ModivCare (MODV) - 2022 Q4 - Annual Report

Part I Item 1. Business ModivCare provides technology-enabled healthcare services, including NEMT, personal care, and RPM, addressing social determinants of health through strategic growth and integrated solutions Overview ModivCare provides integrated NEMT, personal care, and RPM solutions, leveraging technology to address social determinants of health - ModivCare is a technology-enabled healthcare services company offering integrated solutions like NEMT, personal care, and RPM to address SDoH[28] - The company holds a 43.6% minority interest in CCHN Group Holdings, Inc. (Matrix Medical Network), which provides in-home and on-site clinical services[29] Our Development ModivCare has expanded through strategic acquisitions in NEMT, Personal Care, and RPM since its 2003 IPO, supported by significant financing activities Key Acquisitions and Divestitures | Date | Company/Segment | Business | Action | Consideration (approx.) | | :--- | :--- | :--- | :--- | :--- | | Dec 2007 | LogistiCare, Inc. | NEMT | Acquired | $220.0 million | | Nov 2020 | Simplura Health Group | Personal Care | Acquired | $575.0 million | | Sep 2021 | Care Finders Total Care | Personal Care | Acquired | $340.0 million | | Sep 2021 | VRI Intermediate Holdings | RPM | Acquired | $315.0 million | | May 2022 | Guardian Medical Monitoring | RPM | Acquired | $71.3 million | | Nov 2015 | Human Services Segment | Human Services | Divested | $200.0 million | - The company has engaged in significant financing activities, including issuing $500.0 million in Senior Unsecured Notes in November 2020 and another $500.0 million in August 2021 to fund acquisitions. In February 2022, it replaced its old credit facility with a new $325.0 million senior secured revolving credit facility[32] Our Strategies ModivCare's "One ModivCare" strategy integrates NEMT, Personal Care, and RPM services, focusing on technology, organic and inorganic growth, and efficient capital allocation - The company's "One ModivCare" strategy emphasizes alignment across its supportive care services to drive scale, efficiencies, and a better member experience[33] - Key strategic initiatives include a partnership model in NEMT, centralization of non-clinical functions in Personal Care, and gaining market share through enhanced selling in RPM[35] - Growth plans include organic expansion in core Medicaid and Medicare Advantage markets and inorganic growth through consolidation in the fragmented NEMT, Personal Care, and RPM industries[37][40][41][42] - Capital allocation is focused on investing in platforms to streamline operations, enhance technical capabilities, and improve member care, while also assessing opportunities for dividends, share repurchases, and acquisitions[43] Our Operations and Business Segments ModivCare operates as a leading NEMT, personal care, and RPM provider across four segments, driven by an aging population and the shift to value-based care - The company's operations are divided into four business segments: NEMT, Personal Care, RPM, and Corporate and Other[45] - Key business trends driving demand include an aging population, the move towards value-based care, increasing demand for in-home care, and technological advancements[46] - The NEMT segment serves approximately 34.8 million members and managed 54.7 million gross trips in 2022, primarily under capitated contracts with state Medicaid programs and MCOs[54][59] - The Personal Care segment had approximately 15,600 caregivers serving 23,300 patients as of December 31, 2022, with revenue primarily from state Medicaid agencies and MCOs[62][67] - The RPM segment serves approximately 236,000 actively monitored members, offering services like personal emergency response systems and vitals monitoring to health plans and government programs[68][72] - The Corporate and Other segment includes executive, finance, legal, and other corporate functions, as well as the results of the company's equity interest in Matrix Medical Network[70] Governmental Regulations ModivCare's business is subject to extensive federal and state healthcare regulations, with non-compliance risking significant penalties and program exclusion - The business is heavily regulated by federal and state laws, including those governing Medicare/Medicaid, HIPAA, false claims, anti-kickback statutes, and state licensure[71][72] - Non-compliance with regulations like the False Claims Act can result in severe penalties, including significant fines and exclusion from federal healthcare programs[76][78] - The company must adhere to HIPAA and HITECH Act rules regarding the privacy and security of patient health information, with violations carrying substantial civil and criminal penalties[81][83] - The company is subject to periodic surveys and audits by government authorities and payors to ensure compliance, which can result in deficiency findings or adverse actions[96][97] - The company's Personal Care segment has received relief payments from the CARES Act Provider Relief Fund and must comply with its specific terms and conditions[106] Human Capital Management ModivCare's success relies on attracting and retaining talented employees, focusing on competitive compensation, development, and diversity for its approximately 20,000 workforce - As of December 31, 2022, the company employed approximately 20,000 people: ~3,100 in NEMT/Corporate, ~16,400 in Personal Care, and ~500 in