UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended JuneSeptember 30, 2015
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Press Ganey Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 001-37398 | 20‑0259496 |
(State or other jurisdiction of | (Commission File Number) | (I.R.S. Employer |
| 401 Edgewater Place |
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| Suite 500 |
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| Wakefield, Massachusetts 01880 |
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| (Address of Principal Executive Offices) (Zip Code) |
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(781) 295‑5000
(Registrant’s telephone number, including area code)
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act.
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Large accelerated filer ☐ | Accelerated filer ☐ | Non‑accelerated filer ☒ | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act). ☐ Yes ☒ No
There were 52,604,84452,698,465 shares of common stock outstanding as of August 7,November 3, 2015.
PRESS GANEY HOLDINGS, INC.
September 30, 2015 |
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PART I—FINANCIAL INFORMATION |
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| Condensed Consolidated Balance Sheets as of |
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| 4 | |
| Unaudited Notes to Condensed Consolidated Financial Statements |
| 5 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART II—OTHER INFORMATION |
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PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Press Ganey Holdings, Inc.
Condensed Consolidated Balance Sheets
(Thousands of dollars, except share amounts)
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| June 30, |
| December 31, |
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| September 30, |
| December 31, |
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| 2015 |
| 2014 |
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| 2015 |
| 2014 |
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| (Unaudited) |
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| (Unaudited) |
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ASSETS |
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Current assets: |
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Cash |
| $ | 19,922 |
| $ | 6,962 |
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| $ | 23,793 |
| $ | 6,962 |
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Accounts receivable, net of allowances of $736 and $531 at June 30, 2015 and December 31, 2014, respectively |
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| 47,631 |
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| 44,444 |
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Accounts receivable, net of allowances of $749 and $531 at September 30, 2015 and December 31, 2014, respectively |
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| 50,381 |
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| 44,444 |
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Other receivables |
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| 2,324 |
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| 1,782 |
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| 2,661 |
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| 1,782 |
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Prepaid expenses and other assets |
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| 5,652 |
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| 2,741 |
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| 5,815 |
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| 2,741 |
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Income taxes receivable |
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| 6,053 |
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| 2,916 |
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| 5,445 |
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| 2,916 |
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Total current assets |
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| 81,582 |
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| 58,845 |
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| 88,095 |
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| 58,845 |
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Property and equipment, net |
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| 60,430 |
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| 59,610 |
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| 61,503 |
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| 59,610 |
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Deferred financing fees, net |
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| 1,036 |
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| 1,787 |
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| 945 |
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| 810 |
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Intangible assets, net |
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| 367,117 |
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| 375,391 |
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| 366,890 |
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| 375,391 |
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Goodwill |
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| 402,934 |
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| 402,934 |
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| 410,517 |
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| 402,934 |
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Total assets |
| $ | 913,099 |
| $ | 898,567 |
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| $ | 927,950 |
| $ | 897,590 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 4,279 |
| $ | 4,279 |
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| $ | 9,250 |
| $ | 4,279 |
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Current portion of capital lease obligations |
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| 3,661 |
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| 4,373 |
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| 4,187 |
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| 4,373 |
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Accounts payable |
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| 9,434 |
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| 13,232 |
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| 7,206 |
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| 13,232 |
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Accrued payroll and related liabilities |
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| 8,071 |
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| 11,704 |
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| 13,507 |
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| 11,704 |
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Accrued expenses and other liabilities |
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| 1,617 |
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| 1,581 |
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| 1,755 |
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| 1,581 |
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Deferred income taxes |
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| 1,661 |
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| 712 |
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| 1,099 |
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| 712 |
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Deferred revenue |
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| 36,797 |
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| 26,208 |
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| 37,146 |
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| 26,208 |
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Total current liabilities |
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| 65,520 |
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| 62,089 |
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| 74,150 |
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| 62,089 |
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Long-term debt, less current portion |
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| 178,916 |
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| 403,865 |
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| 173,418 |
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| 402,888 |
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Capital lease obligations, less current portion |
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| 7,123 |
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| 6,779 |
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| 6,373 |
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| 6,779 |
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Equity-based compensation liability |
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| — |
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| 19,423 |
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| — |
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| 19,423 |
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Deferred income taxes |
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| 119,905 |
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| 125,767 |
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| 119,505 |
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| 125,767 |
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Total liabilities |
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| 371,464 |
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| 617,923 |
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| 373,446 |
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| 616,946 |
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Commitments and contingencies |
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| — |
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| — |
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| — |
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| — |
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SHAREHOLDERS' EQUITY |
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Common stock, $0.01 par value; 350,000,000 and 44,800,000 shares authorized, and 52,558,546 and 43,313,200 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively |
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| 526 |
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| 433 |
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Common stock, $0.01 par value; 350,000,000 and 44,800,000 shares authorized, and 52,661,538 and 43,313,200 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively |
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| 527 |
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| 433 |
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Additional paid-in capital |
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| 588,819 |
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| 270,847 |
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| 594,271 |
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| 270,847 |
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Retained earnings (accumulated deficit) |
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| (47,710) |
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| 9,364 |
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| (40,294) |
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| 9,364 |
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Total shareholders' equity |
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| 541,635 |
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| 280,644 |
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| 554,504 |
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| 280,644 |
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Total liabilities and shareholders' equity |
| $ | 913,099 |
| $ | 898,567 |
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| $ | 927,950 |
| $ | 897,590 |
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The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
1
Press Ganey Holdings, Inc.
Condensed Consolidated Statements of Operations
(Thousands of dollars,In thousands, except per share amounts)
(Unaudited)
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| Three Months Ended |
| Six Months Ended |
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| Three Months Ended |
| Nine Months Ended |
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| June 30, |
| June 30, |
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| September 30, |
| September 30, |
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| 2015 |
| 2014 |
| 2015 |
| 2014 |
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| 2015 |
| 2014 |
| 2015 |
| 2014 |
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Revenue |
| $ | 77,458 |
| $ | 68,365 |
| $ | 152,349 |
| $ | 133,769 |
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| $ | 80,730 |
| $ | 71,713 |
| $ | 233,079 |
| $ | 205,482 |
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Operating expenses: |
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Cost of revenue, excluding depreciation and amortization |
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| 43,112 |
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| 28,964 |
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| 74,539 |
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| 56,724 |
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Cost of revenue |
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| 34,772 |
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| 30,618 |
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| 109,311 |
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| 87,342 |
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General and administrative |
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| 79,102 |
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| 17,791 |
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| 97,403 |
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| 34,388 |
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| 22,720 |
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| 17,918 |
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| 120,123 |
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| 52,306 |
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Depreciation and amortization |
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| 10,237 |
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| 8,478 |
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| 20,096 |
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| 17,046 |
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| 10,528 |
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| 8,779 |
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| 30,624 |
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| 25,825 |
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Loss (gain) on disposal of property and equipment |
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| 15 |
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| 485 |
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| (31) |
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| 1,091 |
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| 1 |
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| 504 |
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| (30) |
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| 1,595 |
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Total operating expenses |
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| 132,466 |
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| 55,718 |
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| 192,007 |
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| 109,249 |
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| 68,021 |
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| 57,819 |
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| 260,028 |
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| 167,068 |
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Income (loss) from operations |
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| (55,008) |
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| 12,647 |
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| (39,658) |
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| 24,520 |
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| 12,709 |
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| 13,894 |
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| (26,949) |
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| 38,414 |
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Other income (expense): |
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Interest expense, net |
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| (3,775) |
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| (4,966) |
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| (8,354) |
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| (10,430) |
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| (1,567) |
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| (4,706) |
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| (9,921) |
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| (15,136) |
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Extinguishment of debt |
|
| (638) |
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| (2,886) |
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| (638) |
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| (2,886) |
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| (1,112) |
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| (8) |
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| (1,750) |
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| (2,894) |
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Management fee of related party |
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| (267) |
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| (230) |
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| (553) |
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| (460) |
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| — |
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| (230) |
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| (553) |
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| (690) |
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Total other income (expense), net |
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| (4,680) |
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| (8,082) |
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| (9,545) |
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| (13,776) |
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| (2,679) |
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| (4,944) |
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| (12,224) |
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| (18,720) |
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Income (loss) before income taxes |
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| (59,688) |
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| 4,565 |
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| (49,203) |
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| 10,744 |
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| 10,030 |
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| 8,950 |
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| (39,173) |
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| 19,694 |
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Provision for (benefit from) income taxes |
|
| (5,871) |
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| 2,128 |
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| (1,360) |
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| 5,011 |
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Provision for income taxes |
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| 2,614 |
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| 4,174 |
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| 1,254 |
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| 9,185 |
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Net income (loss) |
| $ | (53,817) |
| $ | 2,437 |
| $ | (47,843) |
| $ | 5,733 |
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| $ | 7,416 |
| $ | 4,776 |
| $ | (40,427) |
| $ | 10,509 |
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Earnings (net loss) per share: |
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Basic |
| $ | (1.15) |
| $ | 0.06 |
| $ | (1.06) |
| $ | 0.13 |
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| $ | 0.14 |
| $ | 0.11 |
| $ | (0.85) |
| $ | 0.24 |
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Diluted |
| $ | (1.15) |
| $ | 0.06 |
| $ | (1.06) |
| $ | 0.13 |
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| $ | 0.14 |
| $ | 0.11 |
| $ | (0.85) |
| $ | 0.24 |
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Weighted average shares of common stock outstanding: |
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Basic |
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| 46,803 |
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| 43,313 |
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| 45,058 |
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| 43,313 |
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| 52,620 |
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| 43,313 |
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| 47,616 |
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| 43,313 |
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Diluted |
|
| 46,963 |
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| 43,313 |
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| 45,218 |
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| 43,313 |
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| 52,950 |
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| 43,313 |
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| 47,616 |
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| 43,313 |
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The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
2
Press Ganey Holdings, Inc.
