| (3,893 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 2,257 |
|
|
| 1,589 |
|
Amortization of deferred loan costs |
|
| 1,050 |
|
|
| 1,246 |
|
Amortization of debt discount |
|
| 4,140 |
|
|
| 3,911 |
|
Share-based employee compensation expense |
|
| 3,250 |
|
|
| 3,362 |
|
(Gain) loss on sale of TPHS business |
|
| (1,304 | ) |
|
| 444 |
|
Loss on release of cumulative translation adjustment |
|
| — |
|
|
| 3,044 |
|
Deferred income taxes |
|
| 15,254 |
|
|
| 18,755 |
|
Increase in accounts receivable, net |
|
| (13,890 | ) |
|
| (4,398 | ) |
Decrease in other current assets |
|
| 756 |
|
|
| 869 |
|
Decrease in accounts payable |
|
| (1,869 | ) |
|
| (1,480 | ) |
Decrease in accrued salaries and benefits |
|
| (9,928 | ) |
|
| (11,953 | ) |
Decrease in other current liabilities |
|
| (4,563 | ) |
|
| (2,268 | ) |
Other |
|
| 1,227 |
|
|
| (1,888 | ) |
Net cash flows provided by operating activities |
| $ | 41,300 |
|
| $ | 40,060 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
| $ | (3,673 | ) |
| $ | (2,244 | ) |
Proceeds from sale of MeYou Health |
|
| 1,416 |
|
|
| — |
|
Net cash flows used in investing activities |
| $ | (2,257 | ) |
| $ | (2,244 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
| $ | 13,675 |
|
| $ | 274,425 |
|
Payments of long-term debt |
|
| (14,216 | ) |
|
| (308,496 | ) |
Payments related to tax withholding for share-based compensation |
|
| (1,398 | ) |
|
| (1,066 | ) |
Exercise of stock options |
|
| 1,135 |
|
|
| 2,757 |
|
Deferred loan costs |
|
| — |
|
|
| (2,452 | ) |
Change in cash overdraft and other |
|
| 343 |
|
|
| 1,558 |
|
Net cash flows used in financing activities |
| $ | (461 | ) |
| $ | (33,274 | ) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
| $ | (27 | ) |
| $ | 1,652 |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
| $ | 38,555 |
|
| $ | 6,194 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
| $ | 28,440 |
|
| $ | 1,602 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
| $ | 66,995 |
|
| $ | 7,796 |
|
Three Months Ended March 31, | |||||||||
2018 | 2017 | ||||||||
Cash flows from operating activities: | |||||||||
Net income from continuing operations | $ | 21,336 | $ | 15,481 | |||||
Net loss from discontinued operations | — | (220 | ) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 1,123 | 793 | |||||||
Amortization of deferred loan costs | 522 | 516 | |||||||
Amortization of debt discount | 2,044 | 1,931 | |||||||
Share-based employee compensation expense | 1,410 | 1,446 | |||||||
Loss on sale of TPHS business | — | 310 | |||||||
Deferred income taxes | 7,090 | 8,972 | |||||||
Increase in accounts receivable, net | (12,712 | ) | (16,459 | ) | |||||
Decrease (increase) in other current assets | 2,037 | (441 | ) | ||||||
(Decrease) increase in accounts payable | (916 | ) | 1,337 | ||||||
Decrease in accrued salaries and benefits | (9,007 | ) | (12,099 | ) | |||||
(Decrease) increase in other current liabilities | (1,185 | ) | 2,642 | ||||||
Other | 625 | (1,185 | ) | ||||||
Net cash flows provided by operating activities | $ | 12,367 | $ | 3,024 | |||||
Cash flows from investing activities: | |||||||||
Acquisition of property and equipment | $ | (1,946 | ) | $ | (1,234 | ) | |||
Net cash flows used in investing activities | $ | (1,946 | ) | $ | (1,234 | ) | |||
Cash flows from financing activities: | |||||||||
Proceeds from issuance of long-term debt | 8,400 | 109,975 | |||||||
Payments of long-term debt | (8,793 | ) | (115,465 | ) | |||||
Payments related to tax withholding for share-based compensation | (894 | ) | (885 | ) | |||||
Exercise of stock options | 771 | 2,250 | |||||||
Change in cash overdraft and other | 378 | 1,155 | |||||||
Net cash flows used in financing activities | $ | (138 | ) | $ | (2,970 | ) | |||
Effect of exchange rate changes on cash | $ | 69 | $ | 242 | |||||
Net increase (decrease) in cash and cash equivalents | $ | 10,352 | $ | (938 | ) | ||||
Cash and cash equivalents, beginning of period | 28,440 | 1,602 | |||||||
Cash and cash equivalents, end of period | $ | 38,792 | $ | 664 | |||||
See accompanying notesaccompanying notes to the consolidated financial statements.
8
NOTES TO CONSOLIDATEDCONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States ("(“U.S. GAAP"GAAP”). In our opinion, the accompanying consolidated financial statements of Tivity Health, Inc. and its wholly-owned subsidiaries (collectively, "Tivity“Tivity Health,"” the "Company,"“Company,” or such terms as "we,"“we,” "us,"” or "our"“our”) reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement.
Our results from continuing operations do not include the results of the total population health services ("TPHS"(“TPHS”) business, which we sold to Sharecare, Inc. ("Sharecare"(“Sharecare”) effective July 31, 2016. Navvis Healthcare, LLC and MeYou Health, LLC, which were part of the TPHS business, were sold separately to other buyers in November 2015 and June 2016, respectively. Results of operations for the TPHS business have been classified as discontinued operations for all periods presented in the accompanying consolidated financial statements prior to January 1, 2018.statements. See Note 4 for further information.
We have omitted certain financial information that is normally included in financial statements prepared in accordance with U.S. GAAP but that is not required for interim reporting purposes. You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.
2. | Recent Relevant |
On January 1, 2018, we adopted Accounting Standards Codification ("ASC"(“ASC”) Topic 606, "Revenue“Revenue from Contracts with Customers" ("Customers” (“ASC Topic 606"606”) using the modified retrospective method, pursuant to which we applied ASC Topic 606 to (i) all new contracts entered into after January 1, 2018 and (ii) contracts that were not completed as of January 1, 2018. In accordance with this approach, our results for periods prior to January 1, 2018 were not revised and continue to be reported in accordance with our historical accounting under ASC Topic 605, "Revenue“Revenue Recognition."” For contracts that were modified prior to January 1, 2018, we have not retrospectively restated the contract for those modifications in accordance with the contract modification guidance in ASC 606-10-25-12 and ASC 606-10-25-13 but instead, using the practical expedient available under ASC 606-10-65-1(f)(4), have reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price.
The cumulative impact of our adoption of ASC Topic 606 was not material to record as of January 1, 2018, and there was no material impact on our consolidated income statement, balance sheet, or cash flows for the quarter ended March 31, 2018. For example, we do not have any material contract assets or contract liabilities as defined under ASC Topic 606. In addition, the incremental costs of obtaining a contract with a customer (for example, sales commissions) that would have been recognized as an asset on January 1, 2018 were not material to record. See Note 3 for a further discussion of revenue recognition.
On January 1, 2018, we adopted Accounting Standards Update ("ASU"(“ASU”) No. 2016-15, "Statement“Statement of Cash Flows"Flows” (Topic 230) ("(“ASU 2016-15"2016-15”). ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows and is to be applied using a retrospective approach. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures and did not result in a reclassification to items in prior periods.
On January 1, 2018, we adopted ASU No. 2017-09, "Compensation-Stock“Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting" ("Accounting” (“ASU 2017-09"2017-09”), which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 is to be applied prospectively to awards modified on or after January 1, 2018. The adoption of this standard did not have an impact on our consolidated financial statements and related disclosures.
9
In February 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued ASU No. 2016-02, "Leases" ("“Leases”(“ASU 2016-02"2016-02”), which requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position.position, and is effective for us on January 1, 2019. ASU 2016-02 also requires improved disclosures
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles“Intangibles - Goodwill and Other" ("Other” (“ASU 2017-04"2017-04”), which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. ASU 2017-04 is effective for annual and interim impairment tests in fiscal years beginning after December 15, 2019 and is required to be applied prospectively. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate that adopting this standard will have an impact on our consolidated financial statements and related disclosures.
3. | Revenue Recognition |
Beginning in 2018, we account for revenue from contracts with customers in accordance with ASC Topic 606. The unit of account in ASC Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC Topic 606 requires that a contract's transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when or as the performance obligation is satisfied.
We earn revenue from our three programs, SilverSneakers® senior fitness, Prime®Prime® Fitness and WholeHealth LivingTM. We provide the SilverSneakers senior fitness program to members of Medicare Advantage and Medicare Supplement and Group Retiree plans through our contracts with such plans. We offer Prime Fitness, a fitness facility access program, through contracts with employers, and with commercial health plans, and other sponsoring organizations that allow their members to individually purchase the program. We sell our WholeHealth Living program primarily to health plans.
The significant majority of our customer contracts contain one performance obligation - to stand ready to provide access to our network of fitness locations and fitness programming - which is satisfied over time as services are rendered each month over the contract term. There are generally no performance obligations that are unsatisfied at the end of a particular month. There was no material revenue recognized during the three and six months ended March 31,June 30, 2018 from performance obligations satisfied in a prior period.
Our fees are variable month to month and are generally billed per member per month ("PMPM"(“PMPM”), or billed based on a combination of PMPM and member visits to a network location. We bill PMPM fees by multiplying the contractually negotiated PMPM rate by the number of members eligible for or receiving our services during the month. We bill for member visits approximately one month in arrears once actual member visits are known. Payments from customers are typically due within 30 days of invoice date. When material, we capitalize costs to obtain contracts with customers and amortize them over the expected recovery period.
