Veradigm (MDRX) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements for the period ended September 30, 2019, show a slight increase in total assets to $3.23 billion. Total revenue for the third quarter was $444.2 million, a 2.7% increase year-over-year, but the company reported a net loss of $5.7 million. Key events include the adoption of the new lease accounting standard (ASU 2016-02), several small business acquisitions, and a significant $145 million accrual for an anticipated settlement with the Department of Justice regarding the Practice Fusion investigation Consolidated Balance Sheets As of September 30, 2019, total assets increased to $3.23 billion from $3.18 billion at year-end 2018, primarily driven by an increase in goodwill and the addition of right-of-use assets from the new lease standard. Total liabilities rose to $1.95 billion from $1.60 billion, largely due to increased current and long-term debt and new operating lease liabilities. Consequently, total stockholders' equity decreased from $1.58 billion to $1.28 billion Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $3,229,941 | $3,181,484 | | Cash and cash equivalents | $129,349 | $174,243 | | Goodwill | $1,387,088 | $1,373,744 | | Right-of-use assets - operating leases | $103,537 | $0 | | Total Liabilities | $1,948,883 | $1,601,057 | | Total current liabilities | $1,177,313 | $797,730 | | Long-term debt | $554,864 | $647,539 | | Total Stockholders' Equity | $1,281,058 | $1,580,427 | Consolidated Statements of Operations For the third quarter of 2019, total revenue increased by 2.7% year-over-year to $444.2 million. However, the company reported a net loss of $5.7 million, an improvement from a $23.8 million net loss in Q3 2018. For the nine-month period, a significant net loss of $163.6 million was recorded, primarily due to a $143.7 million charge in 'Other income (loss), net', related to the anticipated DOJ settlement Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $444,184 | $432,430 | $1,320,693 | $1,307,616 | | Gross Profit | $175,302 | $177,952 | $533,519 | $536,384 | | Income (loss) from operations | $3,182 | $186 | $10,570 | $(66,609) | | Net (loss) income | $(5,725) | $(23,846) | $(163,632) | $21,911 | | Net loss attributable to Allscripts stockholders | $(5,725) | $(35,991) | $(163,208) | $(11,041) | | Diluted EPS | $(0.03) | $(0.20) | $(0.97) | $(0.06) | Consolidated Statements of Cash Flows For the nine months ended September 30, 2019, net cash provided by operating activities was $33.9 million, a decrease from $81.6 million in the prior year period, impacted by a $30 million tax payment for discontinued operations. Net cash used in investing activities was $130.3 million, driven by capitalized software costs and business acquisitions. Net cash provided by financing activities was $50.4 million, reflecting net credit facility borrowings partially offset by common stock repurchases and the acquisition of non-controlling interests Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $33,944 | $81,554 | | Net cash used in investing activities | $(130,285) | $(233,321) | | Net cash provided by financing activities | $50,373 | $109,388 | | Net decrease in cash and cash equivalents | $(46,071) | $(42,707) | - Key financing activities for the first nine months of 2019 included $102.2 million in common stock repurchases and $54.1 million for the purchase of subsidiary shares owned by non-controlling interest (Pulse8, Inc.)[21][55] Notes to Consolidated Financial Statements Significant notes detail a change in reportable segments to Provider and Veradigm, the adoption of the new lease accounting standard, and revenue recognition practices. The company's contract backlog stood at $3.9 billion. Key events include several business acquisitions, a $145 million accrual for the Practice Fusion DOJ investigation, and the repurchase of $102.2 million of common stock in the first nine months of 2019 - In Q1 2019, the company changed its reportable segments to Provider and Veradigm to align with its strategic focus after the Netsmart divestiture[27][115] - The company adopted the new lease accounting standard (ASU 2016-02) on January 1, 2019, resulting in the recognition of $103.5 million in right-of-use assets and corresponding lease liabilities[28][43][50] - Total contract backlog was $3.9 billion as of September 30, 2019, of which approximately 38% is expected to be recognized as revenue over the next 12 months[38] - Practice Fusion, an Allscripts subsidiary, reached an agreement in principle with the DOJ to resolve civil and criminal investigations for $145.0 million. This amount was accrued in Q3 2019[109] - The company repurchased 9.6 million shares of common stock for $102.2 million during the first nine months of 2019 under its 2018 stock purchase program[73] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 2.7% year-over-year revenue increase for Q3 2019 to $444 million, with bookings up 19% to $236 million. Gross margin declined to 39.5% from 41.2% due to hosting migration costs and other expenses. The Veradigm segment showed strong revenue growth of 7.5% in Q3, while the Provider segment saw a slight decline. A key event impacting results was the $145 million accrual for the Practice Fusion DOJ settlement. Liquidity remains adequate with $139 million in cash and $649 million available under the revolving credit facility Results of Operations Total revenue for Q3 2019 increased 2.7% to $444.2 million, driven by a 14.1% rise in non-recurring revenue. Gross profit decreased slightly by 1.5% to $175.3 million, with gross margin falling to 39.5% from 41.2% due to higher hosting costs. Operating expenses saw a 6.4% decrease in SG&A, while R&D remained flat. The nine-month results were significantly impacted by a $145 million charge for the DOJ settlement, leading to a pre-tax loss of $163.0 million, compared to a $53.2 million income in the prior year, which had benefited from a $172.3 