Cotiviti Announces Third Quarter 2016 Results

Cotiviti Holdings Inc. (NYSE:COTV) ("Cotiviti"), a leading provider of analytics-driven payment accuracy solutions primarily focused on the healthcare industry, today announced financial results for the three and nine months ended September 30, 2016. The Company will host a conference call on November 10, 2016 at 8:30 a.m. Eastern Time to discuss its results.

"We continue to achieve strong operating and financial performance as a result of our successful execution on our long-term strategic plan by delivering unique value and service to our clients every day. Our third quarter results demonstrate the strength of our business and our very talented team's dedication to serving our clients, with total revenue growth of 14% compared to the prior year period driven by 16% revenue growth in our Healthcare segment," said Doug Williams, Chief Executive Officer. "Our robust performance, as shown by the 19% growth in non-GAAP Adjusted EBITDA in the third quarter, was driven by our ability to deliver tangible payment solutions to our clients through our proprietary technology platform, advanced analytics capabilities and the unique expertise collected from decades of experience across the payment continuum. In both Healthcare and Retail, payment complexity continues to grow and drive demand for our services. Beyond the economic benefit, assuring payment accuracy also supports our clients' relationships with their providers and suppliers, enhancing the overall value we deliver."

"As recently announced by the Centers for Medicare and Medicaid Services (CMS), we are pleased to have been selected once again as a national contractor for the CMS Recovery Audit Program for both Region 2 and Region 3," continued Doug Williams. "We look forward to continuing to generate tangible value to the Medicare system, enabling the program to better serve all stakeholders."

"As a result of the strength of our business model and the successful debt refinancing we completed in the third quarter of 2016, we were able to further reduce our net leverage ratio to 3.3 times at September 30, 2016 from 3.5 times at June 30, 2016, adding flexibility and strength to our balance sheet," said Steve Senneff, Chief Financial Officer. "Using our strong cash flow, we will continue to make strategic investments in technology and analytics to continuously evolve our payment accuracy solutions to create value for clients while also benefiting the broader healthcare industry cost containment efforts."

Third Quarter 2016 Financial Results
  • Total revenue for the quarter increased 14% to $156.2 million, compared to $136.9 million in the third quarter a year ago. Revenue growth was driven by a 16% increase in the Healthcare segment to $138.5 million, with the Global Retail and Other segment contributing $17.8 million, essentially flat compared to the same period a year ago. Healthcare revenue was favorably impacted in the quarter by an increase in volume and expanded adoption of our solutions within existing healthcare clients. Retail revenue was essentially unchanged from the prior year quarter primarily due to a regulatory change in the United Kingdom.
  • Net income increased 163% to $4.6 million, or $0.05 per diluted share for the third quarter, compared to a loss of $7.3 million in the prior year quarter, or $(0.09) per diluted share. The debt refinancing in the third quarter 2016 resulted in a $9.3 million loss on extinguishment of debt. In addition, the impact of a higher stock price triggered the vesting of substantially all performance-based stock options resulting in total stock compensation expense of $17.0 million for the third quarter 2016. Net loss in the third quarter of 2015 was driven by a $27.8 million impairment charge on the Company's trademark assets due to the Cotiviti rebranding.
  • Non-GAAP Adjusted EBITDA for the quarter was $61.6 million, compared to $51.9 million for the quarter a year ago, or a 19% increase.
  • Non-GAAP Adjusted Net Income for the quarter was $33.7 million, or $0.36 per diluted share, compared to $26.5 million, or $0.34 per diluted share a year ago.

Nine Months 2016 Financial Results
  • Total revenue for the nine months ended September 30, 2016, increased 17% to $457.3 million, compared to $389.9 million for the same period a year ago. Revenue growth was driven by a 20% increase in the Healthcare segment to $403.6 million, with the Global Retail and Other segment contributing $53.6 million, up slightly from the same period a year ago. Healthcare revenue growth for the first nine months of 2016 was primarily driven by the success of existing client adoption of new solutions, the addition of new clients and our ability to cross sell our services across our client base. Healthcare revenue also benefitted from $5 million for special projects in the second quarter 2016.
  • Net income increased 403% to $23.6 million, or $0.27 per diluted share for the nine months ended September 30, 2016, compared to a $4.7 million in the prior year period, or $0.06 per diluted share. The increase in net income for 2016 to date is driven by the 17% increase in revenue partially offset by a $16.4 million loss on extinguishment of debt due to debt repayments in the second quarter and the refinancing in the third quarter, as well as stock-based compensation of $21.5 million. Results for the nine months ended September 2015 were adversely impacted by a $27.8 million impairment charge on the Company's trademark assets due to the Cotiviti rebranding.
  • Non-GAAP Adjusted EBITDA for the nine-months ended September 2016 was $175.3 million, compared to $146.9 million for the same period a year ago, or a 19% increase.
  • Non-GAAP Adjusted Net Income for the quarter was $87.1 million, or $1.00 per diluted share, compared to $68.1 million, or $0.88 per diluted share in the comparable period a year ago.