Our customer contracts include variable consideration, which is allocated to each distinct month over the contract term based on eligible members and/or member visits each month. The allocated consideration corresponds directly with the value to our customers of our services completed for the month. Under the majority of our contracts, we recognize revenue each month using the practical expedient available under ASC 606-10-55-18, which provides that revenue is recognized in the amount for which we have the right to invoice.
Although we evaluate our financial performance and make resource allocation decisions based upon the results of our single operating and reportable segment, we believe the following information depicts how our revenues and cash flows are affected by economic factors. For the three and six months ended March 31,June 30, 2018, revenue from our SilverSneakers program, which is predominantly contracted with Medicare Advantage and Medicare Supplement plans, comprised approximately 81% of our consolidated revenues, while revenue from
Sales and usage-based taxes are excluded from revenues.
10
On July 27, 2016, we entered into a Membership Interest Purchase Agreement (the "Purchase Agreement"“Purchase Agreement”) with Sharecare and Healthways SC, LLC, ("Healthways SC"), a newly formed Delaware limited liability company and wholly owned subsidiary of the Company, pursuant to which Sharecare acquired the TPHS business, which closed effective July 31, 2016 ("Closing"(“Closing”).
At Closing, Sharecare delivered to the Company an Adjustable Convertible Equity Right (the "ACER"“ACER”) with an initial face value of $30.0 million. The ACER will bewas convertible into shares of common stock of Sharecare on July 31, 2018 at an initial conversion price of $249.87 per share, subject to customary adjustment for stock splits, stock dividends and other reorganizations of Sharecare.
The Purchase Agreement provided for post-Closingpost-closing adjustments to the ACER based on, (i) net working capital (which resulted in a $9.8 million increase in the face amount of the ACER due to a net working capital surplus), (ii) negative cash flows of the TPHS business during the year following the Closing in excess of $25.0 million (which could have resulted in a reduction in the face amount of the ACER up to a maximum reduction of $20.0 million, but did not result in any reduction), and (iii)among other things, any successful claims for indemnification by Sharecare (which may result in a reduction in the face amount of the ACER, unless the Company elects, in its sole discretion, to satisfy any such successful claims with cash payments), none of which such claims had been made as of March 31,June 30, 2018.
As of each of December 31, 2017 and March 31,June 30, 2018, we have recorded the $39.8 million of face value of the ACER at an estimated carrying value of $10.8 million, which is classified as an equity receivable included in other assets.
The following table presents financial results of the TPHS business included in "loss“loss from discontinued operations"operations” for the three and six months ended March 31, 2017.June 30, 2018 and 2017.
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Revenues |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Cost of services |
|
| 30 |
|
|
| 38 |
|
|
| 30 |
|
|
| 258 |
|
Selling, general & administrative expenses |
|
| 48 |
|
|
| 20 |
|
|
| 48 |
|
|
| 157 |
|
Distribution from joint venture |
|
| — |
|
|
| 98 |
|
|
| — |
|
|
| 98 |
|
Pretax income (loss) on discontinued operations |
| $ | (78 | ) |
| $ | 40 |
|
| $ | (78 | ) |
| $ | (317 | ) |
Pretax loss on release of cumulative translation adjustment (1) |
|
| — |
|
|
| (3,044 | ) |
|
| — |
|
|
| (3,044 | ) |
Pretax income (loss) on sale of TPHS business (2) |
|
| 1,304 |
|
|
| (134 | ) |
|
| 1,304 |
|
|
| (444 | ) |
Total pretax income (loss) on discontinued operations |
| $ | 1,226 |
|
| $ | (3,138 | ) |
| $ | 1,226 |
|
| $ | (3,805 | ) |
Income tax expense |
|
| 325 |
|
|
| 535 |
|
|
| 325 |
|
|
| 88 |
|
Income (loss) from discontinued operations, net of income tax |
| $ | 901 |
|
| $ | (3,673 | ) |
| $ | 901 |
|
| $ | (3,893 | ) |
(In thousands) | Three Months Ended March 31, 2017 | |||
Cost of services | $ | 220 | ||
Selling, general & administrative expenses | 137 | |||
Pretax loss on discontinued operations | $ | (357 | ) | |
Pretax loss on sale of TPHS business | (310 | ) | ||
Total pretax loss on discontinued operations | $ | (667 | ) | |
Income tax benefit | (447 | ) | ||
Loss from discontinued operations, net of income tax benefit | $ | (220 | ) |
(1) | During the second quarter of 2017, we substantially liquidated foreign entities that were part of our TPHS business, resulting in a release of the cumulative translation adjustment of $3.0 million into loss from discontinued operations. |
(2) | Includes $1.4 million received during the three months ended June 30, 2018 from a release of escrow funds related to the sale of MeYou Health, LLC in June 2016. |
5. | Share-Based Compensation |
We currently have three types of share-based awards outstandingshare-based awards outstanding to our employees and directors: stock options, restrictedstock options, restricted stock units, and market stock units.units. We believe that our share-based awards alignshare-based awards align the interestsinterests of our employeesour employees and directorsdirectors with those of our stockholders.
We recognize share-based compensation expense for the market stock units if the requisite service period is rendered, even if the market condition is never satisfied. WeFor the three and six months ended June 30, 2018, we recognized share-based compensation costs of $1.4$1.8 million for each ofand $3.3 million, respectively. For the three and six months ended March 31, 2018June 30, 2017, we recognized share-based compensation costs of $1.9 million and March 31, 2017.$3.4 million, respectively. We account for forfeitures as they occur.
11
A summary of our stock options as of March 31,June 30, 2018 and the changes during the threesix months then ended June 30, 2018 is presented below:
Options |
| Shares (In thousands) |
|
| Weighted Average Exercise Price Per Share |
|
| Weighted Average Remaining Contractual Term |
|
| Aggregate Intrinsic Value (In thousands) |
| ||||
Outstanding at January 1, 2018 |
|
| 507 |
|
| $ | 12.98 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 70 |
|
|
| 38.68 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (97 | ) |
|
| 11.70 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Expired |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018 |
|
| 480 |
|
| $ | 16.98 |
|
|
| 4.5 |
|
| $ | 8,988 |
|
Exercisable at June 30, 2018 |
|
| 410 |
|
| $ | 13.28 |
|
|
| 3.6 |
|
| $ | 8,979 |
|
Options | Shares (In thousands) | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (In thousands) | ||||||||||||
Outstanding at January 1, 2018 | 507 | $ | 12.98 | |||||||||||||
Granted | — | — | ||||||||||||||
Exercised | (57 | ) | 13.48 | |||||||||||||
Forfeited | — | — | ||||||||||||||
Expired | — | — | ||||||||||||||
Outstanding at March 31, 2018 | 450 | $ | 12.91 | 4.2 | $ | 12,018 | ||||||||||
Exercisable at March 31, 2018 | 429 | $ | 12.73 | 4.1 | $ | 11,539 |
The following table shows a summaryweighted-average grant-date fair value of our restricted stock and restricted stock units as of March 31, 2018, as well as activityoptions granted during the three months then ended:
Restricted Stock and Restricted Stock Units | ||||||||
Shares (In thousands) | Weighted- Average Grant Date Fair Value | |||||||
Nonvested at January 1, 2018 | 572 | $ | 17.60 | |||||
Granted | 3 | 39.71 | ||||||
Vested | (75 | ) | 11.07 | |||||
Forfeited | (19 | ) | 22.72 | |||||
Nonvested at March 31, 2018 | 481 | $ | 18.56 |
The followingfollowing table showsshows a summarysummary of our restricted stock units as of June 30, 2018, as well as activity during the six months ended June 30, 2018:
|
| Restricted Stock and Restricted Stock Units |
| |||||
|
| Shares (In thousands) |
|
| Weighted- Average Grant Date Fair Value |
| ||
Nonvested at January 1, 2018 |
|
| 572 |
|
| $ | 17.60 |
|
Granted |
|
| 66 |
|
|
| 38.56 |
|
Vested |
|
| (165 | ) |
|
| 18.27 |
|
Forfeited |
|
| (21 | ) |
|
| 23.04 |
|
Nonvested at June 30, 2018 |
|
| 452 |
|
| $ | 20.17 |
|
The following table shows a summary of our market stock units as of March 31,June 30, 2018,, a as well as activity during the threes well as activity during the six months then ended:ended June 30, 2018:
|
| Market Stock Units |
| |||||
|
| Shares (In thousands) |
|
| Weighted- Average Grant Date Fair Value |
| ||
Nonvested at January 1, 2018 |
|
| 373 |
|
| $ | 9.01 |
|
Granted |
|
| — |
|
|
| — |
|
Vested |
|
| (6 | ) |
|
| 6.48 |
|
Forfeited |
|
| (29 | ) |
|
| 17.44 |
|
Nonvested at June 30, 2018 |
|
| 338 |
|
| $ | 8.32 |
|
Market Stock Units | ||||||||||
Shares (In thousands) | Weighted- Average Grant Date Fair Value | |||||||||
Nonvested at January 1, 2018 | 373 | $ | 9.01 | |||||||
Granted | — | — | ||||||||
Vested | (6 | ) | 6.48 | |||||||
Forfeited | (29 | ) | 17.44 | |||||||
Nonvested at March 31, 2018 | 338 | $ | 8.32 |
12
For the three and six months ended March 31,June 30, 2018, we had an effective income tax rate from continuing operations of 25.1%.