million gain on sale of businesses Revenue Breakdown (in thousands) | Revenue Type | Q3 2019 | Q3 2018 | % Change | | :--- | :--- | :--- | :--- | | Recurring revenue | $349,455 | $349,404 | 0.0% | | Non-recurring revenue | $94,729 | $83,026 | 14.1% | | Total revenue | $444,184 | $432,430 | 2.7% | - Gross margin decreased to 39.5% in Q3 2019 from 41.2% in Q3 2018, primarily due to an increase in hosting migration costs, higher amortization, and recognition of previously deferred expenses[151] - SG&A expenses decreased by 6.4% in Q3 2019 and 12.5% in the nine-month period, mainly due to headcount reductions from the integration of prior acquisitions[153] - Other income (loss), net, for the nine months ended Sep 30, 2019, included a loss of $145 million related to the expected settlement with the DOJ for the Practice Fusion investigation[159] Segment Operations In Q3 2019, the Provider segment's revenue decreased 1.4% to $396.7 million due to known attrition, while its operating margin slightly compressed to 24.4%. The Veradigm segment's revenue grew 7.5% to $41.7 million, driven by organic sales, but its operating margin decreased to 21.5% from 33.1% due to increased hosting migration costs and investments in growth Segment Performance - Q3 2019 vs Q3 2018 (in thousands) | Segment | Revenue (Q3'19) | Revenue (Q3'18) | % Change | Income from Ops (Q3'19) | Income from Ops (Q3'18) | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Provider | $396,679 | $402,213 | (1.4%) | $96,895 | $101,130 | (4.2%) | | Veradigm | $41,680 | $38,775 | 7.5% | $8,975 | $12,850 | (30.2%) | Liquidity and Capital Resources As of September 30, 2019, the company had $139 million in cash and cash equivalents and $649 million available under its revolving credit facility. Net cash from operations for the first nine months was $33.9 million, down from $81.6 million year-over-year. The decrease was mainly due to working capital changes and a $30 million tax payment related to the Netsmart sale. The company plans to fund the $145 million DOJ settlement through cash flows and draws on its credit facility - Principal sources of liquidity as of September 30, 2019, were $139 million in cash and cash equivalents and $649 million available borrowing capacity under the revolving credit facility[184] - Net cash provided by operating activities from continuing operations was $63.9 million for the nine months ended Sep 30, 2019, a slight decrease from $65.3 million in the prior year period[185] - The company plans to fund the expected $145 million settlement with the DOJ through future cash flows and draws on its Revolving Facility[193] Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes to its market risk disclosures as set forth in its Annual Report on Form 10-K for the year ended December 31, 2018 - Market risk disclosures have not changed materially during the nine months ended September 30, 2019[199] Controls and Procedures Management, under the direction of the CEO and CFO, evaluated disclosure controls and procedures and concluded they were effective as of September 30, 2019. The company noted the implementation of internal controls related to the new lease accounting standard adopted on January 1, 2019, but reported no other material changes to its internal control over financial reporting - The company's disclosure controls and procedures were deemed effective as of September 30, 2019[200] - Internal controls were implemented and refined related to the new lease accounting standard adopted in 2019. No other material changes to internal control over financial reporting occurred during the quarter[201] PART II. OTHER INFORMATION Legal Proceedings The company references Note 13 of the financial statements, highlighting the ongoing legal matters. The most significant proceeding is the investigation into Practice Fusion by the Department of Justice (DOJ), for which the company has reached an agreement in principle to pay $145 million to resolve all outstanding civil and criminal investigations - The company incorporates by reference Note 13, which details the agreement in principle with the DOJ to resolve investigations into Practice Fusion for $145 million[109][203] Risk Factors The company highlights a new material risk factor related to the Practice Fusion investigation. This risk centers on the potential failure to finalize the agreement in principle with the DOJ, the significant costs and burdens of compliance if finalized, and the possibility of additional investigations or proceedings from other parties related to the same conduct - A new risk factor was added concerning the finalization of the agreement in principle with the DOJ regarding Practice Fusion[205] - Risks include the failure to reach a final settlement, the potential for substantial monetary penalties or exclusion from federal healthcare programs if the agreement is not complied with, and the possibility of follow-on litigation from other government entities or private parties[206][207][209] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activity under its $250 million program authorized through December 31, 2020. During the third quarter of 2019, the company repurchased 3.46 million shares for a total of $37.1 million. As of September 30, 2019, approximately $111.1 million remained available for future repurchases under the program Stock Repurchase Activity (Q3 2019) | Period (Trade Date) | Total Shares Purchased (in thousands) | Average Price Paid Per Share | Approx. Dollar Value Remaining (in thousands) | | :--- | :--- | :--- | :--- | | Jul 2019 | 0 | $0.00 | $148,104 | | Aug 2019 | 0 | $0.00 | $148,104 | | Sep 2019 | 3,459 | $10.70 | $111,084 | | Total Q3 | 3,459 | $10.70 | $111,084 | Exhibits This section provides a list of exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and Inline XBRL data files - Lists the exhibits filed with the report, such as officer certifications (Rule 13a-14(a), Section 1350) and XBRL data files[212]