RPM[112] - Approximately 2,700 of the Personal Care caregivers in New York were unionized at the end of 2022[112] - The company is focused on inclusion and diversity, with established goals to improve the hiring, development, and retention of diverse employees[113] Item 1A. Risk Factors The company faces significant industry, operational, and regulatory risks, including funding reliance, competition, IT security, acquisition integration, labor shortages, and substantial indebtedness Risks Related to Our Industry The company's performance depends on government and private insurance funding, facing risks from payment model shifts, public health emergencies, and IT security breaches - The business is substantially funded by government and private insurance programs; reductions or limitations in this funding could adversely impact the business[117] - A transition of Medicaid and Medicare beneficiaries to Managed Care Organizations (MCOs) and alternative payment models may limit market share and adversely affect revenues[118] - The company is vulnerable to public health emergencies like pandemics due to its medically fragile end-user population and the nature of its services[123] - Inadequacies or security breaches of IT systems, which store sensitive client data, could lead to legal liability, reputational damage, and material adverse effects on the business[124][125] Risks Related to Our Business ModivCare faces risks from limited payor reliance, pandemic disruptions, accounts receivable delays, goodwill impairment, IT system failures, and challenges in employee retention and acquisition integration - A significant portion of revenue is derived from a limited number of payors; for example, in 2022, one state Medicaid agency accounted for 10.9% of NEMT revenue and another for 12.0% of Personal Care revenue[129] - Pandemics like COVID-19 can adversely affect operations by reducing trip and service hour volumes, creating staffing difficulties, and increasing costs[130][132][133] - Goodwill and intangible assets represent a significant portion of total assets, and impairment could result from factors like loss of contracts or adverse market changes. As of Dec 31, 2022, goodwill was $968.7 million and intangibles were $439.4 million[142][143] - The integration of acquisitions, such as Care Finders and VRI, presents risks including unanticipated costs, cultural harmonization challenges, and potential failure to realize expected benefits[151] Risks Related to Our NEMT Segment The NEMT segment faces risks from contract non-renewal, intense competition, accurate cost estimation for RFPs, potential penalties, and driver reclassification as employees - A significant portion of NEMT contracts are subject to renewal. In 2022, 30.5% of NEMT revenue was generated under state Medicaid contracts subject to renewal in 2023[157] - The company faces competition from national, regional, and local providers, including transportation network companies like Uber and Lyft[159] - A majority of NEMT revenue (87.8% in 2022) is from capitated contracts, where profitability depends on accurately estimating service utilization and costs[165] - Potential reclassification of independent contractor drivers as employees could materially increase operating expenses[166] Risks Related to Our Personal Care Segment The Personal Care segment faces risks from labor shortages, wage pressures, referral source dependency, regulatory hurdles, and potential labor disruptions from unionized caregivers - The in-home personal care industry is highly competitive and fragmented, with relatively few barriers to entry in local markets[168][169] - The business is dependent on maintaining relationships with referral sources like physicians, hospitals, and MCOs, who are not contractually obligated to refer patients[172] - The industry has historically experienced shortages of qualified employees, which could increase wage pressures and turnover, harming the business[180][181] - Approximately 2,700 caregivers in New York are unionized, creating risks of labor disruptions and potentially unfavorable collective bargaining agreement terms[182] Risks Related to Our Remote Patient Monitoring Segment The RPM segment faces intense competition and relies on continuous innovation and market acceptance to sustain growth and demonstrate service benefits - The RPM industry is competitive, with pressure from specialized providers and large health plans that may have greater resources and name recognition[185][186] - The segment's success depends on its ability to innovate, keep pace with technological developments, and achieve market acceptance for its services[188] Risks Related to Our Corporate and Other Segment The company's non-controlling interest in Matrix exposes it to risks from lack of decision-making authority and reliance on Matrix's financial condition - The company holds a non-controlling interest in Matrix and lacks unilateral power to direct its activities, which could lead to conflicts or an inability to take actions deemed appropriate[190][191] Risks Related to Governmental Regulations Operating in a heavily regulated healthcare industry, the company faces risks from non-compliance, regulatory changes, government budgetary shifts, audits, and potential Medicaid beneficiary reductions - The business is heavily regulated by federal and state laws, including those governing Medicare/Medicaid, HIPAA, false claims, anti-kickback