At March 31,June 30, 2018, we had approximately $75.0$47.0 million of federal loss carryforwards, approximately $128.9$101.7 million of state loss carryforwards, and approximately $4.6 million of foreign tax credits.
We file income tax returns in the U.S. Federal jurisdiction and in various state and foreign jurisdictions. jurisdictions. Tax years remaining subject to examination in the U.S. Federal jurisdiction include 2014 to present.
7. | Debt |
The Company'sCompany's debt, net of unamortized deferred loan costs, consistedconsisted of the followingfollowing at March 31,June 30, 2018 and December 31,, 2017:
(In thousands) |
| June 30, 2018 |
|
| December 31, 2017 |
| ||
Cash Convertible Notes, net of unamortized discount |
| $ | 150,000 |
|
| $ | 145,861 |
|
Capital lease obligations and other |
|
| 7 |
|
|
| 549 |
|
|
|
| 150,007 |
|
|
| 146,410 |
|
Less: deferred loan costs |
|
| — |
|
|
| (451 | ) |
|
|
| 150,007 |
|
|
| 145,959 |
|
Less: current portion |
|
| (150,007 | ) |
|
| (145,959 | ) |
|
| $ | — |
|
| $ | — |
|
(In thousands) | March 31, 2018 | December 31, 2017 | ||||||
Cash Convertible Notes, net of unamortized discount | $ | 147,905 | $ | 145,861 | ||||
Capital lease obligations and other | 155 | 549 | ||||||
148,060 | 146,410 | |||||||
Less: deferred loan costs | (229 | ) | (451 | ) | ||||
147,831 | 145,959 | |||||||
Less: current portion | (147,831 | ) | (145,959 | ) | ||||
$ | — | $ | — |
Credit Facility
On June 8, 2012, we entered into the Fifth Amended and Restated Revolving Credit and Term Loan Agreement (as amended, the "Prior“Prior Credit Agreement"Agreement”). The Prior Credit Agreement provided us with a $125 million revolving credit facility that included a swingline sub facility of $20 million and a $75 million sub facility for letters of credit. The Prior Credit Agreement also provided a $200 million term loan facility and an uncommitted incremental accordion facility of $100 million. Borrowings under the Prior Credit Agreement generally bore interest at variable rates based on a margin or spread in excess of either (1) the one-month, two-month, three-month or six-month rate (or with the approval of affected lenders, nine-month or twelve-month rate) for Eurodollar deposits ("LIBOR"(“LIBOR”), which may not be less than zero), or (2) the greatest of (a) the SunTrust Bank prime lending rate, (b) the federal funds rate plus 0.50% and (c) one-month LIBOR plus 1.00% (the "Base Rate"“Base Rate”), as selected by the Company. The LIBOR margin varied between 1.75% and 3.00%, and the Base Rate margin varied between 0.75% and 2.00%, depending on our leverage ratio. The Prior Credit Agreement also provided for an annual fee ranging between 0.30% and 0.50% of the unused commitments under the revolving credit facility.
On April 21, 2017, we entered into a new Revolving Credit and Term Loan Agreement (the "Credit Agreement"“Credit Agreement”) with a group of lenders, which replaced the Prior Credit Agreement. The Credit Agreement provides us with (1) a $100 million revolving credit facility that includes a $25 million sublimit for swingline loans and a $75 million sublimit for letters of credit, (2) a $70 million term loan A facility, (3) a $150 million delayed draw term loan facility, and (4) an uncommitted incremental accordion facility of $100 million.
We used the proceeds of the term loan A and cash on hand to repay all of the outstanding indebtedness under the Prior Credit Agreement and to pay transaction costs and expenses. Proceeds of revolving loans and delayed draw term loans may be used to repay outstanding indebtedness (including amounts payable upon or in respect of any conversion of the Cash Convertible Notes discussed below and the repayment of any revolving loans borrowed for such purposes), to finance working capital needs, to finance acquisitions, to finance the repurchase of our common stock, to finance capital expenditures and for other general corporate purposes of the Company and its subsidiaries. DelayedAs further detailed below under “1.50% Cash Convertible Senior Notes Due 2018”, on July 2, 2018, we borrowed $100.0 million under the delayed draw term loansloan, which was used to repay the principal amount of the Cash Convertible Notes. No additional amounts may not be borrowed under the delayed draw term after July 2, 2018.
13
We are required to repay the term loan A and any outstanding revolving loans in full on April 21, 2022. The term loan A was repaid in full during 2017 and may not be re-borrowed. If we elect to borrow the delayed draw term loans, we will be We are required to repay the delayed draw term loansloan in quarterly principal installments calculated as follows: (1) for each of the first twelvesix quarters following the time of borrowing (beginning with the fourth quarter of 2018 and ending with the first quarter of 2020), 1.250% of the aggregate principal amount of the delayed draw term loansloan funded as of the last day of the immediately preceding quarter; and (2) for each of the remaining quarters prior to maturity on April 21, 2022, 1.875% of the aggregate principal amount of the delayed draw term loansloan funded as of the last day of the immediately preceding quarter. At maturity on April 21, 2022, the entire unpaid principal balancesbalance of the delayed draw term loans areloan is due and payable. As of March 31,June 30, 2018, we had not borrowed any amounts under the delayed draw term loan, and availability under the revolving credit facility totaled $92.6$93.7 million.
Borrowings under the Credit Agreement generally bear interest at variable rates based on a margin or spread in excess of either (1) the one-month, two-month, three-month or six-month LIBOR rate (or with the approval of affected lenders, the 12-month LIBOR rate)LIBOR), which may not be less than zero, or (2) the greatest of (a) the SunTrust Bank prime lending rate, (b) the federal funds rate plus 0.50%, and (c) one-month LIBOR plus 1.00% (the "Base Rate"“Base Rate”), as selected by the Company. The LIBOR margin varies between 1.50% and 2.75%, and the Base Rate margin varies between 0.50% and 1.75%, depending on our net leverage ratio. The Credit Agreement also provides for annual commitment fees ranging between 0.20% and 0.50% of the unused commitments under the revolving credit facility
The Credit Agreement contains financial covenants that require us to maintain, as defined, (1) specified maximum ratios or levels of (1) funded debt to EBITDA and (2) specified minimum ratios or levels of fixed charge coverage. The Credit Agreement also contains various other affirmative and negative covenants that are typical for financings of this type. Among other things, they limit repurchases of our common stock and the amount of dividends that we can pay to holders of our common stock.
1.50% Cash Convertible Senior Notes Due 2018
On July 16, 2013, we completed the issuance of $150.0 million aggregate principal amount of cash convertible senior notes due July 2018 (the "Cash“Cash Convertible Notes"Notes”), which bearbore interest at a rate of 1.50% per year, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2014. The Cash Convertible Notes will maturematured on July 1,2, 2018. All of the holders elected to convert their Cash Convertible Notes for settlement on July 2, 2018, unless earlierand none of the Cash Convertible Notes were repurchased or converted into cash in accordance with their terms prior to such date. WAccordingly, we havee classified the Cash Convertible Notes, net of the unamortized discount, and related deferred loan costs as a current liability at March 31,June 30, 2018 and at December 31, 2017.
The cash conversion feature of the Cash Convertible Notes iswas a derivative liability (the "Cash“Cash Conversion Derivative"Derivative”) that requiresrequired bifurcation from the Cash Convertible Notes in accordance with FASB ASC Topic 815, "Derivatives“Derivatives and Hedging" ("Hedging” (“ASC Topic 815"815”), and iswas carried at fair value. Due to the classification of the Cash Convertible Notes as a current liability at March 31,June 30, 2018 and December 31, 2017, the Cash Conversion Derivative iswas recorded in current liabilities at March 31,June 30, 2018 and December 31, 2017. The fair value of the Cash Conversion Derivative at the time of issuance of the Cash Convertible Notes was $36.8 million, which was recorded as a debt discount for purposes of accounting for the debt component of the Cash Convertible Notes.
The debt discount is beingwas amortized over the term of the Cash Convertible Notes using the effective interest method. For the three and six months ended March 31,June 30, 2018, and 2017, we recorded $2.0$2.1 million and $1.9$4.1 million, respectively, of interest expense related to the amortization of the debt discount based upon an effective interest rate of 5.7%. For the three and six months ended June 30, 2017, we recorded $2.0 million and $3.9 million, respectively, of interest expense related to the amortization of the debt discount based upon an effective interest rate of 5.7%. We also recognized interest expense of $0.6 million of interest expenseand $1.1 million for each of the three and six months ended March 31,June 30, 2018 and March 31, 2017, respectively, related to the contractual interest rate of 1.50% per year. The net carrying amount of the Cash Convertible Notes at March 31,June 30, 2018 and December 31, 2017 was $147.9$150.0 million and $145.9 million, respectively, net of the unamortized discount of $2.1 million$0 and $4.1 million, respectively.
14
In connection with the issuance of the Cash Convertible Notes, we entered into privately negotiated convertible note hedge transactions (the "Cash“Cash Convertible Notes Hedges"Hedges”), which arewere cash-settled and arewere intended to reduce our exposure to potential cash payments that we would be required to make if holders electelected to
On July 2, 2018, we repaid the $150.0 million aggregate principal amount of the Cash Convertible Notes using a combination of available cash and proceeds from borrowings under the delayed draw term loan facility of $100.0 million. In addition, on July 2, 2018 we settled the Cash Conversion Derivative of $141.2 million, which was fully funded by payments made by the counterparties for the settlement of the Cash Convertible Notes Hedges. Subsequent to July 2, 2018, the Credit Agreement provides capacity to borrow under a $100 million revolving credit facility that includes a $25 million sublimit for swingline loans and a $75 million sublimit for letters of credit.