Condensed Consolidated Statement of Shareholders’ Equity
(Thousands of dollars, except share amounts)
(Unaudited)
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| Retained |
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| Retained |
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| Additional |
| Earnings |
| Total |
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| Additional |
| Earnings |
| Total |
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| Common Stock |
| Paid-in |
| (Accumulated |
| Shareholders' |
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| Common Stock |
| Paid-in |
| (Accumulated |
| Shareholders' |
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| Shares |
| Amount |
| Capital |
| Deficit) |
| Equity |
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| Shares |
| Amount |
| Capital |
| Deficit) |
| Equity |
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Balance at January 1, 2015 |
| 43,313,200 |
| $ | 433 |
| $ | 270,847 |
| $ | 9,364 |
| $ | 280,644 |
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| 43,313,200 |
| $ | 433 |
| $ | 270,847 |
| $ | 9,364 |
| $ | 280,644 |
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Sales of equity interests |
| — |
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| — |
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| 100 |
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| — |
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| 100 |
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| — |
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| — |
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| 100 |
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| — |
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| 100 |
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Purchase of equity interests |
| — |
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| — |
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| — |
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| (731) |
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| (731) |
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| — |
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| — |
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| — |
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| (731) |
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| (731) |
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Equity-based compensation |
| — |
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| — |
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| 73,263 |
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| — |
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| 73,263 |
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| — |
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| — |
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| 79,735 |
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| — |
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| 79,735 |
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Impact of liquidation of PG Holdco, LLC |
| (1,028,122) |
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| (10) |
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| 10 |
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| — |
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| — |
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| (1,028,122) |
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| (10) |
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| 10 |
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| — |
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| — |
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Conversion of equity-based compensation liability |
| — |
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| — |
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| 21,008 |
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| — |
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| 21,008 |
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| — |
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| — |
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| 21,008 |
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| — |
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| 21,008 |
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Vesting of restricted stock |
| 48,901 |
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| 1 |
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| — |
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| — |
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| 1 |
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| 189,651 |
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| 2 |
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| (1) |
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| — |
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| 1 |
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Cancellation of shares |
| (7,365) |
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| — |
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| — |
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| — |
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| — |
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Taxes paid for net settlements of restricted stock vesting |
| (10,433) |
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| — |
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| (10,858) |
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| — |
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| (10,858) |
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| (40,826) |
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| — |
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| (11,763) |
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| — |
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| (11,763) |
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Distribution payments |
| — |
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| — |
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| — |
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| (8,500) |
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| (8,500) |
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| — |
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| — |
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| — |
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| (8,500) |
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| (8,500) |
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Initial public offering of common stock, net of issuance costs |
| 10,235,000 |
|
| 102 |
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| 234,449 |
|
| — |
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| 234,551 |
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| 10,235,000 |
|
| 102 |
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| 234,335 |
|
| — |
|
| 234,437 |
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Net loss |
| — |
|
| — |
|
| — |
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| (47,843) |
|
| (47,843) |
|
| — |
|
| — |
|
| — |
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| (40,427) |
|
| (40,427) |
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Balance at June 30, 2015 |
| 52,558,546 |
| $ | 526 |
| $ | 588,819 |
| $ | (47,710) |
| $ | 541,635 |
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Balance at September 30, 2015 |
| 52,661,538 |
| $ | 527 |
| $ | 594,271 |
| $ | (40,294) |
| $ | 554,504 |
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The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
3
Press Ganey Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Thousands of dollars)
(Unaudited)
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| Six Months Ended |
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| Nine Months Ended |
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|
| June 30, |
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| September 30, |
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| 2015 |
| 2014 |
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| 2015 |
| 2014 |
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Operating activities |
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Net income (loss) |
| $ | (47,843) |
| $ | 5,733 |
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| $ | (40,427) |
| $ | 10,509 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
|
| 20,096 |
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| 17,046 |
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| 30,624 |
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| 25,825 |
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Amortization of deferred financing costs and debt discount |
|
| 354 |
|
| 507 |
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| 511 |
|
| 694 |
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Equity‑based compensation |
|
| 74,997 |
|
| 4,907 |
| |||||||
Equity-based compensation |
|
| 81,466 |
|
| 7,565 |
| |||||||
Extinguishment of debt |
|
| 638 |
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| 2,886 |
|
|
| 1,750 |
|
| 2,894 |
|
Provision for doubtful accounts |
|
| 321 |
|
| 219 |
|
|
| 421 |
|
| 329 |
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Loss (gain) on disposal of property and equipment |
|
| (31) |
|
| 1,091 |
|
|
| (30) |
|
| 1,595 |
|
Deferred income taxes |
|
| (4,913) |
|
| (511) |
|
|
| (5,875) |
|
| (90) |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (3,508) |
|
| 897 |
|
|
| (5,020) |
|
| (3,400) |
|
Other receivables |
|
| (542) |
|
| (552) |
|
|
| 2 |
|
| (280) |
|
Prepaid expenses and other assets |
|
| (2,911) |
|
| (1,119) |
|
|
| (3,071) |
|
| (2,034) |
|
Accounts payable |
|
| (2,834) |
|
| (3,585) |
|
|
| (2,363) |
|
| (3,832) |
|
Accrued payroll and related liabilities |
|
| (3,781) |
|
| (2,659) |
|
|
| 1,497 |
|
| 565 |
|
Accrued expenses and other liabilities |
|
| 36 |
|
| 113 |
|
|
| 174 |
|
| 4 |
|
Deferred revenue |
|
| 10,589 |
|
| 3,514 |
|
|
| 9,185 |
|
| 1,675 |
|
Income taxes receivable |
|
| (3,137) |
|
| (1,356) |
|
|
| (2,529) |
|
| (2,485) |
|
Net cash provided by operating activities |
|
| 37,531 |
|
| 27,131 |
|
|
| 66,315 |
|
| 39,534 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired |
|
| — |
|
| (27,824) |
|
|
| (11,721) |
|
| (27,846) |
|
Purchases of property and equipment |
|
| (15,179) |
|
| (4,552) |
|
|
| (20,904) |
|
| (12,178) |
|
Net cash used in investing activities |
|
| (15,179) |
|
| (32,376) |
|
|
| (32,625) |
|
| (40,024) |
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of long‑term debt |
|
| — |
|
| 38,825 |
| |||||||
Payments on long‑term debt |
|
| (225,140) |
|
| (58,514) |
| |||||||
Proceeds from the issuance of long-term debt |
|
| 185,000 |
|
| 41,825 |
| |||||||
Payments on long-term debt |
|
| (408,456) |
|
| (63,592) |
| |||||||
Deferred financing payments |
|
| (50) |
|
| (500) |
|
|
| (3,441) |
|
| (508) |
|
Payments on capital lease obligations |
|
| (2,190) |
|
| (812) |
|
|
| (3,505) |
|
| (1,328) |
|
Proceeds from sale of equity interests |
|
| 100 |
|
| 250 |
|
|
| 100 |
|
| 250 |
|
Purchases of equity interests |
|
| (731) |
|
| (2,745) |
|
|
| (731) |
|
| (3,543) |
|
Taxes paid for net settlements of restricted stock vesting |
|
| (10,858) |
|
| — |
|
|
| (11,763) |
|
| — |
|
Distribution payments |
|
| (8,500) |
|
| — |
|
|
| (8,500) |
|
| — |
|
Proceeds from the issuance of common stock in initial public offering, net of fees |
|
| 237,977 |
|
| — |
|
|
| 234,437 |
|
| — |
|
Net cash used in financing activities |
|
| (9,392) |
|
| (23,496) |
|
|
| (16,859) |
|
| (26,896) |
|
Net increase (decrease) in cash |
|
| 12,960 |
|
| (28,741) |
|
|
| 16,831 |
|
| (27,386) |
|
Cash at beginning of period |
|
| 6,962 |
|
| 32,635 |
|
|
| 6,962 |
|
| 32,635 |
|
Cash at end of period |
| $ | 19,922 |
| $ | 3,894 |
|
| $ | 23,793 |
| $ | 5,249 |
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
| $ | 9,420 |
| $ | 14,377 |
| |||||||
Cash paid during the period for income taxes |
|
| 9,578 |
|
| 11,321 |
| |||||||
Disposal of property and equipment acquired through capital leases |
| $ | 283 |
| $ | — |
|
|
| 333 |
|
| — |
|
Property and equipment acquired through capital leases |
|
| 2,156 |
|
| — |
|
|
| 3,246 |
|
| 367 |
|
Purchase of property and equipment in accounts payable |
|
| 2,069 |
|
| 983 |
|
|
| 2,712 |
|
| 1,759 |
|
IPO related costs in accounts payable |
|
| 3,426 |
|
| — |
|
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
4
Press Ganey Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(All tables in thousands, except per share amounts)
(Unaudited)
1. Basis of Presentation of Interim Financial Information
Press Ganey Holdings, Inc. (the “Company”) is a leading provider of performance measurement, analysis, benchmarking, and quality improvement services primarily to the United States healthcare industry. The accompanying unaudited condensed consolidated financial statements include the financial statements of Press Ganey Holdings, Inc. and its wholly owned subsidiary, Press Ganey Associates (“Associates”), and Associates’ wholly owned subsidiaries, PatientImpact LLC; Data Advantage LLC; Center for Performance Services, Inc.; Morehead Associates, Inc.; On The Spot Systems, Inc.; Dynamic Clinical Systems, Inc.; and Healthcare Performance Improvement, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. Prior to the initial public offering (discussed below), the Company was a wholly owned subsidiary of PG Holdco, LLC (the “Company”, “we”, “us” or “our”“Parent”).
Effective May 8, 2015, the name of the Company was changed from PGA Holdings, Inc. to Press Ganey Holdings, Inc.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal and recurring accruals necessary to present fairly the financial statements in accordance with GAAP. Operating results for the three and sixnine months ended JuneSeptember 30, 2015 and 2014 are not necessarily indicative of results to be expected for any other interim period or for the full year. The preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principlesGAAP requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could materially differ from those estimates.
Description of Business
Press Ganey Holdings, Inc. is a leading provider of performance measurement, analysis, benchmarking, and quality improvement services primarily to the United States healthcare industry. The consolidated financial statements include the financial statements of Press Ganey Holdings, Inc. and its wholly owned subsidiary, Press Ganey Associates (“Associates”), and Associates’ wholly owned subsidiaries, PatientImpact LLC; Data Advantage LLC; Center for Performance Services, Inc.; Morehead Associates, Inc.; On The Spot Systems, Inc.; and Dynamic Clinical Systems, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Prior to the initial public offering (discussed below), the Company was a wholly owned subsidiary of PG Holdco, LLC (the “Parent”).
Effective May 8, 2015, the name of the Company was changed from PGA Holdings, Inc. to Press Ganey Holdings, Inc.
Initial Public Offering
In May 2015, the Company completed its initial public offering (the “IPO”) of 8,900,000 shares of common stock and, upon the underwriters’ exercise of their option to purchase additional shares, issued an additional 1,335,000 shares for a total of 10,235,000 shares issued at an offering price of $25.00 per share. Proceeds from the IPO were approximately $234.6$234.4 million, net of underwriting discounts and commissions and offering-related transaction costs incurred, which included $3.4 million of offering-related transaction costs incurred but not yet paid as of June 30, 2015.incurred. In connection with the IPO: (i) PG Holdco, LLCthe Parent was liquidated and its sole asset, the shares of the Company’s common stock, was distributed to the equity holders based on their relative rights under the limited liability company agreement, (ii) the Company recognized $70.4 million of equity-based compensation expense for the modification of certain units of PG Holdco, LLC,the Parent, (iii) the Company paid a one-time transaction advisory fee of $8.5 million to Vestar, and (iv) the Company recognized a loss on extinguishment of debt of $638 thousand$638,000 related to the write-off of deferred financing fees, loss on original issue discount and lender fees as a result of the partial repayment of its term loan facility with the net proceeds of the IPO.
Stock Split
On May 8, 2015, the Company’s common stock was split at a 2,800-for-one ratio. The authorized shares were increased to 350.0 million. Accordingly, all references to numbers of common shares and per-share data in the accompanying unaudited condensed consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis.
5
Preferred Stock
On May 27, 2015, the Company amended and restated its certificate of incorporation to, among other things, authorize 50.0 million shares of preferred stock with a par value of $0.01.
2. Summary of Significant Accounting Policies
A complete listing of the Company’s significant accounting policies is discussed in Note 2 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in the Company’s prospectus filed with the SEC on May 22, 2015 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014‑09, “Revenue from Contracts with Customers (Topic 606)”. This ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. On July 9,In August 2015, the FASB deferred the effective date by one year to December 15, 2017 for annual and interim reporting periods beginning after that date.December 15, 2017. The FASB also proposedis permitting early adoption of the standard, but not beforeuntil annual and interim reporting periods beginning after December 15, 2016, the original effective date of December 15, 2016.date. An entity may choose to adopt this ASU either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the standard. The Company is currently in the process of evaluating the impact that this new guidance will have on its consolidated financial statements and ourits method of adoption.
In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. In addition, this update changes the accounting for software licenses to be consistent with other licenses of intangible assets. This standard is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. An entity may choose to adopt this ASU either retrospectively or prospectively to all arrangements entered into or materially modified after the effective date. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements and its method of adoption.
In April 2015, the FASB issued ASU 2015‑03, “Simplifying the Presentation of Debt Issuance Costs”. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This standard is effective for annual and interim periods beginning after December 15, 2015, butwith early adoption permitted. The Company adopted ASU 2015-03 during the three months ended September 30, 2015 and prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2014, debt issuance costs of $977,000 were reclassified from deferred financing fees, net to long-term debt, less current portion in the Condensed Consolidated Balance Sheet. The adoption of ASU 2015-03 did not impact the Company’s consolidated financial position, results of operations or cash flows.
6
In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. This ASU added an SEC paragraph addressing the presentation of debt issuance costs related to line-of-credit arrangements since ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff does not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted ASU 2015-15 during the three months ended September 30, 2015. There were no adjustments to the presentation of debt issuance costs relating to the line-of-credit arrangement and no impact on the Company’s financial position, results of operations or cash flows upon adoption of the new standard.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”. This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. This standard is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We areThe Company is currently in the process of evaluating the impact the adoption of this standard will have on our consolidated financial statements.
3. Property and Equipment
Property and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2015 |
| 2014 |
|
| 2015 |
| 2014 |
| ||||
Furniture, fixtures, and leasehold improvements |
| $ | 9,016 |
| $ | 6,249 |
|
| $ | 9,431 |
| $ | 6,249 |
|
Office equipment |
|
| 18,092 |
|
| 15,214 |
|
|
| 19,398 |
|
| 15,214 |
|
Office equipment held under capital lease |
|
| 19,715 |
|
| 18,531 |
|
|
| 20,806 |
|
| 18,531 |
|
Computer equipment and software |
|
| 62,734 |
|
| 57,389 |
|
|
| 69,433 |
|
| 57,389 |
|
Construction in progress |
|
| 16,055 |
|
| 21,628 |
|
|
| 15,193 |
|
| 21,628 |
|
|
|
| 125,612 |
|
| 119,011 |
|
|
| 134,261 |
|
| 119,011 |
|
Accumulated amortization on office equipment held under capital leases |
|
| (7,826) |
|
| (6,244) |
| |||||||
Accumulated amortization of office equipment held under capital leases |
|
| (9,029) |
|
| (6,244) |
| |||||||
Accumulated depreciation |
|
| (57,356) |
|
| (53,157) |
|
|
| (63,729) |
|
| (53,157) |
|
|
| $ | 60,430 |
| $ | 59,610 |
|
| $ | 61,503 |
| $ | 59,610 |
|
Depreciation and amortization of property and equipment was $6.1$6.4 million and $4.6 million for the three months ended JuneSeptember 30, 2015 and 2014, respectively, and $11.8$18.2 million and $9.4$14.0 million for the sixnine months ended JuneSeptember 30, 2015 and 2014, respectively.
6
4. Fair Value Measurements
The Company measures and reports its financial assets and liabilities on the basis of fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
A three‑level hierarchy for disclosure has been established to show the extent and level of judgment used to estimate fair value measurements, as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
7
Level 2: Significant other observable inputs (quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability).
Level 3: Significant unobservable inputs for the asset or liability. These values are generally determined using pricing models which utilize management estimates of market participant assumptions.
Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost‑effective to obtain. The Company had no Level 3 assets or liabilities at JuneSeptember 30, 2015 and December 31, 2014.2014, except for the Level 3 measurements of the acquired net assets of the business acquired (Note 5).
Other Fair Value MeasuresFinancial Instruments
The recorded valuevalues of accounts receivable, other receivables, accounts payable, accrued expenses, and other liabilities approximatesapproximate fair value because of the short maturity of these financial instruments. The recorded values of the variable rate Term Loan and First Lien and Second Lien Term LoansLoan approximate fair value because the interest rates fluctuate with market rates.
