ModivCare (MODV) - 2023 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements The company's net loss widened significantly year-to-date to $199.2 million due to a major goodwill impairment, decreasing assets and creating negative operating cash flow Unaudited Condensed Consolidated Balance Sheets Total assets decreased to $1.76 billion due to a $183.1 million goodwill impairment, causing a sharp decline in stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $8,070 | $14,451 | ($6,381) | | Goodwill | $785,554 | $968,654 | ($183,100) | | Total assets | $1,763,086 | $1,944,272 | ($181,186) | | Liabilities & Equity | | | | | Short-term borrowings | $83,000 | $0 | +$83,000 | | Total liabilities | $1,604,225 | $1,589,716 | +$14,509 | | Retained earnings (accumulated deficit) | ($19,185) | $180,023 | ($199,208) | | Total stockholders' equity | $158,861 | $354,556 | ($195,695) | Unaudited Condensed Consolidated Statements of Operations Year-to-date revenue grew 10.7%, but a $183.1 million goodwill impairment drove a substantial net loss of $199.2 million Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Service revenue, net | $686,925 | $647,782 | $2,048,338 | $1,850,472 | | Service expense | $579,214 | $534,563 | $1,718,735 | $1,498,108 | | Impairment of goodwill | $0 | $0 | $183,100 | $0 | | Operating income (loss) | $12,043 | $12,447 | ($155,622) | $50,467 | | Net loss | ($4,302) | ($28,505) | ($199,208) | ($24,859) | | Diluted loss per share | ($0.30) | ($2.03) | ($14.06) | ($1.77) | Unaudited Condensed Consolidated Statements of Cash Flows Operating activities used $57.3 million in cash year-to-date, a sharp reversal from the prior year, necessitating short-term borrowings Cash Flow Summary (in thousands) | Activity | Nine months ended Sep 30, 2023 | Nine months ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | ($57,327) | $45,526 | | Net cash used in investing activities | ($31,143) | ($104,390) | | Net cash provided by (used in) financing activities | $82,109 | ($1,827) | | Net change in cash, cash equivalents and restricted cash | ($6,361) | ($60,691) | Notes to the Unaudited Condensed Consolidated Financial Statements Key disclosures include a $183.1 million goodwill impairment, details of the company's debt structure, and a $9.6 million legal settlement - The company operates in three main segments: Non-Emergency Medical Transportation (NEMT), Personal Care Services (PCS), and Remote Patient Monitoring (RPM)[24][49] - In Q2 2023, the company recorded a $183.1 million non-cash goodwill impairment charge, with $137.3 million allocated to the PCS segment and $45.8 million to the RPM segment, triggered by a decline in stock price and market volatility[39][72][75] - As of September 30, 2023, the company had $1.0 billion in senior unsecured notes and $83.0 million in outstanding short-term borrowings under its credit facility[79][82] - In May 2023, the company settled with its former CEO, Daniel Greenleaf, for $9.6 million regarding claims of a breach of his employment agreement[100] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue growth was offset by a significant goodwill impairment and rising service expenses, tightening liquidity and increasing reliance on debt Business Outlook and Trends The company faces near-term headwinds from labor shortages and Medicaid redetermination despite positive long-term demographic trends - Long-term growth is expected from an aging population, rising chronic illnesses, and a shift towards value-based and in-home care[111] - Near-term challenges include labor shortages for healthcare professionals, uncertain macroeconomic conditions, and negative impacts from Medicaid redetermination efforts[110][111] Results of Operations Consolidated revenue grew across all segments, but profitability was erased by a $183.1 million goodwill impairment and higher service costs NEMT Segment Key Metrics | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total paid trips (thousands) | 8,824 | 8,045 | 25,761 | 22,987 | | Average monthly members (thousands) | 33,660 | 36,026 | 33,892 | 33,998 | | Service revenue, net ($M) | $485.9 | $459.8 | $1,452.4 | $1,309.4 | | Operating income ($M) | $25.7 | $25.9 | $66.8 | $84.3 | PCS Segment Key Metrics | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total hours (thousands) | 6,995 | 6,836 | 20,752 | 20,076 | | Service revenue per hour | $25.73 | $24.76 | $25.75 | $24.49 | | Service expense per hour | $20.45 | $19.42 | $20.13 | $18.90 | | Operating income (loss) ($M) | $4.3 | $2.3 | ($118.0) | $10.3 | RPM Segment Key Metrics | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Average monthly members (thousands) | 247 | 230 | 241 | 201 | | Service revenue, net ($M) | $19.8 | $18.8 | $57.7 | $49.4 | | Operating income (loss) ($M) | $1.0 | $0.6 | ($43.1) | ($0.2) | Liquidity and Capital Resources A significant decrease in operating cash flow to a $57.3 million deficit necessitated drawing $83.0 million from the credit facility - Cash used in operating activities was $57.3 million for YTD 2023, a decrease of $102.9 million compared to cash provided by operating activities of $45.5 million for YTD 2022[180][183] - The company had $83.0 million of short-term borrowings outstanding on its Credit Facility as of September 30, 2023, with approximately $164.0 million of remaining availability[185][188] Future Cash Requirements Summary (in thousands) | Obligation | Total | Less than 1 Year | Greater than 1 Year | | :--- | :--- | :--- | :--- | | Senior Unsecured Notes & Interest | $1,213,996 | $56,847 | $1,157,149 | | Short-term borrowings | $83,000 | $83,000 | $0 | | Operating leases | $42,299 | $8,902 | $33,397 | | Other current cash obligations | $515,888 | $515,888 | $0 | | Total | $1,936,859 | $691,662 | $1,245,197 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure from its $83.0 million in variable-rate borrowings - The company is exposed to interest rate risk from its Credit Facility, which has variable interest rates; at September 30, 2023, $83.0 million was outstanding[194] - A sensitivity analysis indicates that a one-percentage point increase in interest rates would negatively impact pre-tax earnings by approximately $0.8 million annually[194] Controls and Procedures Disclosure controls were deemed ineffective as of September 30, 2023, due to previously identified material weaknesses under remediation - The principal executive and financial officers concluded that disclosure controls and procedures were not effective as of September 30, 2023, due to previously identified material weaknesses[195] - Ongoing remediation efforts are focused on key areas including general IT controls (GITC), payroll controls, revenue process controls, and risk assessment[197][199] - Management expects that testing the operating effectiveness of the remediation plan will extend into 2024 for the PCS segment[202] PART II—OTHER INFORMATION Legal Proceedings Ongoing legal matters are not expected to have a material adverse effect on the company's financial condition or operations - The company is subject to legal proceedings in the ordinary course of business but does not expect them to have a material adverse effect[205] Risk Factors No material changes were reported from the risk factors disclosed in the 2022 Annual Report on Form 10-K - No material changes have occurred to the risk factors disclosed in the company's 2022 Annual Report on Form 10-K[206] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the reporting period - None[208] Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the reporting period - None[209] Other Information No officers or directors adopted or terminated Rule 10b5-1 trading plans during the third quarter - No officers or directors adopted or terminated a Rule 10b5-1 trading plan during the third quarter of 2023[211] Exhibits This section indexes all exhibits filed with the Form 10-Q, including certifications and corporate documents