In July 2013, we also sold separate privately negotiated warrants (the "Warrants"“Warrants”) initially relating, in the aggregate, to a notional number of shares of our common stock underlying the Cash Convertible Notes Hedges. The Warrants have an initial strike price of approximately $25.95 per share. The Warrants will be net share settled by our issuing a number of shares of our common stock per Warrant with a value corresponding to the excess of the market price per share of our common stock (as measured on each warrant exercise date under the terms of the Warrants) over the applicable strike price of the Warrants. The Warrants meet the definition of derivatives under the guidance in ASC Topic 815; however, because these instruments have been determined to be indexed to our own stock and meet the criteria for equity classification under ASC Topic 815, the Warrants have been accounted for as an adjustment to our additional paid-in-capital.
When the market value per share of our common stock exceeds the strike price of the Warrants, the Warrants have a dilutive effect on net income per share, and the "treasury stock"“treasury stock” method is used in calculating the dilutive effect on earnings per share. See Note 11 for additional information on such dilutive effect.
8. | Commitments and Contingencies |
On November 6, 2017, United Healthcare issued a press release announcing expansion of its fitness benefits ("(“United Press Release"Release”), and the market price of the Company's shares of common stock dropped on that same day. In connection with the United Press Release, two lawsuits have been filed against the Company as described below. We intend to vigorously defend ourselves against both complaints.
Weiner and Denham Lawsuits
On November 20, 2017, Eric Weiner, claiming to be a stockholder of the Company, filed a complaint on behalf of stockholders who purchased the Company's common stock between February 24, 2017 and November 3, 2017 ("(“Weiner Lawsuit"Lawsuit”). The Weiner Lawsuit was filed as a class action in the U.S. District Court for the Middle District of Tennessee, naming the Company, the Company's chief executive officer, chief financial officer and chief accounting officer as defendants. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”) and Rule 10b-5 promulgated under the Exchange Act in making false and misleading statements and omissions related to the United Press Release. The complaint seeks monetary damages on behalf of the purported class. On April 3, 2018, the Court entered an order appointing the Oklahoma Firefighters Pension and Retirement System as lead plaintiff, designated counsel for the lead plaintiff, and established certain deadlines for the case.
On January 26, 2018, Charles Denham, claiming to be a stockholder of the Company, filed a purported shareholder derivative action, on behalf of the Company, in the U.S. District Court for the Middle District of Tennessee, naming the Company as a nominal defendant and the Company's chief executive officer, chief financial officer, chief accounting officer, current directors of the Company and a former director of the Company, as defendants. The complaint asserts claims for breach of fiduciary duty, waste, and unjust enrichment, largely tracking allegations in the Weiner Lawsuit. The complaint further alleges that certain defendants engaged in insider trading. The plaintiff seeks monetary damages on behalf of the Company, certain corporate governance and internal procedural reforms, and other equitable relief.
15
Additionally, from time to time, we are subject to contractual disputes, claims and legal proceedings that arise from time to time in the ordinary course of our business. While we are unable to estimate a range of potential losses, we do not believe that any of the legal proceedings pending against us as of the date of this Report,report, some of which are expected to be covered by insurance policies, will have a material adverse effect on our financial statements. As these matters are subject to inherent uncertainties, our view of these matters may change in the future. We expense legal costs as incurred.
9. | Fair Value Measurements |
We account for certain assets and liabilities at fair value.value. Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market
Fair Value Hierarchy
The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market.market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety.entirety. These levels are:
Level 1: | Quoted prices in active markets for identical assets or liabilities; |
Level 2: | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and |
Level 3: | Unobservable inputs that are supported by little or no market activity and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. |
Assets and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.
The followingfollowing table presentspresents our assets and liabilities measuredliabilities measured at fair value on a recurring basisrecurring basis at MarchJune 30, 2018 and December 31, 2017:
(In thousands) |
| June 30, 2018 |
|
| December 31, 2017 |
| ||
Assets: |
|
|
|
|
|
|
|
|
Cash Convertible Notes Hedges |
| $ | 141,246 |
|
| $ | 134,079 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Cash Conversion Derivative |
| $ | 141,246 |
|
| $ | 134,079 |
|
As described in Note 7, the Cash Convertible Notes Hedges and Cash Conversion Derivative were settled upon their maturity on July 2, 2018. At June 30, 2018, andthe fair values of these instruments were measured using their actual values to be settled on July 2, 2018, which were considered Level 2 inputs. At December 31,, 2017:
(In thousands) March 31, 2018 | Level 3 | Gross Fair Value | Netting (1) | Net Fair Value | ||||||||||
Assets: | ||||||||||||||
Cash Convertible Notes Hedges | $ | 157,143 | $ | 157,143 | — | $ | 157,143 | |||||||
Liabilities: | ||||||||||||||
Cash Conversion Derivative | $ | 157,143 | $ | 157,143 | — | $ | 157,143 |
(In thousands) December 31, 2017 | Level 3 | Gross Fair Value | Netting (1) | Net Fair Value | ||||||||||
Assets: | ||||||||||||||
Cash Convertible Notes Hedges | $ | 134,079 | $ | 134,079 | — | $ | 134,079 | |||||||
Liabilities: | ||||||||||||||
Cash Conversion Derivative | $ | 134,079 | $ | 134,079 | — | $ | 134,079 |
16
The following followingtable presentspresents our financial instruments financial instrumentsmeasuredat fair valueon a recurring basis using unobservable inputs (Levelrecurring basis using unobservableinputs (Level 3):
(In thousands) |
| Balance at December 31, 2017 |
|
| Purchases of Level 3 Instruments |
|
| Settlements of Level 3 Instruments |
|
| Gains (Losses) Included in Earnings |
|
| Balance at June 30, 2018 |
| |||||
Cash Convertible Notes Hedges |
| $ | 134,079 |
|
| $ | — |
|
| $ | — |
|
| $ | 7,167 |
|
| $ | 141,246 |
|
Cash Conversion Derivative |
|
| (134,079 | ) |
|
| — |
|
|
| — |
|
|
| (7,167 | ) |
|
| (141,246 | ) |
(In thousands) | Balance at December 31, 2017 | Purchases of Level 3 Instruments | Settlements of Level 3 Instruments | Gains (Losses) Included in Earnings | Balance at March 31, 2018 | |||||||||||||||
Cash Convertible Notes Hedges | $ | 134,079 | $ | — | $ | — | $ | 23,064 | $ | 157,143 | ||||||||||
Cash Conversion Derivative | (134,079 | ) | — | — | (23,064 | ) | (157,143 | ) |
The gains and losses includedgains and losses included in earnings noted aboveearnings noted above represent the changechange in the fair value of these financial instrumentsfinancial instruments and are recorded each periodwere recorded each period in the consolidated statementsconsolidated statements of operations. The gains and losses on the Cash Convertible Notes Hedges and Cash Conversion Derivative are recordedoperations as selling, general and administrative expenses.
Fair Value of Other Financial Instruments
In addition to the Cash Convertible Notes HedgesNotes Hedges and the Cash Conversion DerivativeCash Conversion Derivative,th the estimated fair values of which are disclosed e estimated fair values of which are disclosed above, ,th the estimated fair e estimated fair value of each class of financial instrumentsfinancial instruments at March 31,June 30, 2018 waswas as follows:
Cash and cash equivalentscash equivalents – The carryingcarrying amount of $38.8$67.0 million approximatesapproximates fair value becausebecause of the shortshort maturity of those instruments (less thaninstruments (less than three months)months).
Debt – The estimatedestimated fair valuevalue of outstanding borrowings under theoutstanding borrowings under the Credit Agreement,Agreement, which includesincludes a revolving creditrevolving credit facility and a term loan facilityfacility (see Note 7), and the Cash Convertible Notes are determined based on the fair value hierarchy as discussed aboveCash Convertible Notes are determined based on the fair value hierarchy as discussed above.
The revolvingrevolving credit facility and the term loan facility areis not actively tradedtraded and therefore are classifiedtherefore is classified as a Level 2 valuationsvaluation based on the market for similar instruments.similar instruments. The estimated fair value is basedbased on the average of the pricesprices set by the issuing bankissuing bank given currentcurrent market conditions andconditions and is not necessarilynecessarily indicative of the amount we could realizecould realize in a currentcurrent market exchangeexchan.ge. There were no outstanding borrowings under the Credit Agreement at March 31, 2018.
Prior to their maturity on July 2, 2018, the Cash Convertible Notes arewere actively traded and therefore are classified as Level 1 valuations. The estimated fair value at March 31,June 30, 2018 was $316.2$291.2 million, which is based on the most recent trading priceactual settlement value of the Cash Convertible Notes as of March 31,on July 2, 2018, and the par value was $150.0 million. The carrying amount of the Cash Convertible Notes at March 31,June 30, 2018 was $147.9 million, which is net of the debt discount discussed in Note 7.
10. | Derivative Instruments and Hedging Activities |
We use derivative instruments to manage risks related to the Cash Convertible Notes.Notes, which matured and were repaid on July 2, 2018. We account for derivatives in accordance with ASC Topic 815, which establishes accounting and reporting standards requiring that certain derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in the derivative's fair value will be recognized currently in earnings unless specific hedge accounting criteria are met.met. We do not execute transactions or hold derivative financial instruments for trading or other purposes.