5. Business Combination
On September 1, 2015, the Company acquired all of the membership interests of Healthcare Performance Improvement, LLC (“HPI”) in exchange for cash of $11.7 million, net of cash acquired. HPI provides patient safety and reliability consulting and coaching services. The acquisition brings the critical dimension of safety to the Company’s ability to help its clients reduce patient suffering.
The acquisition was accounted for under the purchase method of accounting and the total purchase price was preliminarily allocated to the net tangible and identifiable intangible assets based on their estimated fair values (based on Level 3 measurements) as of September 1, 2015. The excess purchase price over the net tangible and intangible assets was recorded to goodwill. The goodwill balance is primarily attributed to assembled workforce and is expected to be deductible for tax purposes.
The estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed. The Company believes that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is waiting for additional information necessary to finalize those fair values. Therefore, the provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.
The following table summarizes the preliminary allocation of the fair value of the acquisition:
Current assets | $ | 2,222 | ||
Property and equipment | 23 | |||
Goodwill | 7,583 | |||
Intangible assets: | ||||
Trade name | 280 | |||
Customer relationships | 2,480 | |||
Other | 1,130 | |||
Total assets acquired | 13,718 | |||
Liabilities assumed: | ||||
Deferred revenue | (1,753) | |||
Other current liabilities | (244) | |||
Net assets acquired | $ | 11,721 |
8
Transaction expenses of $277,000 relating to the purchase are included in general and administrative expenses for both the three and nine months ended September 30, 2015.
6. Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill and intangible assets acquired in connection with business combinations accounted for as a purchase and determined to have indefinite lives are not amortized, but are instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and reviewed for impairment when impairment indicators are present. The Company believes that no such impairment indicators existed during the three and sixnine months ended JuneSeptember 30, 2015 and 2014.
7
Intangible Assets
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| June 30, 2015 |
| December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2015 |
| December 31, 2014 |
| ||||||||||||||
|
| Gross |
|
|
|
| Net |
| Gross |
|
|
|
| Net |
|
| Gross |
|
|
|
| Net |
| Gross |
|
|
|
| Net |
| ||||||||
|
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying |
|
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying |
| ||||||||||||
|
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
|
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
| ||||||||||||
Trade name (indefinite life) |
| $ | 200,000 |
| $ | — |
| $ | 200,000 |
| $ | 200,000 |
| $ | — |
| $ | 200,000 |
|
| $ | 200,000 |
| $ | — |
| $ | 200,000 |
| $ | 200,000 |
| $ | — |
| $ | 200,000 |
|
Trade names (finite life) |
|
| 2,130 |
|
| (1,357) |
|
| 773 |
|
| 2,130 |
|
| (1,167) |
|
| 963 |
|
|
| 2,410 |
|
| (1,432) |
|
| 978 |
|
| 2,130 |
|
| (1,167) |
|
| 963 |
|
Customer relationships |
|
| 235,300 |
|
| (88,396) |
|
| 146,904 |
|
| 235,300 |
|
| (82,010) |
|
| 153,290 |
|
|
| 237,780 |
|
| (91,588) |
|
| 146,192 |
|
| 235,300 |
|
| (82,010) |
|
| 153,290 |
|
Proprietary technology |
|
| 32,240 |
|
| (13,247) |
|
| 18,993 |
|
| 32,240 |
|
| (11,645) |
|
| 20,595 |
|
|
| 32,240 |
|
| (14,048) |
|
| 18,192 |
|
| 32,240 |
|
| (11,645) |
|
| 20,595 |
|
Other |
|
| 2,090 |
|
| (1,643) |
|
| 447 |
|
| 2,090 |
|
| (1,547) |
|
| 543 |
|
|
| 3,220 |
|
| (1,692) |
|
| 1,528 |
|
| 2,090 |
|
| (1,547) |
|
| 543 |
|
|
| $ | 471,760 |
| $ | (104,643) |
| $ | 367,117 |
| $ | 471,760 |
| $ | (96,369) |
| $ | 375,391 |
|
| $ | 475,650 |
| $ | (108,760) |
| $ | 366,890 |
| $ | 471,760 |
| $ | (96,369) |
| $ | 375,391 |
|
Intangible asset amortization expense for the three months ended JuneSeptember 30, 2015 and 2014 was $4.1 million and $3.9$4.2 million, respectively. Intangible asset amortization expense for the sixnine months ended JuneSeptember 30, 2015 and 2014 was $8.3$12.4 million and $7.6$11.8 million, respectively. The Company cannot reliably determine the pattern for which it consumes the benefit of its customer relationship intangible assets. As such, the Company amortizes its customer relationship intangible assets using the straight‑line method over the estimated lives based upon the Company’s historical customer retention and recurring revenue base.
The remaining estimated intangible asset amortization expense is $8.2$4.2 million in 2015, $16.1$16.5 million in 2016, $15.2$15.5 million in 2017, $13.6$14.0 million in 2018, $13.0$13.4 million in 2019 and $101.0$103.3 million thereafter. These amounts are based upon intangible assets recorded as of JuneSeptember 30, 2015 and actual amortization expense could differ from these estimates as a result of future acquisitions and other factors.
6.
9
7. Revolving Line of Credit and Long‑Term Debt
As of JuneSeptember 30, 2015 and December 31, 2014, the Company’s long‑term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2015 |
| 2014 |
|
| 2015 |
| 2014 |
| ||||
Term Loan |
| $ | 185,000 |
| $ | — |
| |||||||
First Lien Term Loan |
| $ | 183,316 |
| $ | 408,456 |
|
|
| — |
|
| 408,456 |
|
Original issue discount, net of accumulated amortization |
|
| (121) |
|
| (312) |
| |||||||
Unamortized deferred financing fees |
|
| (2,332) |
|
| (977) |
| |||||||
Unamortized original issue discount |
|
| — |
|
| (312) |
| |||||||
|
|
| 183,195 |
|
| 408,144 |
|
|
| 182,668 |
|
| 407,167 |
|
Less current portion |
|
| (4,279) |
|
| (4,279) |
|
|
| (9,250) |
|
| (4,279) |
|
Long-term debt |
| $ | 178,916 |
| $ | 403,865 |
|
| $ | 173,418 |
| $ | 402,888 |
|
Unamortized deferred financing fees related to the Company’s Revolver and Revolving Credit Facility (as defined below) were $945,000 and $810,000 at September 30, 2015 and December 31, 2014, respectively, and are classified as deferred financing fees, net in the condensed consolidated balance sheets.
2015 Credit Agreement
On July 31, 2015, the Company entered into a new credit agreement (“2015 Credit Agreement”). The 2015 Credit Agreement consists of a five-year $185.0 million term loan (“Term Loan”) and a five-year $75.0 million revolving credit facility (“Revolver”). The Company used the proceeds from the Term Loan to repay the outstanding First Lien Term Loan (as defined below) balance of $183.2 million, which resulted in a loss on extinguishment of debt of $1.1 million, consisting of unamortized deferred financing fees of $995,000 and a loss on original issue discount of $117,000.
At the discretion of the Company, interest accrues on outstanding borrowings under the 2015 Credit Agreement at either the London Interbank Offered Rate (“LIBOR”) plus an applicable margin, currently 1.75%, or the adjusted base rate (“ABR”) plus an applicable margin, currently 0.75%. The applicable margins for both the LIBOR and ABR are variable based upon stipulated ranges of the secured net leverage ratio, as defined in the agreement. The Company is required to repay the outstanding principal amount of the Term Loan in equal quarterly amounts of $2.3 million, commencing on December 31, 2015. The remaining Term Loan balance and any outstanding balances on the Revolver will be due upon maturity on July 31, 2020. The Term Loan and Revolver are secured by substantially all of the assets of the Company.
There were no borrowings outstanding on the Revolver at September 30, 2015; however, the Company had a letter of credit outstanding of approximately $65,000 at September 30, 2015, which reduced the borrowing capacity of the Revolver to $74.9 million. The Company is charged a loan commitment fee, currently 0.375%, for unused amounts on the Revolver.
The 2015 Credit Agreement contains certain restrictive and financial covenants which the Company must comply with on a quarterly basis, including a maximum secured net leverage ratio, as defined in the agreement. The Company is also limited in its ability to incur additional indebtedness or liens; pay dividends or make certain other restricted payments, enter into certain transactions with affiliates, merge or consolidate with another entity; or sell, assign, transfer, convey, or otherwise dispose of all or substantially all of its assets. The Company was in compliance with these restrictive and financial covenants as of September 30, 2015.
First and Second Lien Credit Agreements
On April 20, 2012,Prior to the 2015 Credit Agreement, the Company entered intowas party to a First Lien Credit Agreement (the “First Lien Agreement”) and a Second Lien Credit Agreement (the “Second Lien Agreement”). The First Lien Agreement consistsconsisted of a six-year $30 million revolving credit facility (the “Revolving Credit Facility”) and a six‑year, $345 million term loan facility (the “First Lien
10
Term Loan”), which was issued at an original issue discount of $3.5 million that is being recognized in interest expense over the term of the debt using the effective interest method.million. The Second Lien Agreement consisted of a six‑and‑a‑half‑year, $95 million term loan facility (the “Second Lien Term Loan”), which was issued at an original issue discount of $950 thousand that was recognized in interest expense over the term of the debt using the effective interest method. The First Lien Agreement and the Second Lien Agreement are both secured by substantially all of the assets of the Company.$950,000.
8
On May 9, 2013, the Company amended the First Lien Agreement to borrow an additional $50 million, lower interest rates, and adjust certain financial covenants. Proceeds from the additional borrowings were used to pay down the principal balance of the Second Lien Term Loan.
On May 9, 2014, the Company amended the First Lien Agreement to borrow an additional $35 million in the form of an incremental term loan increase. Proceeds from the additional borrowings and $10 million of cash were used to pay off the remaining balance of the Second Lien Term Loan. The transactions resulted in a loss on extinguishment of debt of $2.9 million, consisting of unamortized deferred financing fees of $1.5 million, payments of fees to lenders of $0.5 million$497,000 and loss on original issue discount of $0.9 million,$921,000, which are recorded as extinguishment of debt in other expense, net, in the consolidated statement of operations for the quarternine months ended JuneSeptember 30, 2014.
During the second quarter of 2015, the Company used proceeds from the IPO to pay down $223.0 million of the principal balance of the First Lien Term Loan. The transactions resulted in a loss on extinguishment of debt of $638 thousand,$638,000, consisting of unamortized deferred financing fees of $489 thousand$489,000 and loss on original issue discount of $149 thousand,$149,000, which are recorded as extinguishment of debt in other expense, net, in the consolidated statement of operations for the quarternine months ended JuneSeptember 30, 2015.
At the discretion of the Company, interest accruesaccrued on borrowings on the First Lien Term Loan and Revolving Credit Facility at either the London Interbank Offered Rate (“LIBOR” or “Eurodollar Rate”)LIBOR plus an applicable margin or the adjusted base rate (“ABR”)ABR plus an applicable margin, each as defined in the First Lien Agreement. LIBOR had a floor of 1.00% plus an applicable margin for outstanding borrowings under the First Lien Term Loan. The Company was required to make quarterly principal payments of $863,000 from June 2012 through March 31, 2013, payments of $979,000 from June 30, 2013 through March 31, 2014, and payments of $1.1 million from June 30, 2014 through April 20, 2018, when the First Lien Agreement was to mature, and to make interest payments. There were no borrowings outstanding under the Revolving Credit Facility at both June 30, 2015 or December 31, 2014; however, the Company had letters of credit outstanding of approximately $100 thousand at June 30, 2015 and December 31, 2014, which reduced the borrowing capacity of the Revolving Credit Facility to $29.9 million.2014. The Company iswas charged a loan commitment fee of 0.50% for unused amounts on the Revolving Credit Facility.
After the May 9, 2013, amendment, at the discretion of the Company, interest accrues on outstanding borrowings under the First Lien Term Loan at either the ABR, as defined in the First Lien Agreement, plus an applicable margin, currently 2.25%, or the Eurodollar Rate with a floor of 1.00% plus an applicable margin, currently 3.25%. The Company elected to use the Eurodollar Rate during the six months ended June 30, 2015, and the interest rate at June 30, 2015, was 4.25%. The Company was required to make quarterly principal payments of $863 thousand from June 2012 through March 31, 2013, payments of $979 thousand from June 30, 2013 through March 31, 2014, and $1.1 million from June 30, 2014 through April 20, 2018, when the First Lien Agreement matures, and to make interest payments. The remaining principal balance of the First Lien Term Loan is due at maturity on April 20, 2018.
The Company is required to make additional annual principal payments on the First Lien Term Loan equal to 25% or 50% (determined based on the senior leverage ratio at year‑end) of the excess cash flow generated, if any. There was no Excess Cash Flow payment required for the year ended December 31, 2014.
The First Lien Agreement containscontained certain restrictive and financial covenants with which the Company mustwas required to comply with on a quarterly basis, including a maximum net leverage ratio and a minimum interest coverage ratio, as defined. The Company is also limiteddefined in its ability to incur additional indebtedness or liens; pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; merge or consolidate with another entity; or sell, assign, transfer, convey, or otherwise dispose of all or substantially all of its assets.the agreement. The Company was in compliance with these restrictive and financial covenants as of June 30, 2015 and December 31, 2014.