Guidance

Cotiviti is increasing full year 2016 guidance as follows:
  • Total revenue in a range of $615 - $620 million, up from $610 to $615 million; and
  • Adjusted EBITDA in a range of $235 - $237 million, up from $233 to $235 million.

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

Conference Call Information

To participate in the conference call, domestic callers can dial (877) 883-0383 and international callers can dial (412) 902-6506 and provide the following conference passcode: 9856769. The call will also be webcast and be accessible on the Investor page of Cotiviti's website at http://investors.cotiviti.com.

Supplemental Financial Information

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

About Cotiviti

Cotiviti is a leading payment accuracy provider that helps healthcare payers and retailers achieve their business objectives by unlocking value from the incongruities the company discovers in the complex interactions customers have with stakeholders. Cotiviti helps clients capture over $3 billion annually through improved payment accuracy. Cotiviti provides services to eight of the top ten U.S. healthcare payers and eight of the top ten U.S. retailers.

Forward-Looking Statements

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

The forward-looking statements contained in this press release are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. These statements are not guarantees of performance or results. These assumptions and our future performance or results involve risks and uncertainties (many of which are beyond our control). Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following: our inability to successfully leverage our existing client base by expanding the volume of claims reviewed and cross-selling additional solutions; improvements to healthcare claims and retail billing processes reducing the demand for our solutions or rendering our solutions unnecessary; healthcare spending fluctuations; our clients declining to renew their agreements with us or renewing at lower performance fee levels; inability to develop new clients; delays in implementing our solutions; system interruptions or failures, including cyber-security breaches, identity theft or other disruptions that could compromise our information; our failure to innovate and develop new solutions for our clients; our failure to comply with applicable privacy, security and data laws, regulations and standards; changes in regulations governing healthcare administration and policies, including governmental restrictions on the outsourcing of functions such as those that we provide; loss of a large client; consolidation among healthcare payers or retailers; slow development of the healthcare payment accuracy market; negative publicity concerning the healthcare payment industry or patient confidentiality and privacy; significant competition for our solutions; our inability to protect our intellectual property rights, proprietary technology, information, processes and know-how; compliance with current and future regulatory requirements; declines in contracts awarded through competitive bidding or our inability to re-procure contracts through the competitive bidding process; our failure to accurately estimate the factors upon which we base our contract pricing; our inability to manage our growth; our inability to successfully integrate and realize synergies from the merger of Connolly Superholdings, Inc. and iHealth Technologies, Inc. in May 2014 or any future acquisitions or strategic partnerships; our failure to maintain or upgrade our operational platforms; our failure to reprocure our Medicare Recovery Audit Contractor program contract; our rebranding may not be successful; litigation, regulatory or dispute resolution proceedings, including claims or proceedings related to intellectual property infringements; our inability to expand our retail business; our inability to manage our relationships with information suppliers, software vendors or utility providers; fluctuation in our results of operations; changes in tax rules; risks associated with international operations; our inability to realize the book value of intangible assets; our success in attracting and retaining qualified employees and key personnel; and general economic, political and market forces and dislocations beyond our control; risks related to our substantial indebtedness and holding company structure; volatility in bank and capital markets; our status as a controlled company and as an emerging growth company; and provisions in our amended and restated certificate of incorporation. Additional factors or events that could cause our actual performance to differ from these forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual financial condition, results of operations, future performance and business may vary in material respects from the performance projected in these forward-looking statements.

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

Non-GAAP Financial Measures

The Company defines Adjusted EBITDA as net income (loss) before depreciation and amortization, impairment of intangible assets, interest expense, other non-operating (income) expense such as foreign currency translation, income tax expense (benefit), gain on discontinued operations, transaction-related expenses and other, stock-based compensation and loss on extinguishment of debt. The Company defines Adjusted Net Income as net income adjusted for non-cash and other non-recurring items.