DerivativeInstrumentsNot Designated as Hedging Instruments
The Cash Conversion Derivative and Cash Convertible Notes Hedges were settled on July 2, 2018 in conjunction with the maturity of the Cash Convertible Notes Hedges do not qualify for hedge accounting treatment under Notes. They did not qualify for hedge accounting treatment under U.S.. GAA GAAPP and were measured at fair value, with gains and are measured at fair value, with gains and losses recognized immediatelylosses recognized immediately in the consolidatedconsolidated statements of operations. These derivative instruments not designated as hedging instruments did not have These derivative instruments not designated a material impact ons hedging instruments did not have a material impact on our consolidated statementsconsolidated statements of comprehensive income for the three and six months ended March 31,June 30, 2018 and 2017a.n
17
The Cash Conversion Derivative isConversion Derivative was accounted for as a derivativeliability and carried at fair value. In order to offset the risk associated withrisk associatedwith the Cash Conversion Derivative,Derivative, we entered intoCash Convertible Notes Hedges, which are cash-settledConvertible Notes Hedges, which were cash-settled and are intendedwere intended to reducereduce our exposureexposure to potential cash paymentspotential cash payments that we wouldwould be requiredrequired tomake if holders electelected to convert convertthe Cash ConvertibleCash Convertible Notes at a timewhen our stock price exceedsour stock price exceeds the conversion price.conversion price. The Cash ConvertibleCashConvertible Notes Hedges are accountedHedges were accounted for as a derivativederivative asset and carriedcarried at fair value.
The gains and losses resulting from a change in fair values of the Cash Conversion Derivative and the Cash Convertible Notes Hedges are reported in the consolidated statements of comprehensive income (loss).
(In thousands) |
| For the Three Months Ended |
|
| For the Six Months Ended |
|
|
| ||||||||||
|
| June 30, 2018 |
|
| June 30, 2017 |
|
| June 30, 2018 |
|
| June 30, 2017 |
|
| Statements of Operations Classification | ||||
Cash Convertible Notes Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) |
| $ | (15,897 | ) |
| $ | 78,431 |
|
| $ | 7,167 |
|
| $ | 112,515 |
|
| Selling, general and administrative expenses |
Cash Conversion Derivative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain |
| $ | 15,897 |
|
| $ | (78,431 | ) |
| $ | (7,167 | ) |
| $ | (112,515 | ) |
| Selling, general and administrative expenses |
Three Months Ended March 31, | |||||||||||
(In thousands) | 2018 | 2017 | Statements of Comprehensive Income (Loss) Classification | ||||||||
Cash Convertible Notes Hedges: | |||||||||||
Net unrealized gain | $ | 23,064 | $ | 34,084 | Selling, general and administrative expenses | ||||||
Cash Conversion Derivative: | |||||||||||
Net unrealized loss | $ | (23,064 | ) | $ | (34,084 | ) | Selling, general and administrative expenses | ||||
Financial Instruments
The estimatedestimated gross fair valuesfair values of derivative instrumentsderivative instruments at March 31,June 30, 2018 and December 31, 2017 excluding the impact of netting derivative assets and liabilities when were a legally enforceable master netting agreement exists, were as follows:s follows:
(In thousands) |
| June 30, 2018 |
|
| December 31, 2017 |
| ||
Assets: |
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
Cash Convertible Notes Hedges |
| $ | 141,246 |
|
| $ | 134,079 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
Cash conversion derivative |
| $ | 141,246 |
|
| $ | 134,079 |
|
(In thousands) | March 31, 2018 | December 31, 2017 | |||||||||||
Assets: | |||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||
Cash convertible notes hedges | $ | 157,143 | $ | 134,079 | |||||||||
Liabilities: | |||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||
Cash conversion derivative | $ | 157,143 | $ | 134,079 |
See Note 9 for more information on fair value measurements.
18
The followingfollowing is a reconciliationreconciliation of the numeratornumerator and denominator of basic and denominator of basic and diluted earnings (loss) perdiluted earnings (loss) per share forfor the three and six months ended March 31,June 30, 2018 and 2017:and 2017:
(In thousands except per share data) |
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations - numerator for earnings per share |
| $ | 22,683 |
|
| $ | 17,240 |
|
| $ | 44,019 |
|
| $ | 32,720 |
|
Income (loss) from discontinued operations - numerator for earnings (loss) per share |
|
| 901 |
|
|
| (3,673 | ) |
|
| 901 |
|
|
| (3,893 | ) |
Net income - numerator for earnings (loss) per share |
| $ | 23,584 |
|
| $ | 13,567 |
|
| $ | 44,920 |
|
| $ | 28,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used for basic income (loss) per share |
|
| 39,899 |
|
|
| 39,246 |
|
|
| 39,841 |
|
|
| 39,158 |
|
Effect of dilutive stock options and restricted stock units outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock options |
|
| 277 |
|
|
| 481 |
|
|
| 295 |
|
|
| 462 |
|
Restricted stock units |
|
| 332 |
|
|
| 602 |
|
|
| 368 |
|
|
| 606 |
|
Market stock units |
|
| 489 |
|
|
| 312 |
|
|
| 511 |
|
|
| 303 |
|
Warrants related to Cash Convertible Notes |
|
| 2,287 |
|
|
| 1,728 |
|
|
| 2,422 |
|
|
| 927 |
|
Shares used for diluted income (loss) per share |
|
| 43,284 |
|
|
| 42,369 |
|
|
| 43,437 |
|
|
| 41,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.57 |
|
| $ | 0.44 |
|
| $ | 1.10 |
|
| $ | 0.84 |
|
Discontinued operations |
| $ | 0.02 |
|
| $ | (0.09 | ) |
| $ | 0.02 |
|
| $ | (0.10 | ) |
Net income (loss) |
| $ | 0.59 |
|
| $ | 0.35 |
|
| $ | 1.13 |
|
| $ | 0.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
| $ | 0.52 |
|
| $ | 0.41 |
|
| $ | 1.01 |
|
| $ | 0.79 |
|
Discontinued operations |
| $ | 0.02 |
|
| $ | (0.09 | ) |
| $ | 0.02 |
|
| $ | (0.09 | ) |
Net income (loss) |
| $ | 0.54 |
|
| $ | 0.32 |
|
| $ | 1.03 |
|
| $ | 0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive securities outstanding not included in the computation of earnings (loss) per share because their effect is anti-dilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock options |
|
| 59 |
|
|
| — |
|
|
| 29 |
|
|
| 8 |
|
Restricted stock units |
|
| 42 |
|
|
| 3 |
|
|
| 28 |
|
|
| 10 |
|
(1) | Figures may not add due to rounding. |
(In thousands except per share data) | Three Months Ended March 31, | ||||||
2018 | 2017 | ||||||
Numerator: | |||||||
Net income from continuing operations - numerator for earnings per share | $ | 21,336 | $ | 15,481 | |||
Net loss from discontinued operations - numerator for loss per share | — | (220 | ) | ||||
Net income - numerator for earnings per share | $ | 21,336 | $ | 15,261 | |||
Denominator: | |||||||
Shares used for basic income (loss) per share | 39,783 | 39,069 | |||||
Effect of dilutive stock options and restricted stock units outstanding: | |||||||
Non-qualified stock options | 312 | 442 | |||||
Restricted stock units | 405 | 611 | |||||
Market stock units | 533 | 293 | |||||
Warrants related to Cash Convertible Notes | 2,556 | 126 | |||||
Shares used for diluted income (loss) per share | 43,589 | 40,541 | |||||
Earnings (loss) per share - basic: | |||||||
Continuing operations | $ | 0.54 | $ | 0.40 | |||
Discontinued operations | $ | — | $ | (0.01 | ) | ||
Net income | $ | 0.54 | $ | 0.39 | |||
Earnings (loss) per share - diluted: | |||||||
Continuing operations | $ | 0.49 | $ | 0.38 | |||
Discontinued operations | $ | — | $ | (0.01 | ) | ||
Net income (1) | $ | 0.49 | $ | 0.38 | |||
Dilutive securities outstanding not included in the computation of earnings (loss) per share because their effect is anti-dilutive: | |||||||
Non-qualified stock options | — | 16 | |||||
Restricted stock units | 14 | 18 | |||||
(1) Figures may not add due to rounding. |
Market stock units outstanding are considered contingently issuable shares, and certain of these stock units were excluded from the calculations of diluted earnings per share for all periods presented as the performance criteria had not been met as of the end of the reporting periods.
19
There were no changes in accumulated other comprehensive income (loss) ("OCI"(“OCI”) for the threesix months ended March 31,June 30, 2018. The following table summarizestables summarize the changes in accumulated OCI, net of tax, for the threesix months ended March 31, 2017.June 30, 2017:
(In thousands) |
| Foreign Currency Translation Adjustments |
| |
Accumulated OCI, net of tax, as of January 1, 2017 |
| $ | (4,502 | ) |
Other comprehensive income before reclassifications, net of tax of $225 |
|
| 1,458 |
|
Amounts reclassified from accumulated OCI, net of tax of $0 |
|
| 3,044 |
|
Accumulated OCI, net of tax, as of June 30, 2017 |
| $ | — |
|
Foreign Currency Translation Adjustments | |||||
(In thousands) | |||||
Accumulated OCI, net of tax, as of January 1, 2017 | $ | (4,502 | ) | ||
Other comprehensive income before reclassifications, net of tax of $36 | 111 | ||||
Accumulated OCI, net of tax, as of March 31, 2017 | $ | (4,391 | ) |
There were no reclassifications out of accumulated OCI for the threesix months ended March 31,June 30, 2018 and 2017.