7.8. Income Taxes
For the three months ended JuneSeptember 30, 2015, the Company recorded an income tax benefitexpense of $5.9$2.6 million compared to expense of $2.1$4.2 million for the three months ended JuneSeptember 30, 2014. The Company’s effective tax rate was a benefit of 9.8%26.1% for the three months ended JuneSeptember 30, 2015. The Company’s effective tax rate was2015 compared to 46.6% for the three months ended JuneSeptember 30, 2014. The lower effective tax rate for the three months ended JuneSeptember 30, 2015 was primarily due to adjustments to reduce tax liabilities after a review of the Company’s future required tax payments and the impact of nondeductible equity-based compensation.
9
For the sixnine months ended JuneSeptember 30, 2015, the Company recorded an income tax benefitexpense of $1.4$1.3 million compared to expense of $5.0$9.2 million for the sixnine months ended JuneSeptember 30, 2014. The Company’s effective tax rate was a benefit of 2.8%3.2% for the sixnine months ended JuneSeptember 30, 2015. The Company’s effective tax rate was2015 compared to 46.6% for the sixnine months ended JuneSeptember 30, 2014. The lower effective tax rate for the sixnine months ended JuneSeptember 30, 2015 was primarily duereflects the inability to realize a tax benefit from the impact of nondeductible equity-based compensation.compensation expense incurred in connection with the modification of equity awards as a result of the Company’s IPO.
8.
11
9. Segment Information
An operating segment is a component of an enterprise that engages in business activities and has discrete financial information that is regularly reviewed by the enterprise’s chief operating decision maker to assess performance of the individual component and make decisions about allocating resources to the component. The Company produces one set of financial information at the enterprise level that is regularly reviewed by the Company’s chief operating decision maker. Discrete financial information is not produced or reviewed by the Company’s chief operating decision maker at a level lower than the enterprise level. As such, the Company has one operating segment as of JuneSeptember 30, 2015 and 2014.
The Company’s identifiable assets are located in the United States and over 99% of the Company’s revenues are located in the United States.
9.10. Related Party Transactions
The Company was charged an annual management fee that iswas payable quarterly to its majority shareholder, Vestar Capital Partners, LLC (“Vestar”). The Company incurred management fees of $267 thousand and $230 thousand for the three months ended June 30, 2015 and 2014, respectively, and $553 thousand and $460 thousand for the six months ended June 30, 2015 and 2014, respectively. The annual management fee is no longer required after the effective date of the IPO. The Company incurred management fees of $0 and $230,000 for the three months ended September 30, 2015 and 2014, respectively, and $553,000 and $690,000 for the nine months ended September 30, 2015 and 2014, respectively.
In connection with the IPO, the Company paid a one-time transaction advisory fee to Vestar of $8.5 million. This fee was reflected as a distribution payment on the condensed consolidated statement of cash flows for the sixnine months ended JuneSeptember 30, 2015, and reduced retained earnings on the condensed consolidated balance sheet as of JuneSeptember 30, 2015.
10.11. Equity-Based Compensation
The Company measures its stock-based compensation costs based on the grant date fair value of the awards and recognizes these costs in the consolidated financial statements over the requisite service or performance vesting period.
Total equity-based compensation expense recorded in the condensed consolidated statements of operations for the periods indicated is as follows:
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| 2014 |
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Cost of revenue, excluding depreciation and amortization |
| $ | 10,643 |
| $ | 728 |
| $ | 11,355 |
| $ | 1,363 |
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Cost of revenue |
| $ | 1,075 |
| $ | 726 |
| $ | 12,431 |
| $ | 2,090 |
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General and administrative |
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| 62,390 |
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| 1,854 |
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| 63,642 |
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| 3,544 |
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| 5,394 |
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| 1,932 |
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| 69,035 |
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| 5,475 |
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Total equity-based compensation expense |
| $ | 73,033 |
| $ | 2,582 |
| $ | 74,997 |
| $ | 4,907 |
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| $ | 6,469 |
| $ | 2,658 |
| $ | 81,466 |
| $ | 7,565 |
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Parent Equity-Based Compensation Plan
OurThe Company’s former parent company, PG Holdco, LLC, had adopted an equity-based compensation plan (the “Parent Plan”), which authorized the granting of various equity awards of the Parent’s Preferred units, Class A common units, Class B common units, and Class C common units to employees and directors of the Company. The awards of the Parent were recorded as compensation expense in the accounts of the Company because the recipients are employees and directors of the Company.
1012
In connection with the closing of the IPO, the Parent was liquidated and its sole asset, shares of the Company’s common stock, were distributed to its equity holders based on their relative rights under its limited liability agreement. The equity holders of the Parent received the number of shares of the Company’s common stock in the liquidation of the Parent that they would have held in the Company’s common stock directly immediately before the distribution, with no issuance of additional shares by the Company. Vested units of the Parent converted to shares of the Company’s common stock in the distribution. Unvested common units of the Parent that were subject to time-vesting conditions were converted to 1,028,122 unvested restricted shares of the Company’s common stock in the distribution and will continue to vest based on the amended vesting schedule of the respective unit class.
The liquidation and distribution of the Parent resulted in $70.4 million of equity-based compensation expense for the three and sixnine months ended JuneSeptember 30, 2015 due to the following outstanding award modifications:
· | Performance-based Class A and Class C common units of the Parent – vesting of $40.4 million triggered by achievement of performance threshold as a result of the IPO |
· | Class A common units of the Parent – modification of $19.4 million due to change from cliff-vesting awards to quarterly-vesting awards with resulting change from liability treatment to equity treatment |
· | Preferred, Class A and Class B common units purchased with loans – modification of $9.1 million due to repayment of the loan, which was a cancellation of option treatment and replacement with new awards with resulting change from liability treatment to equity treatment |
· | Loan forgiveness – modification of $1.5 million due to forgiveness of loans used to purchase units with resulting change from liability treatment to equity treatment |
The total liability outstanding associated with the Parent Plan equity-based compensation awards not classified in equity but as liabilities was $0 and $19.4 million at JuneSeptember 30, 2015 and December 31, 2014, respectively.
2015 Incentive Award Plan
The Company’s 2015 Incentive Award Plan (the “2015 Plan”) provides for the grant of stock options, restricted stock, dividend equivalents, stock payments, restricted stock units, stock appreciation rights, and other stock or cash based awards. The 2015 Plan authorized 7,120,000 shares of common stock for issuance pursuant to awards under the plan.
Restricted Stock
On May 21, 2015, the Company granted shares of restricted stock with vesting terms summarized as follows:
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4-year service vesting (20% for years 1-2, 30% for years 3-4) |
| 807,000 |
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3-year performance vesting (cliff) |
| 807,000 |
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2-year service vesting (quarterly) |
| 120,000 |
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1-year service vesting |
| 20,000 |
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| 1,754,000 |
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During the sixnine months ended JuneSeptember 30, 2015, the Company granted the following restricted stock with various performance and time vesting conditions:
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Nonvested at January 1, 2015 |
| — |
| $ | — |
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| — |
| $ | — |
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Converted from liquidation of Parent |
| 1,028,122 |
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| 25.00 |
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| 1,028,122 |
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| 25.00 |
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Granted |
| 1,754,000 |
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| 25.00 |
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| 1,806,120 |
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| 25.14 |
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Vested |
| (48,901) |
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| 25.00 |
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| (189,651) |
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| 25.00 |
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Forfeited |
| — |
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| (33,134) |
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| 25.00 |
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Nonvested at June 30, 2015 |
| 2,733,221 |
| $ | 25.00 |
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Nonvested at September 30, 2015 |
| 2,611,457 |
| $ | 25.10 |
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As of JuneSeptember 30, 2015, $56.6$51.3 million of total unrecognized compensation costs related to outstanding nonvested restricted stock was expected to be recognized over a weighted average period of 2.92.8 years.
11. Subsequent Events
On July 31, 2015, the Company completed the refinancing of its First Lien Term Loan and Revolving Credit Facility under a new credit agreement (“2015 Credit Agreement”). In connection with the refinancing, the Company repaid in full, the then outstanding First Lien Term Loan balance of $183.2 million and entered into a new term loan (“Term Loan”) in the amount of $185.0 million. Also in connection with this refinancing, the Company increased the borrowing capacity from its Revolving Credit Facility of $30.0 million to a new revolving line of credit (“Revolver”) of $75.0 million. The subsequent refinancing resulted in a loss on extinguishment of debt of $1.1 million, consisting of unamortized deferred financing fees of $1.0 million and a loss on original issue discount of $0.1 million.Stock Options
The 2015 Credit Agreement consists of a five year $185.0 million Term Loan and a five year $75.0 million Revolver. The outstanding principal amountCompany granted options to purchase 19,088 shares of the Term LoanCompany’s common stock during the nine months ended September 30, 2015. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant. The fair value of the stock options granted was estimated using a Black-Scholes valuation model. The weighted average fair value of the options granted during the nine months ended September 30, 2015 is estimated at $13.97 per share on the date of grant using the following weighted average assumptions: risk-free interest rate of 1.5%; an expected term of approximately 5 years; expected volatility of 35.15%; and dividend yield of 0.0% over the expected life of the option. The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility was based on historical monthly price changes of the Company’s common stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years the Company estimates that options will be payableoutstanding.
Earnings (Net Loss) Per Share
For the three months ended September 30, 2015, 330,000 common stock equivalents comprising restricted stock calculated using the treasury stock method were included in equal quarterly amountsthe computation of $2.3 million, commencing on December 31,diluted earnings per share. For the nine months ended September 30, 2015, withaggregate stock options and restricted stock awards of approximately 2,630,545 shares were excluded from the remaining balance due upon maturity. Outstanding balances on the Revolver will be due upon maturity. The agreement is secured by substantially allcomputation of diluted net loss per share, as they are anti-dilutive because of the assets ofloss for the Company.
Underperiod. For the 2015 Credit Agreement, interest accrues onthree and nine month periods ended September 30, 2014, there were no outstanding borrowings on the Term Loan and Revolver at the Companys’s option of either the (i) LIBOR plus an applicable margin, ranging from 1.50%unvested stock options or restricted stock awards to 2.25%, or (ii) ABR plus an applicable margin, ranging from 0.50% to 1.25%. The applicable margins for both LIBOR and ABR are variable based upon stipulated ranges of the secured net leverage ratio, as definedinclude in the agreement.
The 2015 Credit Agreement contains certain restrictive and financial covenants with which the Company must comply on a quarterly basis, including a maximum secured net leverage ratio, as defined. The Company is also limited in its ability to incur additional indebtedness or liens; pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; merge or consolidate with another entitiy; or sell, assign, transfer, convey, or otherwise disposecomputation of all or substantially all of its assets.diluted earnings per share.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this report on Form 10-Q contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements are not historical facts, but instead represent only our beliefs, assumptions, expectations, estimates, forecasts and projections regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.
The forward-looking statements contained in this report on Form 10-Q are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider the information in this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. We believe these factors include those described under “Risk Factors” included in our prospectus filed with the SEC on May 22, 2015 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”). Should one or more of these risks or uncertainties materialize, or should any of these assupmtionsassumptions prove incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements.
Any forward-looking statement made by us speaks only as of the date on which we make it. Factors or events that could cause our actual operating and financial performance to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Executive Overview
We are a leading provider of patient experience measurement, performance analytics and strategic advisory solutions for healthcare organizations across the continuum of care. Our mission is to help healthcare organizations reduce patient suffering and improve clinical quality, safety and the patient experience. We provide our clients with innovative, technology‑based solutions that capture the perspectives of patients, physicians, nurses and other healthcare employees, which enable our clients to benchmark, analyze and improve the patient’s care experience. We support clients in achieving the “Triple Aim” of improving the patient experience, managing their population’s health and controlling costs through improved patient engagement and experience of care. We believe we offer a powerful value proposition to the healthcare industry, as we help drive transformational change through greater performance transparency, better care coordination and sustainable performance improvements.
On May 27, 2015, we completed our IPO of 8,900,000 shares of common stock and, upon the underwriters’ exercise of their option to purchase additional shares, issued an additional 1,335,000 shares for a total of 10,235,000 shares issued at an offering price of $25.00 per share. Proceeds from the IPO were approximately $234.6 million, net of underwriting discounts, commissions and offering-related transaction costs incurred. Our common stock is currently traded on the New York Stock Exchange under the symbol “PGND”.
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Factors Affecting our Financial Performance
We believe that the financial performance of our business and our continued success are primarily dependent upon the following:
•Client Penetration and Growth. We believe that we have opportunities to continue to grow our revenue from our comprehensive suite of solutions due to the trends we see affecting the healthcare industry. We expect an increasing percentage of our recurring and new revenues to be the result of increased focus by healthcare providers on measuring and reporting on, and bearing financial risk for, clinical outcomes and the patient experience. Our future growth will depend on our ability to expand sales of our suite of solutions to our existing client base and identify and execute upon new opportunities and attract new clients. Our expansion activities consist of focusing on growing healthcare settings, including hospitals, medical practices and post‑acute markets,care settings, and servicing new markets and increasing engagement of existing clients impacted by expanded CAHPS regulatory requirements. We plan to continue to invest in the development of innovative and value‑added solutions and continue to market our proprietary platform.
•Continued Change in the U.S. Healthcare Industry. Healthcare spending represents a significant and growing component of GDP of the United States and the average annual growth in health care spending is expected to exceed average annual GDP growth from 2013 to 2023. As healthcare costs rise and providers, patients and payment models focus on value‑based and patient‑centric care, the healthcare industry has increasingly focused attention on improving efficiency and transparency, standardizing care around best practices, and driving better clinical and operational outcomes. This has resulted in increasing demand for solutions designed to improve the efficiency and quality of care, safety and the patient experience. We believe this shift in the industry will continue to impact our business infor the foreseeable future.
