HealthEquity(US:HQY)2021-03-31 20:04Part I Business HealthEquity provides technology-enabled platforms for Health Savings Accounts (HSAs) and Consumer-Directed Benefits (CDBs), managing millions of accounts and billions in assets, with revenue from service, custodial, and interchange fees, significantly expanded by the WageWorks acquisition Key Metrics as of January 31, 2021 | Metric | Value | | :--- | :--- | | HSAs | 5.8 million | | HSA Assets | $14.3 billion | | Complementary CDBs | 7.0 million | | Total Accounts | 12.8 million | | Network Partners | 174 | | Clients | ~100,000 | - The company's revenue is generated from three primary sources: service fees from clients, custodial revenue from HSA assets and client-held funds, and interchange fees from member card payments20 - Completed the acquisition of WageWorks, Inc. on August 30, 2019, for approximately $2.0 billion in cash, financed by a new term loan and cash on hand, strategically expanding direct employer sales and providing a comprehensive suite of CDBs2122 - As of January 31, 2021, the company had 3,039 team members (3,001 full-time, 38 part-time), with the workforce comprising 63% women and 33% people of color75 Risk Factors The company faces significant risks including the COVID-19 pandemic's impact on interest rates and revenue, integration challenges from the WageWorks acquisition, internal control weaknesses, potential changes to tax-advantaged benefits, and intense competition - The COVID-19 pandemic has materially impacted the business through lower interest rates affecting custodial revenue, reduced commuter benefit usage impacting service and interchange revenue, and increased unemployment affecting overall demand9697 - Management identified material weaknesses in internal control over financial reporting within the acquired WageWorks subsidiary, which could adversely affect timely and accurate financial reporting105 - The business is highly dependent on the tax-advantaged status of HSAs and other CDBs, and any elimination or reduction of these tax benefits would materially harm the company107 - The company faces significant competition from banks (Optum, Webster), retail investment firms (Fidelity), and benefits administrators, with competitors potentially having greater resources and brand recognition112116117 - Cyber-attacks and data security incidents are a major risk due to the sensitive financial and health information handled, where a breach could lead to significant financial and reputational damage120121 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None192 Properties The company leases all its facilities, including its principal executive offices in Draper, Utah, and believes current spaces are sufficient - The company leases all its facilities, with its main office located in Draper, Utah193 Legal Proceedings The WageWorks subsidiary is involved in material litigation, including securities class action and derivative lawsuits, with further details in Note 7 of the financial statements - The company's subsidiary, WageWorks, is involved in pending material litigation, and for further details, refer to Note 7—Commitments and contingencies194 Mine Safety Disclosures This item is not applicable to the company's business - Not applicable195 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "HQY", with no current plans for cash dividends as earnings are retained for growth - Common stock is listed on the NASDAQ Global Select Market under the ticker symbol "HQY"196 - The company has no current plans to pay dividends and intends to retain earnings to fund future growth198 Selected Financial Data This item is not applicable - Not applicable203 Management's Discussion and Analysis of Financial Condition and Results of Operations FY2021 saw 38% revenue growth to $733.6 million and 23% Adjusted EBITDA increase to $240.8 million, driven by the WageWorks acquisition, despite a net income decrease to $8.8 million due to COVID-19 impacts and higher costs Fiscal Year 2021 vs. 2020 Financial Highlights | Metric (in millions) | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $733.6 | $532.0 | 38% | | Net Income | $8.8 | $39.7 | (78)% | | Adjusted EBITDA | $240.8 | $196.5 | 23% | Revenue Breakdown (FY 2021 vs. FY 2020) | Revenue Source (in millions) | FY 2021 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Service revenue | $431.0 | $262.9 | 64% | | Custodial revenue | $190.9 | $181.9 | 5% | | Interchange revenue | $111.7 | $87.2 | 28% | | Total revenue | $733.6 | $532.0 | 38% | - The increase in revenue was primarily driven by the inclusion of a full year of WageWorks' operations, with service revenue growth partially offset by COVID-19's negative impact on commuter benefits, and custodial revenue growth tempered by a significant decrease in the yield on HSA cash (from 2.44% to 2.06%) due to Federal Reserve rate cuts269270 - As of January 31, 2021, the company had achieved approximately $60 million of the targeted $80 million in annualized net synergies from the WageWorks acquisition215 - Cash and cash equivalents increased to $328.8 million at year-end, largely due to net proceeds of $286.8 million from a follow-on public offering in July 2020, with $200 million of these proceeds used to prepay long-term debt294296299 Quantitative and Qualitative Disclosures About Market Risk The company faces significant interest rate risk impacting custodial revenue on $14.3 billion in HSA assets and $986 million in client funds, and interest expense on its $1.0 billion variable-rate loan, alongside credit and market concentration risks - A sustained decline in prevailing interest rates negatively affects custodial revenue earned on HSA Assets ($14.3 billion) and Client-held funds ($986 million)327328 - The company has significant interest rate risk on its debt, where a one percent increase in the interest rate on its $1.0 billion outstanding credit facility would result in approximately $9.9 million of additional annual interest expense as of January 31, 2021332 - Concentration of credit risk exists as cash and cash equivalents of $328.8 million are held in accounts that frequently exceed federally insured limits326 Financial Statements and Supplementary Data The audited financial statements include an independent auditor's report with an unqualified opinion on financials but an adverse opinion on internal controls due to material weaknesses at the WageWorks subsidiary - The independent auditor, PricewaterhouseCoopers LLP, issued an adverse opinion on the Company's internal control over financial reporting as of January 31, 2021337 - The adverse opinion was due to several material weaknesses at the WageWorks subsidiary, including ineffective risk assessment, information and communication, monitoring, controls over the accounting close process, the contract-to-cash cycle, and IT general controls337347 Consolidated Balance Sheet Highlights (as of Jan 31, 2021) | Account (in millions) | Value | | :--- | :--- | | Total Assets | $2,710.4 | | Goodwill & Intangibles, net | $2,094.2 | | Total Liabilities | $1,331.7 | | Long-term Debt, net | $924.2 | | Total Stockholders' Equity | $1,378.7 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None486 Controls and Procedures Management concluded disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting at the WageWorks subsidiary, with a remediation plan underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of January 31, 2021488 - The ineffectiveness was due to material weaknesses in internal control over financial reporting at the WageWorks subsidiary492 - Specific material weaknesses were identified in: Risk Assessment, Information and Communication, Monitoring, Accounting Close and Financial Reporting, Contract to Cash Process, and Information Technology General Controls (ITGCs)495496497498499 - Management is actively working on remediation efforts, including enhancing risk assessment, formalizing policies, improving process-level controls, and consolidating IT systems502503504 Other Information The company reports no other information for this item - None506 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement, including the Code of Business Conduct and Ethics - The required information is incorporated by reference from the company's 2021 Proxy Statement508 - The company has a Code of Business Conduct and Ethics applicable to all team members, officers, and directors, available on its website509 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2021 Proxy Statement - The required information is incorporated by reference from the company's 2021 Proxy Statement510 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the 2021 Proxy Statement - The required information is incorporated by reference from the company's 2021 Proxy Statement511 Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement - The required information is incorporated by reference from the company's 2021 Proxy Statement512 Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2021 Proxy Statement - The required information is incorporated by reference from the company's 2021 Proxy Statement513 Part IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements and notes, with schedules omitted as information is included elsewhere - All required financial statements are included in the report515 - Financial statement schedules have been omitted because they are not applicable or the information is included within the consolidated financial statements and notes516 Form 10-K Summary This item is not applicable - None523