Overview
Tivity Health, Inc. (the "Company"“Company”) was founded and incorporated in Delaware in 1981. Through our three programs, SilverSneakers senior fitness, Prime Fitness and WholeHealth Living, we are focused on advancedadvancing long-lasting health and vitality, especially in aging populations. The SilverSneakers senior fitness program is offered to members of Medicare Advantage and Medicare Supplement and Group Retiree plans. We also offer Prime Fitness, a fitness facility access program, through commercial health plans, employers, and employers.other sponsoring organizations. Our national network of fitness centers delivers both SilverSneakers and Prime Fitness. In addition, a small portion of our fitness center network is available for discounted access through our WholeHealth Living program. Our fitness networks encompass approximately 16,00016,000 participating locations and more than 1,0001,000 alternative locations that provide classes outside of traditional fitness centers.centers. Through our WholeHealth Living program, which we sell primarily to health plans, we offer a continuum of services related to complementary, alternative, and physical medicine. Our WholeHealth Living network includes relationships with approximately 80,000 complementary, alternative, and physical medicine practitioners to serve individuals through health plans and employers who seek health services such as chiropractic care, acupuncture, physical therapy, occupational therapy, speech therapy, and more.more
Effective July 31, 2016, we sold our total population health services ("TPHS"(“TPHS”) business to Sharecare, Inc. ("Sharecare"). Navvis Healthcare, LLC and MeYou Health, LLC, which were part of the TPHS business, were sold separately to other buyers in November 2015 and June 2016, respectively.Sharecare. Results of operations for the TPHS business have been classified as discontinued operations for all periods presented in the consolidated financial statements prior to January 1, 2018.
The Company is headquarteredheadquartered at 701 Cool Springs Boulevard, Franklin,Cool Springs Boulevard, Franklin, Tennessee 37067.
Forward-Looking Statements
This report contains forward-looking statements, which are based upon current expectations, involve a number of risks and uncertainties, and are subject to the "safe harbor"“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking1995. Forward-looking statements include all statements that are not historical statements of fact and those regarding the intent,, belief, or expectations of the Company,, including,, without limitation,, all statements regarding the Company's future earnings, revenues, and results of operations. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties,, and that actual results may vary from those in the forward-looking statements as a result of various factors,, including,, but not limited to:to:
our ability to develop and implement effective strategies;
the effectiveness of the reorganization of our business and our ability to realize the anticipated benefits;
our ability to sign and implement new contracts with new or existing customers;
our ability to accurately forecast the costs required to successfully implement new contracts;
ourabilityto renew and/or maintaincontracts withour customers underexistingterms or restructure thesecontracts on terms that would not havea materialnegative impacton our results of operations;
our ability to effectively compete againstother entities, whose financial, research, staff, and marketing resources may exceed ourresources;
our ability to accurately forecast ourrevenues, margins, earningsand net income, as well as any potential charges that we may incur asa result of changes in our business andleadership;
ourabilityto anticipatechangeandrespondto emergingtrendsfor healthcare andthe impact of the same ondemandfor ourservices;
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• |
the risks associated with deriving a significant concentration of our revenues from a limited number of customers; |
22ou
the impact of severe or adverse weather conditions on member participation in our programs;
theabilityofourcustomerstomaintainthenumberofcoveredlivesenrolledintheplansduringthetermsofouragreements;
ourabilitytoserviceourdebt,makeprincipalandinterestpaymentsasthosepaymentsbecomedue,andremainincompliance withourdebtcovenants;
therisksassociatedwithchangesinmacroecononmicconditions;
ourabilitytointegrateneworacquiredbusinesses,services,technologies, solutions, or productsintoourbusiness andtoaccuratelyforecasttherelatedcosts;
ourabilitytoanticipateandrespondtostrategicchanges,opportunities,andemergingtrendsinourindustryand/orbusinessand toaccuratelyforecasttherelatedimpactonourrevenuesandearnings;
theimpactofanyimpairmentofourgoodwill,intangibleassets,orotherlong-termassets;
ourabilitytodevelopnewproducts and services;
ourabilitytoobtainadequatefinancingtoprovidethecapitalthatmaybenecessarytosupportour current or futureoperations;
therisksassociatedwithdataprivacyorsecuritybreaches,computerhacking,networkpenetrationandotherillegalintrusionsof ourinformationsystemsorthoseofthird-partyvendorsorotherserviceproviders,whichmayresultinunauthorizedaccessby thirdpartiestocustomer,employeeorourinformationorpatienthealthinformationand may leadto a disruption in our business, costs to modify, enhance, or remediate our cybersecurity measures, enforcementactions,finesor litigationagainstus, or damage to our business reputation;
theimpactofanyneworproposedlegislation,regulationsandinterpretationsrelatingtoMedicare,MedicareAdvantage, or Medicare Supplement;
currentgeopoliticalturmoil,thecontinuingthreatofdomesticorinternationalterrorism,andthepotentialemergenceofahealth pandemicor an infectiousdiseaseoutbreak;
the impact of the Tax Act and any additional new or proposed tax legislation;
theimpactoflegalproceedingsinvolvingusand/oroursubsidiaries; and
otherrisksdetailedinour Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and our other filings with the Securities and Exchange Commission.
We undertakeundertake no obligationobligation to update oror revise any such forwardforward-llooking statements.
Customer Contracts
Our customer contracts generallycontracts generally have initial terms of approximately three years. Some of our contracts allow the customer to terminateyears. Some of our contracts allow the customer to terminate early and/or determine on an annual basis to which of their members they will offer our programs.programs
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Our "A-B-C-D"“A-B-C-D” strategy, which will leverage both our traditional physical footprint and developing digital platforms, is designed to (A) add new members in our three existing networks - SilverSneakers, Prime Fitness and WholeHealth Living, (B) build engagement and participation among our current eligible members, (C) collaborate with partners to add new products and services that will leverage the value of our brand, and (D) deepen relationships with our partners and their instructors within our national network. In addition to the A-B-C-D strategy, we are focused on supporting the ability of our health plan customers to meet the needs of their members as well as providing a valuable service to improve the health and well-being of the consumers we serve through our networks and with our programs.
We engage and support our members based on the needs and preferences of our customers. Within our fitness networks, we have approximately 16,000 participating locations and more than 1,000 alternative locations that provide classes outside of traditional fitness centers. More than 14,000 of these participating locations within the national network provide access to SilverSneakers members, and more than 10,000 of these locations offer access to Prime Fitness members.
Critical Accounting Policies
We describedescribe our significant accounting policiessignificant accounting policies in NoteNote 1 to the consolidated financial statementsconsolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. We prepareprepare the consolidated financial statements in conformity with U.S. consolidated financial statements in conformity with U.S. GAAP which requires, which requires us to make estimates and judgmentsmake estimates and judgments that affect the reported amountsreported amounts of assetsassets and liabilitiesliabilities and related disclosures atdisclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
We believe the date of the financial statements and the reported amounts of revenues and expenses during the reporting periodfollowi.n Actual results may differ from those estimates.
Revenue Recognition
Beginning in 2018, we account for revenue from contracts with customers in accordance with ASC Topic 606. The unit of account in ASC Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC Topic 606 requires that a contract'scontract’s transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when or as the performance obligation is satisfied.
We earn revenue from our three programs,programs, SilverSneakers seniorsenior fitness, Prime Fitness and WholeHealth Living. We provide the SilverSneakers senior fitness programSilverSneakers senior fitness program to membersmembers of Medicare Advantage, Medicare Supplement,Medicare Advantage and Group RetireeMedicare Supplement plans through our contracts with such plans. We offer Prime Fitness, a fitness facility access program, through contracts with employers, and with commercial health plans, and other sponsoring organizations that allow their members to individually purchase the program. We sell our WholeHealth Living program primarily to health plans.
The significant majority of our customer contracts contain one performance obligation - to stand ready to provide access to our network of fitness locations and fitness programming - which is satisfied over time as services are rendered each month over the contract term. There are generally no performance obligations that are unsatisfied at the end of a particular month. There was no material revenue recognized during the three and six months ended March 31,June 30, 2018 from performance obligations satisfied in a prior period.
Our fees are variable month to month and are generally billed per member per month ("PMPM"(“PMPM”), or billed based on a combination of PMPM and member visits to a network location. We bill PMPM fees by multiplying the contractually negotiated PMPM rate by the number of members eligible for or receiving our services during the month. We bill for member visits approximately one month in arrears once actual member visits are known. Payments from customers are typically due within 30 days of invoice date. When material, wewe capitalize costs to obtain contracts with customers and amortize them over the expected recovery period.
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Our customer contracts include variable consideration, which is allocated to each distinct month over the contract term based on eligible members and/or member visits each month. The allocated consideration corresponds directly with the value to our customers of our services completed for the month. Under the majority of our contracts, we recognize revenue each month using the practical expedient available under ASC 606-10-55-18, which provides that revenue is recognized in the amount for which we have the right to invoice.
Although we evaluate our financial performance and make resource allocation decisions based upon the results of our single operating and reportable segment, we believe the following information depicts how our revenues and cash flows are affected by economic factors. For the three and six months ended March 31,June 30, 2018, revenue from our SilverSneakers program, which is predominantly contracted with Medicare Advantage and Medicare Supplement plans, comprised approximately 81% of our consolidated revenues, while revenue from our Prime Fitness and WholeHealth Living programs comprised approximately 16% and 3%, respectively, of our consolidated revenues.
Sales and usage-based taxes are excluded from revenues.
Impairment of Intangible Assets and Goodwill
We review goodwillgoodwill for impairmentimpairment at the reportingreporting unit level (operating segment orlevel (operating segment or one level belowbelow an operating segment)operating segment) on an annual basis (duringannual basis (during the fourth quarterquarter of ourour fiscal year) or more frequentlyfrequently whenever events or circumstances indicate circumstances indicate that the carrying value may not be recoverablethe carrying value may not be recoverable.We have a single reporting unit.