•Selective Acquisitions. We expect to grow through selective acquisitions that complement and grow our existing suite of technologies, services and solutions and increase the number of clients we serve. Our acquisitions are integrated within our overall solutions suite and brand to strengthen our comprehensive offerings. As the U.S. healthcare industry continues to evolve, we expect that there will be attractive investment opportunities given the large number of complementary businesses in the industry. Any acquisition could have a material impact on our financial position and results of operations.
•Macro‑Economic Conditions. Our clients are affected by macro‑economic trends such as general economic conditions, inflation and unemployment. Macro‑economic trends have various effects on our business, and on occasion have resulted in the slowing of the decision‑making processes by existing and prospective clients. In recent years, changes in macro‑economic trends have increased demand for our solutions as our clients strive to improve their clinical and operating performance, while reducing costs and moving to a value‑based care model.
AcquisitionsInitial Public Offering
WeOn May 27, 2015, we completed two acquisitions duringour Initial Public Offering (the “IPO”) of 8,900,000 shares of common stock and, upon the year ended December 31, 2014underwriters’ exercise of their option to expand capabilitiespurchase additional shares, issued an additional 1,335,000 shares for a total of 10,235,000 shares issued at an offering price of $25.00 per share. Proceeds from the IPO were approximately $234.4 million, net of underwriting discounts, commissions and complementoffering-related transaction costs incurred. Our common stock is currently traded on the New York Stock Exchange under the symbol “PGND”. In connection with the IPO: (i) PG Holdco, LLC, our suiteformer parent, was liquidated and its sole asset, the shares of solutions. During 2014,our common stock, was distributed to the equity holders based on their relative rights under the limited liability company agreement, (ii) we acquired allrecognized $70.4 million of equity-based compensation expense for the modification of certain units of PG Holdco, LLC, (iii) we paid a one-time transaction advisory fee of $8.5 million to our majority shareholder, and (iv) we recognized a loss on extinguishment of debt of $638,000 related to the write-off of deferred financing fees, loss on original issue discount and lender fees as a result of the capital stockpartial repayment of Dynamic Clinical Systems, Inc. (“DCS”), which provides patient reported outcomes services and solutions for a purchase price of $3.3 million. We also purchased allour term loan facility with the net proceeds of the assets of The National Database of Nursing Quality Indicators (“NDNQI”) for a purchase price of $24.9 million. NDNQI is a leading quality improvement and nurse engagement tool. Both of these acquisitions were financed with cash on hand.
The results of operations of the acquired businesses have been included in our consolidated financial statements since the applicable date of acquisition.IPO.
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Refinancings
We completed refinancings to lower our interest expense, reduce principal balances, and amend certain financial covenants. In May 2014, we borrowed an additional $35.0 million under the First Lien Term Loan and used such funds, together with $10.0 million of cash on hand, to repay in full all amounts outstanding under, and terminate, our Second Lien Term Loan. In May 2015, we repaid $223.0 million of principal on our First Lien Term Loan using the net proceeds from our IPO. In July 2015, we repaid the remaining principal balance of $183.2 million on our First Lien Term Loan with proceeds from a new $185 million Term Loan and replaced our $30 million Revolving Credit Facility with a $75 million Revolver under our 2015 Credit Agreement. See Note 7 – Revolving Line of Credit and Long-Term Debt in the Notes to Condensed Consolidated Financial Statements for additional details. These refinancings resulted in losses on the extinguishment of debt consisting of write‑write offs of unamortized deferred financing fees and losses on original issue discount in the applicable periods.
Acquisitions
We completed one acquisition during the nine months ended September 30, 2015, and two acquisitions during the year ended December 31, 2014 to expand capabilities and complement our suite of solutions. On July 31,September 1, 2015, we completedacquired all of the membership interests of Healthcare Performance Improvement, LLC (“HPI”), a subsequent refinancingleading patient safety and reliability consulting and coaching firm, for a purchase price of $11.7 million, net of cash acquired. During 2014, we acquired all of the capital stock of Dynamic Clinical Systems, Inc. (“DCS”), which provides patient reported outcomes services and solutions for a purchase price of $3.3 million, net of cash acquired. We also purchased all of the assets of The National Database of Nursing Quality Indicators (“NDNQI”) for a purchase price of $24.9 million. NDNQI is a leading quality improvement and nurse engagement tool. All of these acquisitions were financed with cash on hand.
The results of operations of the acquired businesses have been included in our First Lien Term Loan and Revolving Credit Facility. See Note 11 – Subsequent Events inconsolidated financial statements from the Notes to Condensed Consolidated Financial Statements for additional details.applicable date of acquisition.
Results of Operations
The following table sets forth our results of operations and our results of operations as a percentage of revenue for the periods indicated:indicated (in thousands):
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| 2015 |
| revenue |
|
| 2014 |
| revenue |
|
| 2015 |
| revenue |
|
| 2014 |
| revenue |
|
| 2015 |
| revenue |
|
| 2014 |
| revenue |
|
| 2015 |
| revenue |
|
| 2014 |
| revenue |
| ||||||||
Revenue |
| $ | 77,458 |
| 100.0 | % |
| $ | 68,365 |
| 100.0 | % |
| $ | 152,349 |
| 100.0 | % |
| $ | 133,769 |
| 100.0 | % |
| $ | 80,730 |
| 100.0 | % |
| $ | 71,713 |
| 100.0 | % |
| $ | 233,079 |
| 100.0 | % |
| $ | 205,482 |
| 100.0 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
| 43,112 |
| 55.7 |
|
|
| 28,964 |
| 42.4 |
|
|
| 74,539 |
| 48.9 |
|
|
| 56,724 |
| 42.4 |
|
|
| 34,772 |
| 43.1 |
|
|
| 30,618 |
| 42.7 |
|
|
| 109,311 |
| 46.9 |
|
|
| 87,342 |
| 42.5 |
|
General and administrative |
|
| 79,102 |
| 102.1 |
|
|
| 17,791 |
| 26.0 |
|
|
| 97,403 |
| 63.9 |
|
|
| 34,388 |
| 25.7 |
|
|
| 22,720 |
| 28.1 |
|
|
| 17,918 |
| 25.0 |
|
|
| 120,123 |
| 51.5 |
|
|
| 52,306 |
| 25.5 |
|
Depreciation and amortization |
|
| 10,237 |
| 13.2 |
|
|
| 8,478 |
| 12.4 |
|
|
| 20,096 |
| 13.2 |
|
|
| 17,046 |
| 12.7 |
|
|
| 10,528 |
| 13.0 |
|
|
| 8,779 |
| 12.2 |
|
|
| 30,624 |
| 13.1 |
|
|
| 25,825 |
| 12.6 |
|
Loss (gain) on disposal of property and equipment |
|
| 15 |
| — |
|
|
| 485 |
| 0.7 |
|
|
| (31) |
| — |
|
|
| 1,091 |
| 0.8 |
|
|
| 1 |
| — |
|
|
| 504 |
| 0.7 |
|
|
| (30) |
| — |
|
|
| 1,595 |
| 0.8 |
|
Total operating expenses |
|
| 132,466 |
| 171.0 |
|
|
| 55,718 |
| 81.5 |
|
|
| 192,007 |
| 126.0 |
|
|
| 109,249 |
| 81.7 |
|
|
| 68,021 |
| 84.3 |
|
|
| 57,819 |
| 80.6 |
|
|
| 260,028 |
| 111.6 |
|
|
| 167,068 |
| 81.3 |
|
Income (loss) from operations |
|
| (55,008) |
| (71.0) |
|
|
| 12,647 |
| 18.5 |
|
|
| (39,658) |
| (26.0) |
|
|
| 24,520 |
| 18.3 |
|
|
| 12,709 |
| 15.7 |
|
|
| 13,894 |
| 19.4 |
|
|
| (26,949) |
| (11.6) |
|
|
| 38,414 |
| 18.7 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (3,775) |
| (4.9) |
|
|
| (4,966) |
| (7.3) |
|
|
| (8,354) |
| (5.5) |
|
|
| (10,430) |
| (7.8) |
|
|
| (1,567) |
| (1.9) |
|
|
| (4,706) |
| (6.6) |
|
|
| (9,921) |
| (4.3) |
|
|
| (15,136) |
| (7.4) |
|
Extinguishment of debt |
|
| (638) |
| (0.8) |
|
|
| (2,886) |
| (4.2) |
|
|
| (638) |
| (0.4) |
|
|
| (2,886) |
| (2.2) |
|
|
| (1,112) |
| (1.4) |
|
|
| (8) |
| — |
|
|
| (1,750) |
| (0.8) |
|
|
| (2,894) |
| (1.4) |
|
Management fee of related party |
|
| (267) |
| (0.3) |
|
|
| (230) |
| (0.3) |
|
|
| (553) |
| (0.4) |
|
|
| (460) |
| (0.3) |
|
|
| — |
| — |
|
|
| (230) |
| (0.3) |
|
|
| (553) |
| (0.2) |
|
|
| (690) |
| (0.3) |
|
Total other expense, net |
|
| (4,680) |
| (6.0) |
|
|
| (8,082) |
| (11.8) |
|
|
| (9,545) |
| (6.3) |
|
|
| (13,776) |
| (10.3) |
|
|
| (2,679) |
| (3.3) |
|
|
| (4,944) |
| (6.9) |
|
|
| (12,224) |
| (5.2) |
|
|
| (18,720) |
| (9.1) |
|
Income (loss) before income taxes |
|
| (59,688) |
| (77.1) |
|
|
| 4,565 |
| 6.7 |
|
|
| (49,203) |
| (32.3) |
|
|
| 10,744 |
| 8.0 |
|
|
| 10,030 |
| 12.4 |
|
|
| 8,950 |
| 12.5 |
|
|
| (39,173) |
| (16.8) |
|
|
| 19,694 |
| 9.6 |
|
Provision (benefit) for income taxes |
|
| (5,871) |
| (7.6) |
|
|
| 2,128 |
| 3.1 |
|
|
| (1,360) |
| (0.9) |
|
|
| 5,011 |
| 3.7 |
| ||||||||||||||||||||||||
Provision for income taxes |
|
| 2,614 |
| 3.2 |
|
|
| 4,174 |
| 5.8 |
|
|
| 1,254 |
| 0.5 |
|
|
| 9,185 |
| 4.5 |
| ||||||||||||||||||||||||
Net income (loss) |
| $ | (53,817) |
| (69.5) | % |
| $ | 2,437 |
| 3.6 | % |
| $ | (47,843) |
| (31.4) | % |
| $ | 5,733 |
| 4.3 | % |
| $ | 7,416 |
| 9.2 | % |
| $ | 4,776 |
| 6.7 | % |
| $ | (40,427) |
| (17.3) | % |
| $ | 10,509 |
| 5.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (a) |
| $ | 29,131 |
| 37.6 | % |
| $ | 25,328 |
| 37.0 | % |
| $ | 56,471 |
| 37.1 | % |
| $ | 49,102 |
| 36.7 | % |
| $ | 30,910 |
| 38.3 | % |
| $ | 26,459 |
| 36.9 | % |
| $ | 87,381 |
| 37.5 | % |
| $ | 75,561 |
| 36.8 | % |
(a)For an explanation of Adjusted EBITDA as a measure of the Company’s operating performance and a reconciliation to net income (loss), see “Non-GAAP Financial Measures”.
17
Three Months Ended JuneSeptember 30, 2015 compared to Three Months Ended JuneSeptember 30, 2014
Revenue
Revenue increased $9.1$9.0 million, or 13.3%12.6%, from $68.4$71.7 million for the three months ended JuneSeptember 30, 2014 to $77.5$80.7 million for the three months ended JuneSeptember 30, 2015. Revenue growth consisted of 11.6% organic growth and 1.0% acquisition growth. The increaseacquisition of HPI contributed revenue of $726,000 in the third quarter of 2015. Organic growth was primarily attributable to the expansioncomprised of ourincreased sales of patient experience solutions sold to new and existing clients revenue from new clients and $2.0 millionto a lesser extent sales of incremental revenue in the second quarter of 2015 from the acquisition of NDNQI in June 2014.engagement and consulting solutions.
Operating Expenses
15
Cost of Revenue
Revenue. Cost of revenue increased $14.1$4.2 million, or 48.8%13.6%, from $29.0$30.6 million for the three months ended JuneSeptember 30, 2014 to $43.1$34.8 million for the three months ended JuneSeptember 30, 2015. As a percentage of revenue, cost of revenue increased from 42.4%42.7% in the 2014 period to 43.1% in the 2015 period.
Cost of revenue included stock-based compensation expense of $726,000 in the three months ended September 30, 2014 and $1.1 million in the three months ended September 30, 2015. The increase in stock-based compensation reflects the issuance of equity incentive grants as part of our IPO. Cost of revenue also included $60,000 of expenses associated with the discontinuance of certain clinical solutions and software applications in the 2014 period and $705,000 of severance in the 2015 period. Excluding these amounts, cost of revenue decreased as a percentage of revenue from 41.4% in the 2014 period to 40.9% in the 2015 period. The decrease was primarily the result of a higher proportion of lower cost electronic surveys for our patient experience solutions.