Management believes Adjusted EBITDA is useful because it provides meaningful supplemental information about our operating performance and facilitates period-to-period comparisons without regard to our financing methods, capital structure or other items that we believe are not indicative of our ongoing operating performance. Management believes Adjusted Net Income is useful because it provides meaningful supplemental information about our operating performance and facilitates period-to-period comparisons without regard to non-cash expenses and other items that are one-time in nature. In order to assure that all investors have access to similar data the Company has determined that it is appropriate to provide these non-GAAP financial measures. Management believes we are enhancing investors' understanding of our business and our results of operations, as well as assisting them in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA and Adjusted Net Income are intended as supplemental measures of our performance that is not required by, or presented in accordance with U.S. generally accepted accounting principles, or GAAP. Adjusted EBITDA and Adjusted Net Income are not determined in accordance with GAAP, and should not be considered in isolation or as an alternative to net income, income from operations, net cash provided by operating, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP.
   
Cotiviti Holdings, Inc.
Consolidated Balance Sheets
 
September 30, December 31,
(in thousands) 2016 2015
 
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 43,770 $ 149,365
Restricted cash 10,202 10,741

Accounts receivable, net of allowance for doubtful accounts of $1,561 and$1,053 at September 30, 2016 and December 31, 2015, respectively; and net ofestimated allowance for refunds and appeals of $31,887 and $33,406 atSeptember 30, 2016 and December 31, 2015, respectively
83,345 78,856
Prepaid expenses and other current assets 23,313 24,044
Deferred tax assets   33,346     32,919  
Total current assets 193,976 295,925
Property and equipment, net 63,768 57,452
Goodwill 1,196,350 1,197,044
Intangible assets, net 548,593 594,410
Other long-term assets   2,866     2,176  
TOTAL ASSETS $ 2,005,553   $ 2,147,007  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 18,000 $ 21,099
Customer deposits 10,202 10,741
Accounts payable and accrued other expenses 28,331 29,521
Accrued compensation costs 41,520 42,902
Estimated liability for refunds and appeals   70,596     67,775  
Total current liabilities 168,649 172,038
Long-term liabilities:
Long-term debt 766,042 1,012,971
Other long-term liabilities 9,454 12,199
Deferred tax liabilities   152,967     162,203  
Total long-term liabilities   928,463     1,187,373  
Total liabilities   1,097,112     1,359,411  
Commitments and contingencies (Note 6)
 
Stockholders' equity:

Common stock ($0.001 par value; 600,000,000 and 122,000,000 shares authorized,90,177,862 and 77,237,711 issued, and 90,170,462 and 77,230,311 outstanding atSeptember 30, 2016 and December 31, 2015, respectively)
90 77
Additional paid-in capital 905,963 807,419
Retained earnings (deficit) 8,625 (14,935 )
Accumulated other comprehensive loss (6,139 ) (4,867 )
Treasury stock, at cost (7,400 shares at September 30, 2016 and December 31, 2015)   (98 )   (98 )
Total stockholders' equity   908,441     787,596  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,005,553   $ 2,147,007  
 
           
Cotiviti Holdings Inc.

Consolidated Statements of Comprehensive Income (Loss)
 
Three Months Ended September 30, Nine Months Ended September 30,
(unaudited, in thousands except per share data) 2016 2015 2016 2015
 
Net revenue $ 156,241 $ 136,936 $ 457,250 $ 389,880
Cost of revenue (exclusive of depreciation and amortization, stated separately below):
Compensation 58,517 46,424 167,263 132,928
Other costs of revenue   6,658     5,646     17,331     14,629  
Total cost of revenue   65,175     52,070     184,594     147,557  

Selling, general and administrative expenses (exclusive ofdepreciation and amortization, stated separately below):
Compensation 32,496 16,997 74,782 52,586
Other selling, general and administrative expenses   13,978     16,351     44,152     44,423  
Total selling, general and administrative expenses   46,474     33,348     118,934     97,009  
Depreciation and amortization of property and equipment 5,218 3,773 14,864 9,270
Amortization of intangible assets 15,203 15,437 45,618 46,256
Transaction-related expenses 16 354 909 354
Impairment of intangible assets   -     27,826     -     27,826  
Total operating expenses   132,086     132,808     364,919     328,272  
Operating income 24,155 4,128 92,331 61,608
 