statutes, and state licensure[192][193] - Non-compliance with regulations like the False Claims Act can result in severe penalties, including significant fines and exclusion from federal healthcare programs[194][195] - The company must adhere to HIPAA and HITECH Act rules regarding the privacy and security of patient health information, with violations carrying substantial civil and criminal penalties[196][197] - The company is subject to periodic surveys and audits by government authorities and payors to ensure compliance, which can result in deficiency findings or adverse actions[198][199] - The company's Personal Care segment has received relief payments from the CARES Act Provider Relief Fund and must comply with its specific terms and conditions[200] Risks Related to Our Indebtedness The company's substantial indebtedness, including a $325 million credit facility and $1 billion in senior notes, limits operational flexibility and poses refinancing risks - Existing debt agreements contain restrictive covenants that limit flexibility in areas such as incurring additional debt, making investments, and paying dividends[214] - The company has substantial indebtedness and lease obligations that could affect its ability to fund operations and react to changes in the economy[216] - The New Credit Agreement matures in 2027 and the Senior Notes mature in 2025 and 2029; an inability to refinance this debt could adversely affect financial condition[218] Risks Related to Our Common Stock The company identified material weaknesses in internal control over financial reporting, risking investor confidence, alongside stock price volatility and anti-takeover provisions - The company identified material weaknesses in its internal control over financial reporting as of December 31, 2022, related to risk assessment, reporting lines, and accountability, which could affect the accuracy and timing of financial reports[222][224] - Future sales of common stock by existing stockholders, including those held by Coliseum Capital Partners, could cause the stock price to decline[227][228] - The company's stock price may be volatile due to factors such as changes in reimbursement rates, regulatory policies, and overall market conditions[230] - Anti-takeover provisions in the company's charter and bylaws could discourage or prevent a change of control, potentially affecting the stock's trading price[235] Item 2. Properties The company maintains principal executive offices in Denver, CO, and leases/owns various facilities nationwide for its NEMT, Personal Care, and RPM operations - Principal executive offices are in a leased 73,000 sq. ft. space in Denver, CO[238] - The NEMT segment utilizes the former principal offices in Atlanta, GA, and 28 other leased facilities totaling approximately 350,000 sq. ft[239] - The Personal Care segment maintains a primary office in Valley Stream, NY, and 69 other leased locations totaling approximately 200,000 sq. ft[240][241] - The RPM segment owns two properties in Franklin, OH (24,000 sq. ft.) and Sullivan, IL (23,000 sq. ft.)[241] Item 3. Legal Proceedings The company is involved in ordinary course legal proceedings, which management does not expect to materially impact financial condition or operating results - The company is involved in various legal proceedings in the ordinary course of business and records accruals when a loss is probable and reasonably estimable[243] - Management does not currently expect any ongoing or anticipated legal matters to have a material adverse effect on the company's business or financial condition[243] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ModivCare's common stock trades on NASDAQ, with no expected cash dividends and limited share repurchases for tax withholding purposes in Q4 2022 - The company's common stock is traded on the NASDAQ Global Select Market under the ticker symbol "MODV"[247] - The company has not paid any cash dividends on its common stock and does not currently expect to, with future payments depending on financial condition and other factors[250] Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2022 | 173 | $96.53 | | Nov 2022 | 1,323 | $91.17 | | Dec 2022 | 68 | $90.10 | | Total | 1,564 | | - Shares purchased during Q4 2022 were redeemed from participants in the company's 2006 Plan to cover income tax withholding and were not part of a publicly announced repurchase program[254] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section details ModivCare's financial condition and results of operations for 2022 vs 2021, covering segment performance, critical accounting policies, and liquidity Business Outlook and Trends The company's performance is driven by an aging population and value-based care trends, while facing post-pandemic impacts like NEMT volume shifts and caregiver shortages - Long-term growth is expected to be driven by an aging population, a move towards value-based care, and increasing demand for in-home care and remote monitoring[260] - The COVID-19 pandemic has led to structural changes, such as increased telehealth use, which continues to impact NEMT trip volume. The Personal Care segment faces labor shortages and wage pressures post-pandemic[260][261][262] Critical Accounting Policies and Estimates Critical accounting estimates include accrued transportation costs, goodwill recoverability, and income taxes, all requiring significant management judgment - Accrued