General and Administrative Expense. General and administrative expense increased $4.8 million, or 26.8%, from $17.9 million for the three months ended JuneSeptember 30, 2014 to 55.7%$22.7 million for the three months ended JuneSeptember 30, 2015. As a percentage of revenue, general and administrative expense increased from 25.0% in the 2014 period to 28.1% in the 2015 period.
General and administrative expense included stock-based compensation expense of $1.9 million in the three months ended September 30, 2014 and $5.4 million in the three months ended September 30, 2015. The increase in stock-based compensation primarily reflects the issuance of equity incentive grants as part of our IPO. General and administrative expense also included $264,000 and $116,000 of expenses associated with completed and potential acquisitions in the 2014 and 2015 periods, respectively, and $382,000 of expenses associated with preparations for our IPO and capital structure and strategic corporate planning in 2015. Excluding these amounts, general and administrative expenses decreased as a percentage of revenue from 21.8% in the 2014 period to 20.8% in the 2015 period. The decrease was primarily the result of the leveraging of general and administrative resources as a result of 11.6% organic growth.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $1.7 million, or 19.9%, from $8.8 million for the three months ended September 30, 2014 to $10.5 million for the three months ended September 30, 2015. Amortization expense associated with acquired intangible assets from business combinations was $4.2 million in the 2014 period and $4.1 million in the 2015 period. The $14.1increase was largely the result of depreciation of previously capitalized software development costs and new assets acquired under capital leases.
Loss (Gain) on Disposal of Property and Equipment. We recorded a net loss on disposal of property and equipment of $504,000 for the three months ended September 30, 2014 and a nominal net loss for the three months ended September 30, 2015. The losses for the 2014 and 2015 periods were primarily the result of write-offs of certain software development projects.
18
Other Income (Expense)
Interest expense, net. Interest expense, net decreased $3.1 million, increaseor 66.7%, from $4.7 million for the three months ended September 30, 2014 to $1.6 million for the three months ended September 30, 2015. The $3.1 million decrease was primarily due to lower average borrowings in 2015 as a result of principal repayments from the proceeds of our IPO, which resulted in interest savings of approximately $2.4 million, and lower average interest rates on our borrowings as a result of our debt refinancings, which resulted in interest savings of approximately $700,000.
Extinguishment of debt. During the three months ended September 30, 2015, we repaid the remaining principal balance of $183.2 million on our First Lien Term Loan with proceeds from the new Term Loan under the 2015 Credit Agreement. The transaction resulted in a loss on extinguishment of debt of $1.1 million consisting of unamortized deferred financing fees of $995,000 and loss on original issue discount of $117,000.
Management fee of related party. We paid a management fee of $230,000 for the three months ended September 30, 2014 to our majority shareholder. The management fee was no longer required after the effective date of the IPO in May 2015.
Provision for Income Taxes
Provision for income taxes decreased $1.6 million, or 37.4%, from $4.2 million for the three months ended September 30, 2014 to $2.6 million for the three months ended September 30, 2015. The provision for income taxes for the three months ended September 30, 2015 and 2014 represents federal and state income tax expense for the periods.
For the three months ended September 30, 2014, our effective income tax rate was 46.6% as compared to 26.1% for the three months ended September 30, 2015. Our federal statutory income tax rate and state statutory rate, net of federal benefit, is approximately 42%. The 2014 effective tax rate of 46.6% is primarily due to nondeductible equity-based compensation expense. The 2015 effective tax rate of 26.1% reflects adjustments to reduce tax liabilities after a review of our future required tax payments and the impact of nondeductible equity-based compensation expense incurred in connection with the modification of equity awards as a result of our IPO (see Note 11 – Equity-Based Compensation in the Notes to Condensed Consolidated Financial Statements for additional details).
Nine Months Ended September 30, 2015 compared to Nine Months Ended September 30, 2014
Revenue
Revenue increased $27.6 million, or 13.4%, from $205.5 million for the nine months ended September 30, 2014 to $233.1 million for the nine months ended September 30, 2015. Revenue growth consisted of 10.7% organic growth and 2.7% acquisition growth. The acquisitions of HPI, NDNQI and DCS contributed incremental revenue of $5.7 million in 2015. Organic growth was comprised of increased sales of patient experience solutions to new and existing clients and to a lesser extent sales of engagement and consulting solutions.
Operating Expenses
Cost of Revenue. Cost of revenue increased $22.0 million, or 25.2%, from $87.3 million for the nine months ended September 30, 2014 to $109.3 million for the nine months ended September 30, 2015. As a percentage of revenue, cost of revenue wasincreased from 42.5% for the 2014 period to 46.9% for the 2015 period.
19
Cost of revenue included stock-based compensation of $2.1 million for the nine months ended September 30, 2014 and $12.4 million for the nine months ended September 30, 2015. The increase in stock-based compensation is primarily due to $10.1 million of stock-based compensation from the equity-based compensation modification related to the IPO (see Note 1011 – Equity-Based Compensation in the Notes to Condensed Consolidated Financial Statements for additional details). The increase wasCost of revenue also driven by an increase in postage and printing costsincluded $446,000 of $1.4 million due to a 14.7% increase in outgoing survey volume, an increase in professional fees of $1.4 millionexpenses associated with additional temporary staffingthe discontinuance of certain clinical solutions and software applications in 2014 and $705,000 of severance in 2015. Excluding these amounts, cost of revenue increased as a percentage of revenue from 41.1% for the 2014 period to support increased telephone survey volumes,41.3% for the 2015 period. The change was primarily the result of increases in benefit costs and an increase in personnel costs of $1.2 million, including $0.4 million of incremental costs related to NDNQI and an increase of $0.8 millionexpenses associated with an increase in salaries and headcount.growing our consulting solutions.
General and Administrative Expense
Expense. General and administrative expense increased $61.3$67.8 million, or 344.6%129.7%, from $17.8$52.3 million for the threenine months ended JuneSeptember 30, 2014 to $79.1$120.1 million for the threenine months ended JuneSeptember 30, 2015. As a percentage of revenue, general and administrative expense increased from 26.0%25.5% for the three2014 period to 51.5% for the 2015 period.
General and administrative included stock-based compensation expense of $5.5 million for the nine months ended JuneSeptember 30, 2014 to 102.1%and $69.0 million for the threenine months ended JuneSeptember 30, 2015.
The $61.3 million increase in general and administrative expenses wasstock-based compensation is primarily due to $60.3 million of stock-based compensation from the equity-based compensation modification related to the IPO (see Note 1011 – Equity-Based Compensation in the Notes to Condensed Consolidated Financial Statements for additional details). Other increasesGeneral and administrative also included personnel costs$332,000 and $319,000 of $2.0 millionexpenses associated with increasescompleted and potential acquisitions in salaries, headcount2014 and ongoing stock-based compensation,2015, respectively, and $0.4$605,000 and $1.2 million of professional fees relatedexpenses associated with preparations for our IPO and capital structure and strategic corporate planning in 2014 and 2015, respectively. Excluding these amounts, general and administrative expenses decreased as a percentage of revenue from 22.3% for the 2014 period to accounting21.2% for the 2015 period. The decrease was primarily the result of the leveraging of general and transaction expenses, offset byadministrative resources as a $1.4 million decrease in severance expense.result of 10.7% organic growth.
Depreciation and Amortization Expense
Expense. Depreciation and amortization expense increased $1.8$4.8 million, or 20.7%18.6%, from $8.5$25.8 million for the threenine months ended JuneSeptember 30, 2014 to $10.2$30.6 million for the threenine months ended JuneSeptember 30, 2015. Amortization expense associated with acquired intangible assets from business combinations was $11.8 million for the 2014 period and $12.4 million for the 2015 period. The $1.8 million increase was due to an increase inlargely the result of depreciation expense of $1.5 million driven by additional investments in computerpreviously capitalized software development costs and new assets acquired under capital leases, and $0.3 million related to the amortization of intangible assets associated with recently acquired businesses.leases.
Loss (Gain) on Disposal of Property and Equipment
Equipment. We recorded a net loss on disposal of property and equipment of $15 thousand for the three months ended June 30, 2015 compared to a net loss on disposal of property and equipment of $0.5$1.6 million for the threenine months ended JuneSeptember 30, 2014. The $15 thousand2014 and a net lossgain of $30,000 for the threenine months ended JuneSeptember 30, 20152015. The loss in the 2014 period was the result of retirementthe consolidation of office locations and the write-off of certain software and computer hardware assets no longerdevelopment projects. The net gain in use. The $0.5 million net loss on disposal of equipment for the three months ended June 30, 20142015 period was primarily the result of the write-offearly termination of two software development projects.
16certain capital leases for equipment.
Other Income (Expense)
Interest expense, net. Interest expense, net decreased $1.2$5.2 million, or 24.0%34.5%, from $5.0$15.1 million for the threenine months ended JuneSeptember 30, 2014 to $3.8$9.9 million for the threenine months ended JuneSeptember 30, 2015. Interest expense on the First Lien Term Loan decreased $0.7The $5.2 million decrease was primarily due to the repayment of $223.0 millionlower average borrowings in 2015 as a result of principal usingrepayments from the proceeds fromof our IPO, duringwhich resulted in interest savings of approximately $3.0 million, and the three months ended June 30, 2015, compared to additional borrowingspayoff of $35.0 million during the three months ended June 30, 2014. The interest rate on the First Lien Term Loan remained consistent at 4.25% during both periods. Interest expense on theour Second Lien Term Loan decreased $0.4 million duein May 2014, which resulted in interest savings of $1.3 million. Also contributing to the payoffdecrease were lower average interest rates on our borrowings as a result of the $45.0 million principal balance on May 9, 2014. Theour debt refinancings, which resulted in interest rate on the Second Lien Term Loan was 8.25% during the three months ended June 30, 2014. The remaining $0.1 million decrease was related to reduced amortizationsavings of deferred financing fees and accretionapproximately $700,000.
20
Extinguishment of debt. During the threenine months ended June 30, 2015, we repaid $223.0 million of the principal balance on our First Lien Term Loan with proceeds from the IPO. The transactions resulted in a loss on extinguishment of debt of $638 thousand consisting of unamortized deferred financing fees of $489 thousand and loss on original issue discount of $149 thousand. During the three months ended JuneSeptember 30, 2014, we repaid the remaining balance of our Second Lien Term Loan. The transaction resulted in a loss on extinguishment of debt of $2.9 million consisting of the write‑write off of unamortized deferred financing fees of $1.5 million, payments of fees to lenders of $0.5 million$497,000 and loss on original issue discount of $0.9 million.
Management fee of related party. Our annual management fee increased $37 thousand from $230 thousand for$921,000. During the threenine months ended June 30, 2014 to $267 thousand for the three months ended June 30, 2015. The annual management fee is based on our performance in the previous fiscal year. The year‑over‑year improvement in performance resulted in a corresponding increase in the annual management fee. The annual management fee is no longer required after the effective date of the IPO.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes decreased $8.0 million, or 375.9%, from an expense of $2.1 million for the three months ended June 30, 2014 to a benefit of $5.9 million for the three months ended June 30, 2015. The provision for income taxes for the three months ended June 30, 2015 and 2014 primarily represents federal and state income tax expense for the periods.
For the three months ended June 30, 2015, our effective income tax rate was a benefit of 9.8% as compared to an effective income tax rate of 46.6% for the three months ended June 30, 2014. These rates differ from the federal statutory income tax rate of 35% primarily due to nondeductible equity-based compensation expense incurred in connection with the modification of equity awards as a result of the IPO (see Note 10 – Equity-Based Compensation in the Notes to Condensed Consolidated Financial Statements for additional details).
Six Months Ended June 30, 2015 compared to Six Months Ended June 30, 2014
Revenue
Revenue increased $18.5 million, or 13.9%, from $133.8 million for the six months ended June 30, 2014 to $152.3 million for the six months ended June 30, 2015. The increase was primarily attributable to the expansion of our patient experience solutions sold to existing clients, revenue from new clients and $6.0 million of incremental revenue from businesses acquired in the second quarter of 2014.
Cost of Revenue
Cost of revenue increased $17.8 million, or 31.4%, from $56.7 million for the six months ended June 30, 2014 to $74.5 million for the six months ended June 30, 2015. As a percentage of revenue, cost of revenue increased from 42.4% for the six months ended June 30, 2014 to 48.9% for the six months ended June 30, 2015.
17
The $17.8 million increase in cost of revenue was primarily due to $10.1 million of stock-based compensation from the equity-based compensation modification related to the IPO (see Note 10 – Equity-Based Compensation in the Notes to Condensed Consolidated Financial Statements for additional details).The additional increase of $7.7 million relates to a $3.0 million increase in postage and printing costs due to a 15.2% increase in outgoing survey volume. Personnel costs increased $2.4 million, including $0.9 million of incremental costs related to NDNQI and DCS, an increase of $0.9 million associated with an increase in salaries and headcount, an increase of $0.6 million for group health insurance, and an increase of $0.2 million in bonus expense which is based on targeted earnings. Other increases include an increase in professional fees of $1.8 million associated with additional temporary staffing to support increased telephone survey volumes, $0.3 million related to our regional client conferences due to increases in conference attendance and $0.2 million of incremental technology costs related to NDNQI and DCS.
General and Administrative Expense
General and administrative expense increased $63.0 million, or 183.2%, from $34.4 million for the six months ended June 30, 2014 to $97.4 million for the six months ended June 30, 2015. As a percentage of revenue, general and administrative expense increased from 25.7% for the six months ended June 30, 2014 to 63.9% for the six months ended June 30, 2015.