Other expense (income):
Interest expense 9,625 16,180 40,345 49,855
Loss on extinguishment of debt 9,349 - 16,417 4,084
Other non-operating (income) expense   (113 )   (187 )   (771 )   (384 )
Total other expense (income) 18,861 15,993 55,991 53,555
 
Income (loss) from continuing operations before income taxes 5,294 (11,865 ) 36,340 8,053
Income tax expense (benefit)   711     (4,571 )   12,780     3,932  
Income (loss) from continuing operations 4,583 (7,294 ) 23,560 4,121
 
Gain on discontinued operations, net of tax   -     -     -     559  
Net income (loss) $ 4,583 $ (7,294 ) $ 23,560 $ 4,680
 
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments 14 (1,045 ) (657 ) (1,284 )
Change in fair value of derivative instruments   (49 )   (1,061 )   (615 )   (2,629 )
Total other comprehensive (loss) income   (35 )   (2,106 )   (1,272 )   (3,913 )
Comprehensive income (loss) $ 4,548   $ (9,400 ) $ 22,288   $ 767  
 
Earnings (loss) per share from continuing operations:
Basic $ 0.05 $ (0.09 ) $ 0.28 $ 0.05
Diluted 0.05 (0.09 ) 0.27 0.05
 
Earnings per share from discontinued operations:
Basic $ - $ - $ - $ 0.01
Diluted - - - 0.01
 
Total earnings (loss) per share:
Basic $ 0.05 $ (0.09 ) $ 0.28 $ 0.06
Diluted 0.05 (0.09 ) 0.27 0.06
 
       
Cotiviti Holdings, Inc.

Consolidated Statements of Cash Flows
 
(unaudited, in thousands) Nine Months Ended September 30,
2016 2015
 
Cash flows from operating activities:
Net income $ 23,560 $ 4,680
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes (8,682 ) (11,596 )
Depreciation and amortization 60,482 55,526
Stock-based compensation expense 21,544 1,624
Amortization of debt issuance costs 3,618 4,274
Accretion of asset retirement obligations 138 108
Loss on impairment of intangible assets - 27,826
Loss on extinguishment of debt 16,417 4,084
Gain on discontinued operations - (900 )
Changes in operating assets and liabilities
Restricted cash 539 9,801
Accounts receivable (4,489 ) (4,984 )
Other current assets (451 ) (23,624 )
Other long-term assets (690 ) 117
Customer deposits (539 ) (9,801 )
Accrued compensation (1,382 ) (3,250 )
Accounts payable and accrued other expenses (4,352 ) (16,180 )
Estimated liability for refunds and appeals 2,821 (5,966 )
Other long-term liabilities 146 (221 )
Other   (335 )   (1,110 )
Net cash provided by operating activities 108,345 30,408
 
Cash flows from investing activities:
Expenditures for property and equipment (22,578 ) (11,022 )
Other investing activities   1,181     406  
Net cash used in investing activities (21,397 ) (10,616 )
 
Cash flows from financing activities:
Net proceeds from issuance of common stock 226,963 -
Proceeds from exercise of stock options 56 210
Proceeds from issuance of long-term debt 800,000 -
Dividends paid (150,000 ) -
Payment of debt issuance costs (6,327 ) (1,086 )
Repayment of debt   (1,062,850 )   (6,075 )
Net cash used in financing activities (192,158 ) (6,951 )
 
Effect of foreign exchanges on cash and cash equivalents   (385 )   (623 )
Net (decrease) increase in cash and cash equivalents (105,595 ) 12,218
Cash and cash equivalents at beginning of period   149,365     118,612  
Cash and cash equivalents at end of the period $ 43,770   $ 130,830  
 
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 24,377   $ 32,714  
Cash paid for interest   35,927     45,154  
Noncash investing activities (accrued property and equipment purchases)   12,000     5,485  
Noncash financing activities (accrued debt issuance costs)   979     -  
 
               
Cotiviti Holdings, Inc.
Reconciliation of Net Income (Loss) to Adjusted EBITDA
 
Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited, in thousands) 2016 2015 Change 2016 2015 Change
Net income (loss) $ 4,583 $ (7,294 ) 163% $ 23,560 $ 4,680 403%
Adjustments to net income (loss):
Depreciation and amortization 20,421 19,210 6% 60,482 55,526 9%
Impairment of intangible assets (a) - 27,826 100% - 27,826 100%
Interest expense 9,625 16,180 41% 40,345 49,855 19%
Other non-operating (income) expense (b) (113 ) (187 ) 40% (771 ) (384 ) 101%
Income tax expense (benefit) 711 (4,571 ) 116% 12,780 3,932 225%
Gain on discontinued operations, net of tax (c) - - - - (559 ) 100%
Transaction-related expenses and other (d) 16 354 95% 909 354 157%
Stock-based compensation (e) 17,042 405 NM 21,544 1,624 NM
Loss on extinguishment of debt (f)   9,349     -   NM   16,417     4,084   302%
Adjusted EBITDA $ 61,634   $ 51,923   19% $ 175,266   $ 146,938   19%
% of revenue 39.4 % 37.9 % 38.3 % 37.7 %
 