As part of the impairment evaluation, we may elect to performperform a qualitative assessmentassessment to determine whether it is more likelylikely than not that the fair value of the reporting unit is less than its carrying value. If we elect not to perform a qualitative assessment or we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative review as described below.
During a quantitative review of goodwill, we estimate the fair value of the reporting unit based on our market capitalization and compare such fair value to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds its carrying amount, no impairment is indicated. If the fair value of the reporting unit is less than its carrying value. If we conclude during the qualitative assessment that this is the case or if we elect not to perform a qualitative assessment, we perform a quantitative review as described below.
Except for a tradename that has an indefiniteindefinite life and is not subject to amortizationamort,ization, we amortize identifiable intangible assetsintangible assets over their estimated usefuluseful lives usingusing the straight-line methodstra.ight-line method. We assessassess the potential impairmentimpairment of intangible assets subject to amortizationamortization whenever eventsevents or changes in circumstancescircumstances indicate that the carrying values may not be recoverable.recoverable. If we determine that the carrying value of other identifiable intangible assets may notnot be recoverable,, we calculate any impairmentimpairment using an estimate of the
Income Taxes
The objectivesobjectives of accountingaccounting for income taxes are to recognizerecognize the amount of taxes payable or refundable forrefundable for the current year and deferreddeferred tax liabilities and assetsassets for the future tax consequencesconsequences of events that havehave been recognizedrecognized in an entity's financial statements orentity's financial statements or tax returns. Accountingreturns. Accounting for income taxes requires significant judgmentincome taxes requires significant judgment in evaluating tax positionspositions and in determining incomedetermining income tax provisionsprovisio,n including determinations, including determination of deferreddeferred tax assets,, deferred taxtax liabilities,, and any valuation allowances thatvaluation allowances that might be required against deferredrequired against deferred tax assets.
Valuation allowancesallowances are established when necessaryestablished when necessary to reduce deferredreduce deferred tax assets to the amountsamounts that areare expected to be realizedrealized. When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset is made and reflected in income. This determination will be made by considering various factors, including the reversal and timing of existing temporary differences, tax planning strategies, and estimates of future taxable income exclusive of the reversal of temporary differences.
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We recognize the tax benefit from an uncertain tax position onlyif itis more likely than not that the tax position will be sustainedonexaminationbythetaxingauthorities, basedonthetechnicalmerits of theposition.Thetax benefitsrecognizedin the financial statements from suchaposition should bemeasured basedon the largest benefit that hasagreater than 50% likelihood of being realized upon ultimate settlement. When we determine U.S. GAAPalso providesguidance on derecognition ofincome tax assets andliabilities, classificationof current and deferred income tax assets and liabilities, accounting for interest and penalties associated withtax positions, andincometax disclosures.Judgmentisrequiredinassessingthefuturetax consequences ofeventsthat it is more likely than not that we will be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset is made and reflected in income. This determination will be made by considering various factors, including the reversal and timing of existing temporary differences, tax planning strategies,have and estimates of future taxable income exclusive of the reversal of temporary differences.
The Tax Act was signed into law on December 22, 2017 and includes a number of changes to existing U.S. tax laws that impact us, most notably, a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The Tax Act also provided for a one-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017. In addition, it provides for prospective changes beginning in 2018, including acceleration of tax revenue recognition and additional limitations on executive compensation and the deductibility of interest. We are currently evaluating the Tax Act with our professional advisers; we cannot predict at this time the full impact of the Tax Act on the Company in future periods.
Executive Overview of Results
The key financial resultsfinancial results for the three and six months ended March 31,June 30, 2018 are:are:
Revenues from continuing operations of:
o | $151.9 million for the |
o | $301.8 million for the |
Restructuring charges of $0.1 million for the six months ended June 30, 2018, compared to $0.7 million for the six months ended June 30, 2017;
Pre-tax income from continuing operations of:
o | $30.4 million for the three months ended June 30, 2018, up 13.3% from $26.8 million for the same period in 2017; and |
o | $58.8 million for the six months ended June 30, 2018, up 13.9% from $51.7 million for the same period in 2017. |
Earnings per diluted share from continuing operations of:
o | $0.52 for the three months ended June 30, 2018, up 26.8% from $0.41 for the same period in 2017; and |
o | $1.01 for the six months ended June 30, 2018, up 27.8% from |
Income (loss) from discontinued operations, net of income tax, of:
o | $0.9 million for the three months ended June 30, 2018 compared to |
o | $0.9 million for the six months ended June 30, 2018 compared to ($3.9) million for the same period in 2017. |
The followingfollowing table sets forthforth the componentscomponents of the consolidated statements of operations for the three and six months ended March 31,June 30, 2018 and 2017 expressedexpressed as a percentagepercentage of revenuesrevenues from continuing operations.
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Revenues |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of services (exclusive of depreciation and amortization included below) |
|
| 71.8 | % |
|
| 71.3 | % |
|
| 72.0 | % |
|
| 72.0 | % |
Selling, general and administrative expenses |
|
| 5.1 | % |
|
| 5.9 | % |
|
| 5.4 | % |
|
| 5.9 | % |
Depreciation and amortization |
|
| 0.7 | % |
|
| 0.6 | % |
|
| 0.7 | % |
|
| 0.6 | % |
Restructuring and related charges |
|
| 0.1 | % |
|
| (0.0 | )% |
|
| 0.0 | % |
|
| 0.2 | % |
Operating income (1) |
|
| 22.3 | % |
|
| 22.3 | % |
|
| 21.8 | % |
|
| 21.3 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 2.3 | % |
|
| 3.0 | % |
|
| 2.3 | % |
|
| 2.8 | % |
Income before income taxes (1) |
|
| 20.0 | % |
|
| 19.3 | % |
|
| 19.5 | % |
|
| 18.5 | % |
Income tax expense |
|
| 5.0 | % |
|
| 6.9 | % |
|
| 4.9 | % |
|
| 6.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (1) |
|
| 14.9 | % |
|
| 12.4 | % |
|
| 14.6 | % |
|
| 11.7 | % |
Income (loss) from discontinued operations, net of tax |
|
| 0.6 | % |
|
| (2.6 | )% |
|
| 0.3 | % |
|
| (1.4 | )% |
Net income (1) |
|
| 15.5 | % |
|
| 9.8 | % |
|
| 14.9 | % |
|
| 10.3 | % |
(1) | Figures may not add due to rounding. |
Re26v
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Revenues | 100.0 | % | 100.0 | % | ||||
Cost of services (exclusive of depreciation and amortization included below) | 72.2 | % | 72.6 | % | ||||
Selling, general and administrative expenses | 5.7 | % | 5.9 | % | ||||
Depreciation and amortization | 0.7 | % | 0.6 | % | ||||
Restructuring and related charges | 0.0 | % | 0.5 | % | ||||
Operating income (1) | 21.3 | % | 20.3 | % | ||||
Interest expense | 2.3 | % | 2.7 | % | ||||
Income before income taxes | 19.0 | % | 17.6 | % | ||||
Income tax expense | 4.8 | % | 6.6 | % | ||||
Net income from continuing operations | 14.2 | % | 11.0 | % | ||||
Loss from discontinued operations, net of income tax benefit | 0.0 | % | (0.2 | )% | ||||
Net income | 14.2 | % | 10.8 | % |
Revenues from continuing operations for the three and six months ended March 31,June 30, 2018 increased $9.0$13.0 million, and $21.9 million, respectively, or 6.4%9.3% and 7.8%, respectively, over the three months ended March 31,same periods in 2017,, primarily due to a net increase in the number of members either eligible or enrolled to participate in our fitness solutions.
Cost of Services
While cost of services from continuing operations (excluding depreciation and amortization) as a percentage of revenues did not materially change overall from the three months ended March 31,June 30, 2017 (72.6%(71.3%) to the three months ended March 31,June 30, 2018 (72.2%(71.8%).
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations as a percentage of revenues did not materially change from the three months ended March 31,June 30, 2017 (5.9%) to the three months ended March 31,June 30, 2018 (5.7%(5.1%) or from the six months ended June 30, 2017 (5.9%) to the six months ended June 30, 2018 (5.4%).
Depreciation and amortization expenseamortization expense from continuing operations did not materially change fromincreased $0.3 million and $0.7 million for the three and six months ended March 31, 2017 June 30, 2018, respectively, primarily due to the three months ended March 31, 2018.
Restructuring and Related Charges
In the third quarter of 2016, we began implementing a reorganization of our corporate support infrastructure, which was largely completed during the first quarter of 2017 (the "2016 Restructuring Plan"). WeDuring the six months ended June 30, 2017, we incurred approximately $0.7 million during the three months ended March 31, 2017 in restructuring charges from continuing operations, which consisted primarily of severance and other employee-related costs, related to the 2016 Restructuring Plan. There were no restructuring charges incurred during the first quarter of 2018.
Interest Expense
Interest expense from continuing operations decreased $0.4$0.6 million and $1.0 million from the three and six months ended March 31,June 30, 2017, respectively, compared to the same periodperiods in 2018,, primarily due to a lower average level of outstanding borrowings under our credit agreement during 2018 compared to 2017.
Income Tax Expense
See N
ote 6 of the notes to consolidated financial statements in this report for a discussion of income tax expense.Liquidity and Capital Resources
Overview
As of March 31,June 30, 2018, we had a working capital deficit of $114.2$85.0 million, includingwhich was negatively impacted by the classification of the Cash Convertible Notes, net of unamortized discount, of $147.9$150.0 million as a current liability at March 31,June 30, 2018 (as discussed in
On April 21, 2017, we entered into the Credit Agreement, which replaced the Prior Credit Agreement. The Credit Agreement provides us with (1) a $100 million revolving credit facility that includes a $25 million sublimit for swingline loans and a $75 million sublimit for letters of credit, (2) a $70 million term loan A facility, (3) a $150 million delayed draw term loan facility, and (4) an uncommitted incremental accordion facility of $100 million.