The $63.0 million increase in general and administrative expenses was primarily due to $60.3 million of stock-based compensation from the equity-based compensation modification related to the IPO (see Note 10 – Equity-Based Compensation in the Notes to Condensed Consolidated Financial Statements for additional details). Personnel costs increased $1.7 million, including an increase of $2.5 million in wages and taxes driven by increases in salaries and headcount, an increase of $0.2 million in bonus expense which is based on targeted earnings, and an increase of $0.2 million for group health insurance, offset by a $1.2 million decrease in severance expense. Also contributing to the increase was an increase of $0.9 million in professional fees including accounting, consultant and transaction expenses and consultant fees.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $3.1 million, or 17.9%, from $17.0 million for the six months ended June 30, 2014 to $20.1 million for the six months ended June 30, 2015. The $3.1 million increase was due to an increase in depreciation expense of $2.4 million driven by higher investments in computer software development and new assets under capital leases, and $0.7 million primarily related to the amortization of intangible assets associated with recently acquired businesses.
Loss (Gain) on Disposal of Property and Equipment
We recorded a net gain on disposal of property and equipment of $31 thousand for the six months ended June 30, 2015 compared to a loss on disposal of property and equipment of $1.1 million for the six months ended June 30, 2014. The $31 thousand net gain for the six months ended June 30, 2015 was primarily the result of early termination of capital leases for equipment. The $1.1 million loss on disposal of equipment for the six months ended June 30, 2014 was the result of the consolidation of several of our smaller office locations and the write-off of two software development projects.
18
Other Income (Expense)
Interest expense, net. Interest expense, net decreased $2.0 million, or 19.9%, from $10.4 million for the six months ended June 30, 2014 to $8.4 million for the six months ended June 30, 2015. Interest expense on the Second Lien Term Loan decreased from $1.3 million for the six months ended June 30, 2014 to $0 for the six months ended June 30, 2015, due to the payoff on May 9, 2014. The interest rate on the Second Lien Term Loan was 8.25% during the six months ended June 30, 2014. Interest expense on the First Lien Term Loan decreased $0.5 million due to the repayment of $223.0 million of principal using proceeds from our IPO during to the six months ended June 30, 2015, compared to additional borrowings of $35.0 million offset by an excess cash flow payment of $11.0 million during the six months ended June 30, 2014. The interest rate on the First Lien Term Loan remained consistent at 4.25% during both periods. The remaining $0.2 million decrease was related to reduced amortization of deferred financing fees and accretion of original issue discount following the losses on extinguishment as described below.
Extinguishment of debt. During the six months ended JuneSeptember 30, 2015, we prepaid $223.0 million of the principal balance on our First Lien Term Loan with proceeds from the IPO.IPO and then repaid the remaining principal balance of $183.2 million with proceeds from the new Term Loan under the 2015 Credit Agreement. The transactions resulted in a loss on extinguishment of debt of $638 thousand consisting of unamortized deferred financing fees of $489 thousand and loss on original issue discount of $149 thousand. During the six months ended June 30, 2014, we repaid the remaining balance of our Second Lien Term Loan. The transaction resulted in a loss on extinguishment of debt of $2.9$1.7 million consisting of the write‑off of unamortized deferred financing fees of $1.5 million payments of fees to lenders of $0.5 million and loss on original issue discount of $0.9 million.$265,000.
Management fee of related party. Our annualWe paid a management fee increased $93 thousand from $460 thousandto our majority shareholder of $690,000 and $553,000 for the sixnine months ended JuneSeptember 30, 2014 to $553 thousand for the six months ended June 30, 2015.and 2015, respectively. The annual management fee is based on our performance in the previous fiscal year. The year‑over‑year improvement in performance has resulted in a corresponding increase in the annual management fee. The annual management fee iswas no longer required after the effective date of the IPO.IPO in May 2015.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes decreased $6.4$7.9 million, or 127.1%86.3%, from an expense of $5.0$9.2 million for the sixnine months ended JuneSeptember 30, 2014 to a benefit of $1.4$1.3 million for the sixnine months ended JuneSeptember 30, 2015. The provision for income taxes for the sixnine months ended JuneSeptember 30, 2015 and 2014 primarily represents federal and state income tax expense for the periods.
For the sixnine months ended JuneSeptember 30, 2015,2014, our effective income tax rate was a benefit of 2.8%46.6% as compared to an effective income tax rate of 46.6%3.2% for the sixnine months ended JuneSeptember 30, 2014. These rates differ from the2015. Our federal statutory income tax rate and state statutory rate, net of 35%federal benefit, is approximately 42%. The 2014 effective tax rate of 46.6% is primarily due to nondeductible equity-based compensation expense. The 2015 effective tax rate of 3.2% primarily reflects our expected net loss position for the full year of 2015 and the inability to realize a tax benefit from the nondeductible equity-based compensation expense incurred in connection with the modification of equity awards as a result of theour IPO (see Note 1011 – Equity-Based Compensation in the Notes to Condensed Consolidated Financial Statements for additional details).
Non-GAAP Financial Measures
We define Adjusted EBITDA as net income (loss) before interest expense, net, income taxes and depreciation and amortization, with further adjustments to add back (i) items that terminated in connection with the IPO, (ii) non-cash charges, (iii) items that are not indicative of the underlying operating performance of the business and (iv) items that are solely related to changes in our capital structure, and therefore are not indicative of the underlying operating performance of the business.
19
Management uses Adjusted EBITDA (i) to compare our operating performance on a consistent basis, (ii) to calculate incentive compensation for our employees, (iii) for planning purposes, including the preparation of our internal annual operating budget, (iv) to evaluate the performance and effectiveness of our operational strategies and (v) to assess compliance with various metrics associated with the agreements governing our indebtedness. We also believe that Adjusted EBITDA is useful to investors in assessing our financial performance because this measure is similar to the metrics used by investors and other interested parties when comparing companies in our industry that have different capital structures, debt levels and/or income tax rates. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating performance in the same manner as our management.
21
Adjusted EBITDA is not determined in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered in isolation or as an alternative to net income, income from operations, net cash provided by operating, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP. The table below presents information for the periods indicated about our Adjusted EBITDA. A reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measures is provided below.in the table below (in thousands).
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| Three Months Ended |
| Six Months Ended |
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| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||
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| June 30, |
| June 30, |
|
| September 30, |
| September 30, |
| ||||||||||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||||||
Net income (loss) |
| $ | (53,817) |
| $ | 2,437 |
| $ | (47,843) |
| $ | 5,733 |
|
| $ | 7,416 |
| $ | 4,776 |
| $ | (40,427) |
| $ | 10,509 |
|
Interest expense |
|
| 3,775 |
|
| 4,966 |
|
| 8,354 |
|
| 10,430 |
|
|
| 1,567 |
|
| 4,706 |
|
| 9,921 |
|
| 15,136 |
|
Income tax expense (benefit) |
|
| (5,871) |
|
| 2,128 |
|
| (1,360) |
|
| 5,011 |
| |||||||||||||
Income tax expense |
|
| 2,614 |
|
| 4,174 |
|
| 1,254 |
|
| 9,185 |
| |||||||||||||
Depreciation and amortization |
|
| 10,237 |
|
| 8,478 |
|
| 20,096 |
|
| 17,046 |
|
|
| 10,528 |
|
| 8,779 |
|
| 30,624 |
|
| 25,825 |
|
EBITDA |
| $ | (45,676) |
| $ | 18,009 |
| $ | (20,753) |
| $ | 38,220 |
|
| $ | 22,125 |
| $ | 22,435 |
| $ | 1,372 |
| $ | 60,655 |
|
Equity-based compensation(a) |
|
| 73,033 |
|
| 2,582 |
|
| 74,997 |
|
| 4,907 |
|
|
| 6,469 |
|
| 2,658 |
|
| 81,466 |
|
| 7,565 |
|
Extinguishment of debt(b) |
|
| 638 |
|
| 2,886 |
|
| 638 |
|
| 2,886 |
|
|
| 1,112 |
|
| 8 |
|
| 1,750 |
|
| 2,894 |
|
Management fee to related party(c) |
|
| 267 |
|
| 230 |
|
| 553 |
|
| 460 |
|
|
| — |
|
| 230 |
|
| 553 |
|
| 690 |
|
Acquisition expenses(d) |
|
| 195 |
|
| 66 |
|
| 203 |
|
| 68 |
|
|
| 116 |
|
| 264 |
|
| 319 |
|
| 332 |
|
Severance(e) |
|
| 705 |
|
| — |
|
| 705 |
|
| — |
| |||||||||||||
Loss (gain) on disposal of property and equipment |
|
| 15 |
|
| 485 |
|
| (31) |
|
| 1,091 |
|
|
| 1 |
|
| 504 |
|
| (30) |
|
| 1,595 |
|
Other non-comparable items(e) |
|
| 659 |
|
| 1,070 |
|
| 864 |
|
| 1,470 |
| |||||||||||||
Other non-comparable items(f) |
|
| 382 |
|
| 360 |
|
| 1,246 |
|
| 1,830 |
| |||||||||||||
Adjusted EBITDA |
| $ | 29,131 |
| $ | 25,328 |
| $ | 56,471 |
| $ | 49,102 |
|
| $ | 30,910 |
| $ | 26,459 |
| $ | 87,381 |
| $ | 75,561 |
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(a)Represents costsEquity-based compensation expense associated with (i) the modification of existing equity awards and forgiveness of loans associated with certain equity awards in connection with our IPO and the liquidating distribution of PG Holdco, LLC, and (ii) equity awards at the time of our IPO and subsequent equity awards granted to attract and retain employees. See Note 1011 – Equity-Based Compensation in the Notes to Condensed Consolidated Financial Statements for classification of equity-based compensation on the Condensed Consolidated Statements of Operations for the periods indicated.
(b)Represents the write‑Write‑off of unamortized deferred financing fees, loss on original issuance discount and lender fees in connection with debt payments and refinancings. See “Refinancings.”
(c)Represents annual management feesFees paid to Vestarour majority owner under thea management agreement whichprior to our IPO. The management agreement was terminated upon the closing of the IPO. See Note 910 – Related Party Transactions in the Notes to Condensed Consolidated Financial Statements for additional details.
(d)Represents transactionTransaction costs incurred in connection with completed and potential acquisitions. See “Acquisitions.”
(e)Expense associated with executive separation agreements and targeted employee headcount reductions.
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(e)(f)Other non‑comparable items include costs incurred in connection with our IPO, costs, professional fees incurred in connection with capital structure and strategic corporate planning and revenue credits and expenses related to client retention due to the discontinuation of certain clinical solutions and software applications. We believe that these are expenses that are not comparable as they relate to individual projects and initiatives. As a result, we believe they should be excluded from Adjusted EBITDA in order to enable investors and other interested parties to more effectively assess our period‑over‑period and ongoing operating performance.
22
Liquidity and Capital Resources
Overview
Our principal uses of cash are to meet working capital requirements, fund debt obligations, finance capital expenditures and fund strategic acquisitions. In addition, we expect to use cash to support our growth strategy and cover additional expenses that we expect to incur as a public company. Our principal sources of funds are cash flows from operating activities and available borrowings under our Revolving Credit Facility.Revolver.
As of JuneSeptember 30, 2015, we had cash of $19.9$23.8 million and $29.9$74.9 million of available borrowings under our Revolving Credit FacilityRevolver (after giving effect to a $0.1 million$65,000 letter of credit outstanding under our Revolving Credit Facility)Revolver). As of JuneSeptember 30, 2015, we had $194.0$193.2 million of outstanding indebtedness (which includes capital leases) after giving effect to the application of the net proceeds from the IPO.
On April 20, 2012, we refinanced our prior senior secured term loan facility and our senior subordinated notes with the proceeds from our First Lien Term Loan and our Second Lien Term Loan. On each of May 9, 2013 and May 9, 2014, we refinanced our Second Lien Term Loan with incremental borrowings under our First Lien Term Loan in an aggregate amount of $85.0 million. The Second Lien Term Loan was repaid in full as part of the 2014 refinancing. The 2013 and 2014 refinancings resulted in recognized loss on extinguishment of debt of $7.9 million and $2.9 million, respectively. In the second quarter of 2015, we repaid $223.0 million of principal on our First Lien Term Loan using proceeds from our IPO. This repayment resulted in a loss on extinguishment of debt of $638 thousand.
On July 31, 2015, we completed a subsequent refinancing of our First Lien Term Loan and Revolving Credit Facility. See Note 11 – Subsequent Events in the Notes to Condensed Consolidated Financial Statements for additional details..
We believe that our cash flows from operations, cash on hand and available borrowings under our Revolving Credit FacilityRevolver will be sufficient to meet our liquidity needs during the next twelve months and beyond. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of indebtedness, including borrowings under our Revolving Credit Facility,Revolver, equity financings or a combination thereof. It is not guaranteed that we will be able to obtain this additional liquidity on reasonable terms, or at all. Our liquidity and our ability to meet our obligations and fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control. Accordingly, there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under our senior secured credit facilities or otherwise to meet our liquidity needs. Although we have no specific current plans to do so, ifIf we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions.