(a) Represents an impairment during the quarter ended September 30, 2015 as a result of our rebranding and the related impact to our tradenames.
 
(b) Represents other non-operating (income) expense that consists primarily of gains and losses on transactions settled in foreign currencies. Income received for certain sub-leases is included herein.
 
(c) Represents payment on a $900 note receivable ($559 net of taxes) related to a business that was disposed of in 2012. This note receivable had been reported in the loss on discontinued operations in 2012 upon the sale of that business. Since the date of sale, we had elected to fully reserve the note receivable as the collectability was determined to be uncertain.
 
(d) Represents transaction-related expenses that consist primarily of certain expenses associated with the preparation for our Initial Public Offering and certain corporate development activity.
 
(e) Represents expense related to stock-based compensation awards granted to certain employees, officers and non-employee directors as long-term incentive compensation. We recognize the related expense for these awards ratably over the vesting period. During the three months ended September 30, 2016, performance awards vested resulting in stock compensation expense of $15.9 million.
 
(f) Represents loss on extinguishment of debt that consists primarily of fees paid and write-offs of unamortized debt issuance costs and original issue discount in connection with the repricing of our long-term debt in 2015, the early repayment of a portion of our long-term debt in 2016 and the refinancing of our long-term debt in 2016.
 
Cotiviti Holdings, Inc.                

Reconciliation of Net Income (Loss) to Adjusted Net Income
 
Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited, in thousands) 2016 2015

Percent Change
2016 2015

Percent Change
Net income (loss) $ 4,583 $ (7,294 ) 163% $ 23,560 $ 4,680 403%
Adjustments to net income (loss):
Amortization of Acquired Intangible Assets - Non Tax Deductible 10,402 10,591 2% 31,206 31,785 2%
Amortization of Acquired Intangible Assets - Tax Deductible 4,801 4,846 1% 14,412 14,471 0%
Impairment of intangible assets (a) - 27,826 100% - 27,826 100%
Loss on extinguishment of debt 9,349 - NM 16,417 4,084 302%
Transaction-related expenses and other 16 354 95% 909 354 157%
Stock-based compensation (b) 17,042 405 NM 21,544 1,624 NM
Gain on discontinued operations - - NM - (900 ) 100%
Tax effect of above adjustments (c)   (12,476 )   (10,220 ) 22%   (20,949 )   (15,832 ) 32%
Adjusted Net Income $ 33,717   $ 26,508   27% $ 87,099   $ 68,092   28%
 
Weighted average shares of common stock - Diluted (000s) 93,954 77,224 86,858 77,715
 
Adjusted Net Income per diluted share $ 0.36 $ 0.34 $ 1.00 $ 0.88
 
(a) Represents an impairment during the quarter ended September 30, 2015 as a result of our rebranding and the related impact to our tradenames.
 
(b) Represents expense related to stock-based compensation awards granted to certain employees, officers and non-employee directors as long-term incentive compensation. We recognize the related expense for these awards ratably over the vesting period. During the three months ended September 30, 2016, performance awards vested resulting in stock compensation expense of $15.9 million.
 
(c) This line represents the tax impact of the amortization of acquired intangible assets - tax deductible, a portion of impairment of intangible assets, loss on extinguishment of debt, stock-based compensation and gain on discontinued operations assuming a 40% tax rate.
 
       
Adjusted EBITDA 2016 Guidance Reconciliation
 
(unaudited, in millions) 2016 Guidance Range
Low   High
Net income $ 38 $ 41
Adjustments to net income (1)   197     196
Adjusted EBITDA $ 235   $ 237
 
(1) Adjustments to net income include depreciation and amortization, interest expense, other non-operating (income) expense, income tax expense, transaction-related expenses and other, stock-based compensation and loss on extinguishment of debt. A 40% tax rate is assumed to approximate the Company's effective tax rate.

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