Transportation Costs require significant judgment to estimate costs for completed but unbilled trips based on historical data. The estimated portion of this accrual was $19.6 million greater in 2022 than in 2021 due to increased trip volume[266][268] - Goodwill is tested for impairment annually (as of October 1) or more frequently if indicators exist. The process involves qualitative and potentially quantitative assessments using discounted cash flow and market approaches. No impairment was recorded in the latest analysis[269][271] - Income tax accounting involves significant estimates regarding deferred tax assets and liabilities, valuation allowances, and the sustainability of uncertain tax positions[272][273] Results of Operations In 2022, consolidated service revenue increased to $2.50 billion, but operating income decreased to $57.1 million, resulting in a net loss of $31.8 million due to higher expenses Consolidated Results of Operations (2022 vs. 2021) | (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Service revenue, net | $2,504,393 | $1,996,892 | 25.4% | | Total operating expenses | $2,454,660 | $1,912,970 | 28.3% | | Operating income | $57,084 | $89,363 | (36.1%) | | Net loss | $(31,806) | $(6,585) | 383.0% | - The $507.5 million increase in service revenue was driven by a $284.7 million increase in the NEMT segment, a $172.1 million increase in Personal Care (largely from the Care Finders acquisition), and a $50.7 million increase in the RPM segment (from VRI and GMM acquisitions)[292] - Service expense increased by $447.8 million (28.3%), primarily due to a $275.5 million increase in purchased transportation costs in the NEMT segment and a $161.1 million increase in payroll costs, largely from acquisitions[294][295] - Depreciation and amortization increased by $43.4 million (76.2%), mainly due to intangible assets from the Care Finders, VRI, and GMM acquisitions[297] Results of Operations - Segments In 2022, NEMT revenue grew to $1.77 billion but operating income declined, Personal Care revenue increased to $667.7 million, and RPM revenue reached $68.3 million NEMT Segment Operating Results (2022 vs. 2021) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Service revenue, net | $1,768,442 | $1,483,696 | | Operating income | $105,351 | $135,960 | | Total paid trips | 30,795 | 27,282 | Personal Care Segment Operating Results (2022 vs. 2021) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Service revenue, net | $667,674 | $495,579 | | Operating income | $12,570 | $14,049 | | Total hours | 26,918 | 21,188 | RPM Segment Operating Results (2022 vs. 2021) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Service revenue, net | $68,277 | $17,617 | | Operating income | $705 | $2,040 | | Average monthly members | 210 | 173 | Corporate and Other Segment Operating Results (2022 vs. 2021) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | General and administrative expense | $60,715 | $62,686 | | Operating loss | $(61,542) | $(62,686) | Liquidity and Capital Resources Cash and cash equivalents decreased to $15.0 million in 2022, with cash used in operations at $10.4 million, while the company maintains $1.0 billion in senior notes and a $325.0 million credit facility - Cash and cash equivalents decreased to $15.0 million at year-end 2022 from $133.4 million at year-end 2021[328] - Cash used in operating activities was $10.4 million in 2022, compared to cash provided by operating activities of $186.8 million in 2021, a decrease of $197.3 million mainly due to changes in working capital, including repayments of accrued contract payables[330] - The company has two series of senior unsecured notes totaling $1.0 billion, with maturities in 2025 and 2029. It also has a $325.0 million New Credit Facility maturing in 2027, with no borrowings outstanding as of December 31, 2022[335][338] Future Cash Requirements as of December 31, 2022 | (in thousands) | Total | Less than 1 Year | Greater than 1 Year | | :--- | :--- | :--- | :--- | | Senior Unsecured Notes & Interest | $1,252,306 | $54,375 | $1,197,931 | | Operating leases | $49,835 | $11,346 | $38,489 | | Contracts payable | $194,287 | $194,287 | $— | | Transportation costs | $96,851 | $96,851 | $— | | Total (selected items) | $1,593,279 | $356,859 | $1,236,420 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on its variable-rate New Credit Facility, which had no outstanding borrowings as of December 31, 2022 - The company's main market risk is interest rate risk associated with its variable-rate New Credit Facility[361] - As of December 31, 2022, there were no outstanding borrowings under the New Credit Facility[361] Item 8. Financial Statements and Supplementary Data This section presents the company's 2022 consolidated financial statements and KPMG's reports, including an adverse opinion on internal control over financial reporting due to material weaknesses Report of Independent Registered Public Accounting Firm KPMG issued an unqualified opinion on financial statements but an adverse opinion on internal control over financial reporting due to material weaknesses in risk assessment and IT controls - The auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements for the year ended December 31, 2022[366] - KPMG issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022, due to identified material weaknesses[367][389] - Critical Audit Matters identified were the sufficiency of audit evidence