21
Cash Flows
The following table presents a summary of our cash flow for the periods indicated:indicated (in thousands):
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| Six months ended June 30, |
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| Nine months ended September 30, |
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| 2015 |
| 2014 |
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| 2015 |
| 2014 |
| ||||
Net cash provided by operating activities |
| $ | 37,531 |
| $ | 27,131 |
|
| $ | 66,315 |
| $ | 39,534 |
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Net cash used in investing activities |
|
| (15,179) |
|
| (32,376) |
|
|
| (32,625) |
|
| (40,024) |
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Net cash used in financing activities |
|
| (9,392) |
|
| (23,496) |
|
|
| (16,859) |
|
| (26,896) |
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Net increase (decrease) in cash |
| $ | 12,960 |
| $ | (28,741) |
|
| $ | 16,831 |
| $ | (27,386) |
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Operating Activities
Cash provided by operating activities consisted of net income adjusted for certain non‑cash items, including depreciation and amortization, equity‑based compensation, extinguishment of debt, and deferred income taxes, as well as the effect of changes in working capital and other activities.
NetFor the nine months ended September 30, 2014 and 2015, cash provided by operating activities for the six months ended June 30, 2015 was $37.5amounted to $39.5 million compared to $27.1and $66.3 million, for the six months ended June 30,respectively. In 2014, an increase of $10.4 million, or 38.2%. Net cash provided by operating activities for the six months ended June 30, 2015 was drivenoperations primarily resulted from net earnings after adding back non-cash items offset by an increase in net loss of $47.8 million, as adjusted for the exclusion of non‑cash expenses totaling $91.5 million, and the negative net effect of $6.1 million of changes in working capital and other balance sheet accounts resultingof $9.8 million. In 2015, cash provided by operations primarily resulted from net earnings after adding back non-cash items offset by an increase in net working capital of $2.1 million. The increase in cash inflowsflow from operations in 2015 as compared to the same period in 2014 is due to an increase in profitability after adjusting for non-cash expenses, a decrease in cash interest expense as a result of $37.5 million.repayment of principal using proceeds from our IPO and refinancing our credit facilities at lower interest rates and to a lesser extent an improvement in net working capital. Net working capital improved because of an increase in deferred revenue as a result of revenue growth. We typically bill and receive funds from clients in advance of services provided.
23
Investing Activities
Our primary investing activities consisted of acquisition‑related costsrelate to acquisitions and purchases of property and equipment, which includes investments in capitalized computer software development costs, facilities and infrastructure.equipment.
NetFor the nine months ended September 30, 2014 and 2015, cash used in investing activities amounted to $40.0 million and $32.6 million, respectively. Cash paid for acquisitions, net of cash acquired was $15.2$27.8 million for the six months ended June 30, 2015 compared to $32.4 million for the six months ended June 30,in 2014 a decrease of $17.2 million, or 53.1%. This decrease was primarily due toand included the acquisitions of NDNQI and DCS duringand $11.7 million in 2015 and included the six months ended June 30,acquisition of HPI. In 2014, totaling $27.8 million. Purchases of property and equipment of $15.2 million for the six months ended June 30, 2015 exceeded purchases of property and equipment were $12.2 million and included $10.7 million of $4.6 million for the six months ended June 30, 2014, as we continued to invest in infrastructure, facilities and software development. Capital investments were lower during the six months ended June 30, 2014 as several largercapitalized software development projectscosts and $1.5 million of equipment and facilities. In 2015, purchases of property and equipment were $20.9 million and included $20.1 million of capitalized software development costs and $820,000 of equipment and facilities. Capitalized software development costs increased in the planning stages,2015 from greater investments in software development and therefore not yet eligible for capitalization.technology projects.
Financing Activities
Our primary financing activities consisted of borrowings under our credit facilities, payments on our long‑term debt and capital leases, repurchases of equity interests and proceeds from sales of equity units by our parent to employees, which were subsequently contributed to our equity. Additionally, financing activities include proceeds from our IPO, distributions related to our IPO and withholding of shares to satisfy employee tax withholding related to vested restricted stock units.
NetFor the nine months ended September 30, 2014 and 2015, cash used in financing activities was $9.4amounted to $26.9 million for the six months ended June 30, 2015 comparedand $16.9 million, respectively. In 2014, we used borrowings and our cash balances to $23.5fund operations after investing activities of $490,000, payments on indebtedness of $63.6 million for the six months ended June 30, 2014, a decrease of $14.1 million, or 60.2%. For the six months ended June 30, 2015, net cash used inand other financing activities was driven byrelated primarily to equity-related expenses and payments on long-term debtcapital leases. In 2015, we used cash generated from operations after investing activities of $225.1$33.7 million withholding of sharesalong with $234.4 million raised from our IPO in May 2015 primarily to satisfyreduce our borrowings and to fund minimum employee tax withholdingwithholdings for vested restricted stock unitsaccelerated vesting of $10.8 million, anemployee equity incentives as a result of our IPO, a final IPO-related distribution payment to Vestar of $8.5 million,our majority shareholder and payments on capital lease obligations of $2.2 millionobligations. In 2015, we also incurred fees and the repurchase of equity interests of $0.7 million, offset by the net proceeds ofpayments related to entering into a new secured credit facility and used borrowings under this credit facility to retire our IPO of $238.0 million. For the six months ended June 30, 2014, net cash used in financing activities was driven by payments on long-term debt of $58.5 million, repurchases of equity interests of $2.7 million, payments on capital lease obligations of $0.8 million and deferred financing payments of $0.5 million, offset by proceeds from the issuance of long-term debt of $38.8 million.previous credit facility.
22
Senior Secured Credit Facilities
See Note 67 – Revolving Line of Credit and Long-Term Debt in the Notes to Condensed Consolidated Financial Statements for a description of our senior secured credit facilities.
Contractual Obligations and Commitments
Our contractual obligations and commitments as of JuneSeptember 30, 2015 are summarized in the table below.below (in thousands).
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| Thereafter |
| Total |
|
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| Thereafter |
| Total |
| ||||||||||||||
Long-term debt(a) |
| $ | 6,024 |
| $ | 11,890 |
| $ | 11,687 |
| $ | 174,816 |
| $ | — |
| $ | — |
| $ | 204,417 |
|
| $ | 3,242 |
| $ | 12,840 |
| $ | 12,645 |
| $ | 12,460 |
| $ | 12,275 |
| $ | 147,367 |
| $ | 200,829 |
|
Capital lease obligations |
|
| 2,991 |
|
| 4,583 |
|
| 2,830 |
|
| 788 |
|
| 477 |
|
| 40 |
|
| 11,709 |
|
|
| 2,043 |
|
| 5,147 |
|
| 3,052 |
|
| 788 |
|
| 477 |
|
| 40 |
|
| 11,547 |
|
Operating lease obligations(b) |
|
| 1,469 |
|
| 2,575 |
|
| 770 |
|
| 761 |
|
| 647 |
|
| 167 |
|
| 6,389 |
|
|
| 738 |
|
| 3,076 |
|
| 2,366 |
|
| 1,221 |
|
| 1,129 |
|
| 695 |
|
| 9,225 |
|
Total |
| $ | 10,484 |
| $ | 19,048 |
| $ | 15,287 |
| $ | 176,365 |
| $ | 1,124 |
| $ | 207 |
| $ | 222,515 |
|
| $ | 6,023 |
| $ | 21,063 |
| $ | 18,063 |
| $ | 14,469 |
| $ | 13,881 |
| $ | 148,102 |
| $ | 221,601 |
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(a)Represents the principal amount of our long‑term debt, including current portion, and the expected cash payments for interest on our long‑term debt based on the interest rates in place and amounts outstanding as of JuneSeptember 30, 2015.
(b)For a more detailed description of our operating leases, see Note 9 – Leases in the Notes to Consolidated Financial Statements included in our prospectus filed with the SEC on May 22, 2015 pursuant to Rule 424(b)(4) under the Securities Act.
24
Off‑Balance Sheet Arrangements
As of JuneSeptember 30, 2015, we do not have any off‑balance sheet transactions or interests.
Application of Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared using accounting principles generally accepted in the United States of America. Our significant accounting policies are discussed in Note 2 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in our prospectus filed with the SEC on May 22, 2015 pursuant to Rule 424(b)(4) under the Securities Act, and in Note 2 – Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements included in Item 1. The preparation of these financial statements requires management to make estimates and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. If actual amounts are ultimately different from previous estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes its critical accounting policies that reflect its more significant estimates and assumptions relate to revenue recognition, property and equipment, goodwill and intangible assets, and equity-based compensation. See “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our prospectus filed with the SEC on May 22, 2015 pursuant to Rule 424(b)(4) under the Securities Act.
23
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014 09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance under GAAP when it becomes effective. On July 9,In August 2015, the FASB deferred the effective date by one year to December 15, 2017 for annual and interim reporting periods beginning after that date.December 15, 2017. The FASB also proposedis permitting early adoption of the standard, but not beforeuntil annual and interim reporting periods beginning after December 15, 2016, the original effective date of December 15, 2016.date. An entity may choose to adopt ASU 2014-09 either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the standard. We are currently in the process of evaluating the impact that this new guidance will have on our consolidated financial statements and our method of adoption.
In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. In addition, this update changes the accounting for software licenses to be consistent with other licenses of intangible assets. This standard is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. An entity may choose to adopt this ASU either retrospectively or prospectively to all arrangements entered into or materially modified after the effective date. We are currently in the process of evaluating the impact the adoption of this standard will have on our consolidated financial statements and our method of adoption.
25
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This standard is effective for annual and interim periods beginning after December 15, 2015, butwith early adoption permitted. We adopted ASU 2015-03 during the three months ended September 30, 2015 and prior period amounts were reclassified to conform to the current period presentation. As of December 31, 2014, debt issuance costs of $977,000 were reclassified from deferred financing fees, net to long-term debt, less current portion on the Condensed Consolidated Balance Sheet. The adoption of ASU 2015-03 did not impact our consolidated financial position, results of operations or cash flows.
In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. This ASU added an SEC paragraph addressing the presentation of debt issuance costs related to line-of-credit arrangements since ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff does not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted ASU 2015-15 during the three months ended September 30, 2015. There were no adjustments to the presentation of debt issuance costs relating to the line-of-credit arrangement and no impact on our financial position, results of operations or cash flows upon adoption of the new standard.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”. This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. This standard is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We are currently in the process of evaluating the impact the adoption of this standard will have on our consolidated financial statements.
Emerging Growth Company
We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act and we could remain an “emerging growth company” until as late as December 31, 2020. For as long as we are an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding executive compensation in our annual reports and proxy statements.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
26
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are subject to interest rate risk in connection with our long‑term indebtedness. Our principalprimary interest rate exposure relates to loans outstanding under our Revolving Credit FacilityTerm Loan and First Lien Term Loan.Revolver. All outstanding indebtedness under the Revolving Credit FacilityTerm Loan and First Lien Term LoanRevolver bears interest at a variable rate. Each quarter point change in interest rates on such indebtedness under our First Lien Term Loan would result in a change of $0.5 million$468,000 to our interest expense on an annual basis, based on our outstanding balance of $183.3$185.0 million (exclusive of the original issue discount)deferred financing fees) at JuneSeptember 30, 2015. There were no borrowings under the Revolving Credit FacilityRevolver at JuneSeptember 30, 2015 or December 31, 2014.2015. Assuming the $29.9$74.9 million of current borrowing capacity were drawn under the Revolving Credit Facility,Revolver, a hypothetical quarter point change in interest rates on such variable rate debt would change our annual interest expense by $0.1 million.$187,000.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control
There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely otto materially affect, our internal control over financial reporting.
From time to time, we may be involved in various legal proceedings and subject to claims that arise in the ordinary course of business. Although the results of litigation and claims are inherently unpredictable and uncertain, we are not currently a party to any legal proceedings the outcome of which, if determined adversely to us, are believed to, either individually or taken together, have a material adverse effect on our business, operating results, cash flows or financial condition. Regardless of the outcome, litigation has the potential to have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
There have been no material changes to the risk factors previously disclosed in “Risk Factors” included in our prospectus filed with the SEC on May 22, 2015 pursuant to Rule 424(b)(4) under the Securities Act.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
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Use of Proceeds from Registered Securities
On May 27, 2015, we completed our IPO of 8,900,000 shares of common stock and, upon the underwriters’ exercise of their option to purchase additional shares, issued an additional 1,335,000 shares for a total of 10,235,000 shares issued at an offering price of $25.00 per share. Proceeds from the IPO were approximately $234.6$234.4 million, net of underwriting discounts and commissions and offering-related transaction costs incurred, which included $3.4 million of offering-related transaction costs incurred but not yet paid as of June 30, 2015.incurred. All of the shares were sold pursuant to our registration statement on Form S-1, as amended (File No. 333-203248), that was declared effective by the SEC on May 20, 2015. Our common stock is currently traded on the New York Stock Exchange under the symbol “PGND”.
There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with SEC on May 22, 2015 pursuant to Rule 424(b)(4) under the Securities Act. We used a portion of the additional proceeds from the underwriters’ option to purchase additional shares from us to repay $48.0 million in principal of borrowings outstanding under our First Lien Term Loan Facility.Loan.
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Exhibit |
| Description of Exhibit | |
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| 31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 |
| Certifications of Chief Executive Officer and Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS |
| XBRL Instance Document |
| 101.SCH |
| XBRL Taxonomy Extension Schema Document |
| 101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
* Previously filed.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| PRESS GANEY HOLDINGS, INC. |
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| By: | /S/ PATRICK T. RYAN |
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| Name: | Patrick T. Ryan |
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| Title: | Chief Executive Officer |
November 5, 2015 | By: | /S/ BREHT T. FEIGH | |
Name: | Breht T. Feigh | ||
Title: | Chief Financial Officer |
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