We used the proceeds of the term loan A and cash on hand to repay all of the outstanding indebtedness under the Prior Credit Agreement and to pay transaction costs and expenses. As of March 31,June 30, 2018, our availability under the Credit Agreement included $92.6$93.7 million under the revolving credit facility and $150$150.0 million under the delayed draw term facility (which can be borrowed at our option until July 2, 2018).loan. Proceeds of revolving loans and delayed draw term loans may be used to repay outstanding indebtedness (including amounts payable upon or in respect of any conversion of the Cash Convertible Notes discussed below and the repayment of any revolving loans borrowed for such purposes), to finance working capital needs, to finance acquisitions, to finance the repurchase of our common stock, to finance capital expenditures and for other general corporate purposes of the Company and its subsidiaries. DelayedOn July 2, 2018 we borrowed $100.0 million under the delayed draw term loansloan, which was used to repay the principal amount of the Cash Convertible Notes. No additional amounts may not be borrowed under the delayed draw term after July 2, 2018.
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We are required to repay the term loan A and any outstanding revolving loans in full on April 21, 2022. The term loan A was repaid in full during 2017 and may not be re-borrowed. If we elect to borrow the delayed draw term loans, we will beWe are required to repay the delayed draw term loansloan in quarterly principal installments calculated as follows: (1) for each of the first twelvesix quarters following the time of borrowing (beginning with the fourth quarter of 2018 and ending with the first quarter of 2020), 1.250% of the aggregate principal amount of the delayed draw term loansloan funded as of the last day of the immediately preceding quarter; and (2) for each of the remaining quarters prior to maturity on April 21, 2022, 1.875% of the aggregate principal amount of the delayed draw term loansloan funded as of the last day of the immediately preceding quarter. At maturity on April 21, 2022, the entire unpaid principal balancesbalance of the delayed draw term loans areloan is due and payable.
Cash Flows Provided by Operating Activities
Operating activities duringactivities during the threesix months ended March 31,June 30, 2018 provided cashprovided cash of $12.4$41.3 million compared to $40.1 million compared to $3.0 million duringduring the threesix months ended March 31, 2017.June 30, 2017. The increaseslight increase in operating cash flow resultedis primarily from the following:
Cash Flows Used in Investing Activities
Investing activities duringactivities during the threesix months ended March 31,June 30, 2018 used $1.9used $2.3 million in cashc,a comparedsh, compared to $1.2$2.2 million duringduring the threesix months ended March 31,June 30, 2017, wh,i whichch was primarily due to increased capitalcapital expenditures primarily related to digital applications and platforms.
Cash Flows Provided By/Used in Financing Activities
Financing activities during the six months ended June 30, 2018 used $0.5 million in cash, compared to $33.3 million during the threesix months ended March 31, 2018 used $0.1 million in cash, while financing activities during the three months ended March 31, 2017 used $3.0 million in cash.June 30, 2017. This change is primarilyprimarily due to higher net borrowings on debt during the first quarter of 2017, slightly offset by a decrease in the amount of cash received from exercises of stock options.
Credit Facility
For a detailed description of the Credit Agreement, refer to Note 7 of the notes to consolidated financial statements in this report. The Credit Agreement contains financial covenants that require us to maintain specified ratios or levels at March 31,June 30, 2018 of (1) a maximum total funded debt to EBITDA of 3.75 and (2) a minimum total fixed charge coverage of 1.50. We were in compliance with all of the financial covenant requirements of the Credit Agreement as of March 31, 2018.
Cathsh Co consecutive trading day period beginning on the 82nndv scheduled trading day immediately preceding the maturity date, which 82endrtible scheduled trading day was March 6, 2018). The indenture requires the Company to satisfy the entire settlement amount for any conversions (determined in accordance with the provisions of the indenture) in cash, and the notes are not convertible into the Company's common stock or any other securities under any circumstances.S
We anticipate that we will satisfysatisfied the Cash Convertible Notes upon their maturity on July 1,2, 2018 through a combination of available cash, payments made by the counterparties under the Cash Convertible Notes Hedges, and available credit under the Credit Agreement, as needed. Additionally, iffurther described in Note 7 of the notes to consolidated financial statements in this report.
For a detailed description of the related warrants, refer to Note 7 of the notes to consolidated financial statements included in this report. If the market price per share of our common stock exceeds the strike price of the Warrantswarrants on any warrant exercise date, we will be obligated to issue to the option counterparties a number of shares based on the amount by which the then-current market price per share of our common stock exceeds the then-effective strike price of each Warrant.warrant. We will not receive any additional proceeds if the Warrantswarrants are exercised.
General
We believe that cash flows from operating activities, our available cash, the Cash Convertible Notes Hedges, and our anticipated available credit under the Credit Agreement will continue to enable us to meet our contractual obligations and fund our current operations and debt payments for at least the next 12 months. We cannot assure you that we will be able to secure additional financing if needed and, if such funds are available, whether the terms or conditions will be acceptable to us.
28
If contract development accelerates or acquisition opportunities arise, we may need to issue additional debt or equity securities to provide the funding for these increased growth opportunities. We may also issue debt or equity securities in connection with future acquisitions or strategic alliances. We cannot assure you that we would be able to issue additional debt or equity securitiesin connection with futureacquisitionsor strategic alliances. We cannot assure you that we would be able to issue additional debt orequity securities onterms that would wouldbe acceptable acceptableto us.
Re29c
See Note 2 of the notes to consolidated financial statements included in this report for discussion of recent relevant accounting standards.
Item 33. Qua.n Quantitativetitative and Qualitative Disclosures About MarketQualitative Disclosures About Market Risk
We are subject to market risk related to interest rate changes, primarily as a result of the Credit Agreement. Borrowings under the Credit Agreement generally bear interest at variable rates based on a margin or spread in excess of either (1) the one-month, two-month, three-month or six-month LIBOR rate (or with the approval of affected lenders, the twelve-month LIBOR rate)LIBOR), which may not be less than zero, or (2) the greatest of (a) the SunTrust Bank prime lending rate, (b) the federal funds rate plus 0.50%, and (c) one-month LIBOR plus 1.00% (the "Base Rate"“Base Rate”), as selected by the Company. The LIBOR margin varies between 1.50% and 2.75%, and the Base Rate margin varies between 0.50% and 1.75%, depending on our net leverage ratio.
A one-point interest rate change in our floating rate debt would one-point interest rate change in our floating rate debt would not have resulted inhave resulted in a material change in interest expense for the change in interest expense for the three and six months ended March 31,June 30, 2018.
Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of March 31,June 30, 2018. Based on that evaluation, the principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective. They are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission'sCommission’s rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal controls over financial reporting during the three months ended March 31,June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
There have been no material developments with respect to any previously reported legal proceedings since the disclosures contained in the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Reference is made to the other information set forth in this report, you should carefully consider the risks and uncertainties previously reported under the caption "Part“Part I — Item 1A. Risk Factors"Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 for information concerning risk factors. In connection with the occurrencerepayment of which could materially and adversely affect our business, prospects, financial condition and operating results. Cash Convertible Notes, certain of the risk factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 have changed due to the elimination of risks related to the Cash Convertible Notes.
The risks previously reported and describedfollowing risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 are deleted in their entirety:
“The accounting for the Cash Convertible Notes and related cash convertible notes hedge transactions may result in this report are not the only risks facing our business. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business operations.
“We are subject to counterparty risk factors previously disclosedwith respect to the Cash Convertible Note Hedges.”
The following risk factor included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2017 has changed and is restated in its entirety below.
The performance of our business and the level of our indebtedness could prevent us from meeting the obligations under our credit agreement or have an adverse effect on our future financial condition, our ability to raise additional capital, or our ability to react to changes in the economy or our industry.
On April 21, 2017, we entered into a new Revolving Credit and Term Loan Agreement (the "Credit Agreement") with a group of lenders. As of June 30, 2018, we had no borrowings outstanding under the Credit Agreement. On July 2, 2018 we borrowed $100.0 million under the delayed draw term loan, which was used to repay the principal amount of the Cash Convertible Notes.
Our ability to service our indebtedness will depend on our ability to generate cash in the future. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable us to service our indebtedness or to fund other liquidity needs.
The Credit Agreement contains various financial covenants and limits repurchases of our common stock and the amount of dividends that we can pay to holders of our common stock. A breach of any of these covenants could result in a default under the Credit Agreement in which all amounts outstanding under the Credit Agreement may become immediately due and payable and all commitments under the Credit Agreement to extend further credit may be terminated.
Our indebtedness could adversely affect our future financial condition or our ability to react to changes in the economy or industry by, among other things:
increasing our vulnerability to a downturn in general economic conditions, loss of revenue and/or profit margins in our business, or to increases in interest rates, particularly with respect to the portion of our outstanding debt that is subject to variable interest rates;
potentially limiting our ability to obtain additional financing or to obtain such financing on favorable terms;
causing us to dedicate a portion of future cash flow from operations to service or pay down our debt, which reduces the cash available for other purposes, such as operations, capital expenditures, and future business opportunities; and
possibly limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less leveraged.
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(a) | Exhibits |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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 hereunto duly authorized.
Tivity Health, Inc. | ||||
(Registrant) | ||||
Date: | August 3, 2018 | By | /s/ Adam Holland | |
Chief Financial Officer | ||||
(Principal Financial Officer) |
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