over certain capitated contracts and the goodwill impairment assessment for certain reporting units[371][372][376] Consolidated Financial Statements The consolidated financial statements present ModivCare's financial position, operations, and cash flows for 2022, showing total assets of $1.94 billion and a net loss of $31.8 million Key Consolidated Balance Sheet Data (as of Dec 31) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $346,154 | $409,834 | | Goodwill | $968,654 | $924,787 | | Total Assets | $1,944,272 | $2,027,425 | | Total Current Liabilities | $491,597 | $527,234 | | Long-term debt, net | $979,361 | $975,225 | | Total Liabilities | $1,589,716 | $1,654,158 | | Total Stockholders' Equity | $354,556 | $373,267 | Key Consolidated Operations Data (Year Ended Dec 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Service revenue, net | $2,504,393 | $1,996,892 | $1,368,675 | | Operating income | $57,084 | $89,363 | $122,042 | | Net income (loss) | $(31,806) | $(6,585) | $88,836 | | Diluted EPS | $(2.26) | $(0.47) | $2.37 | Key Consolidated Cash Flow Data (Year Ended Dec 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(10,442) | $186,840 | $348,435 | | Net cash used in investing activities | $(111,813) | $(685,625) | $(635,012) | | Net cash provided by financing activities | $3,808 | $448,851 | $408,260 | | Net change in cash | $(118,447) | $(49,934) | $121,683 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, acquisitions, segment reporting, revenue recognition, debt, and legal contingencies, including a change in intangible asset useful life - Effective January 1, 2022, the company changed the estimated useful lives for Simplura's trademarks (10 to 3 years) and payor network (15 to 10 years), resulting in an additional $14.3 million in amortization expense for 2022[423] - The company provides detailed purchase price allocations for its recent major acquisitions, including Simplura (2020), Care Finders (2021), VRI (2021), and GMM (2022), which added significant goodwill and intangible assets[463][468][475][482] - The company has two series of senior unsecured notes: $500 million at 5.875% due 2025 and $500 million at 5.000% due 2029. The fair value of the notes as of Dec 31, 2022 was $896.6 million[527] - The company is involved in an arbitration with its former CEO, who is seeking approximately $35 million in damages, and a class action lawsuit related to pay for live-in caregivers in New York[603][607] Item 9A. Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in internal control over financial reporting, specifically in risk assessment, IT general controls, and process-level controls - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to material weaknesses in internal control over financial reporting[618] - Material weaknesses were identified in three areas: (i) ineffective risk assessment related to new IT systems and acquisitions, (ii) ineffective reporting lines and accountability, and (iii) lack of mechanisms to enforce accountability[623] - These weaknesses led to ineffective IT general controls and ineffective process-level controls for revenue and payroll processes within the Personal Care, NEMT, and Corporate segments[624][625] - The company is implementing a remediation plan that includes enhancing risk assessment processes, designing and implementing improved controls, and leveraging third-party specialists and new systems[628][629] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement, with a code of ethics adopted - Information required by this item is incorporated by reference from the company's 2023 Proxy Statement[633] - The company has adopted a code of ethics for senior management, directors, and employees, which is available on its website[634] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the company's 2023 Proxy Statement - Information required by this item is incorporated by reference from the company's 2023 Proxy Statement[635] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 31, 2022, 250,077 securities were issuable under equity plans at a weighted-average exercise price of $115.33, with 1,177,991 remaining available Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Number of Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 250,077 | $115.33 | 1,177,991 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the 2023 Proxy Statement - Information required by this item is incorporated by reference from the company's 2023 Proxy Statement[639] Item 14. Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the company's 2023 Proxy Statement - Information required by this item is incorporated by reference from the company's 2023 Proxy Statement[640] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K, including consolidated financial statements and Schedule II - This item lists all financial statements, schedules, and exhibits filed with the annual report[642] Schedule II: Valuation and Qualifying Accounts (Allowance for Doubtful Accounts) | (in thousands) | Balance at beginning of period | Additions Charged to costs and expenses | Deductions (Write-offs) | Balance at end of period | | :--- | :--- | :--- | :--- | :--- | | Year Ended Dec 31, 2022 | $2,296 | $2,690 | $(2,908) | $2,078 | | Year Ended Dec 31, 2021 | $2,403 | $1,740 | $(1,847) | $2,296 | | Year Ended Dec 31, 2020 | $5,933 | $642 | $(4,172) | $2,403 | Item 16. Form 10-K Summary No Form 10-K summary is provided in this report - None[650]