Change Healthcare Inc. Reports Second Quarter Fiscal 2020 Financial Results

NASHVILLE, Tenn.–(BUSINESS WIRE)–Change Healthcare Inc. (Nasdaq: CHNG), a leading independent healthcare technology company, today reported financial results for Change Healthcare LLC (“Change Healthcare”) for the second quarter of fiscal year 2020 ended September 30, 2019.

“I am pleased to report another quarter of strong financial and operational performance, supported by continued strength in our underlying business and the execution on our strategic initiatives in our Enterprise Imaging and RCM Services businesses,” said Neil de Crescenzo, president and chief executive officer. “We continue to invest in innovation internally and with leading technology partners to bring to market new solutions that deliver increased value to our more than 30,000 customers by helping them reduce cost, increase quality, and enhance their ability to drive consumer engagement. Our focus on operational excellence and innovation across our platform places Change Healthcare in a strong position to deliver accelerated growth and shareholder value over the coming years.”

Adoption of the New Revenue Recognition Standard – ASC 606

Change Healthcare adopted the new revenue recognition accounting standard Accounting Standards Codification (“ASC”) 606 effective April 1, 2019 on a modified retrospective basis. Financial results for reporting periods during fiscal year 2020 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to fiscal year 2020 are presented in conformity with the prior revenue recognition standard, ASC 605. This press release includes additional information to reconcile the impacts of the adoption of the new revenue recognition standard on Change Healthcare’s financial results for the quarter and six months ended September 30, 2019. This includes the presentation of financial results during fiscal year 2020 under ASC 605 for comparison to the prior year period.

Fiscal 2020 Second Quarter Highlights for Change Healthcare LLC:

Financial Summary – ASC 606 (standard adopted effective April 1, 2019)

• Total revenue of $795.8 million, including Solutions revenue of $738.7 million
• Net income of $(0.1) million, resulting in net income of $(0.00) per diluted unit⁽¹⁾
• Adjusted net income of $86.6 million, resulting in adjusted net income of $0.27 per diluted unit⁽¹⁾
• Adjusted EBITDA of $217.7 million

Financial Summary – ASC 605 (standard before April 1, 2019)

• Total revenue of $805.8 million, including Solutions revenue of $748.6 million
• Net income of $4.3 million, resulting in net income of $0.01 per diluted unit⁽¹⁾
• Adjusted net income of $91.0 million, resulting in adjusted net income of $0.28 per diluted unit⁽¹⁾
• Adjusted EBITDA of $222.0 million

⁽¹⁾ Common units of Change Healthcare LLC are equivalent to the number of outstanding common shares of Change Healthcare Inc. and membership interests of Change Healthcare LLC held by subsidiaries of McKesson.

Financial Results – ASC 606 (standard adopted effective April 1, 2019)

• Solutions revenue was $738.7 million. Second quarter results were impacted by the adoption of the new accounting standard, ASC 606, which resulted in the recognition of certain revenue in the first quarter of the fiscal year that would have been recognized in the second quarter or subsequent periods under the prior accounting rules. As a result, the second quarter results reflect an unfavorable revenue impact of $9.9 million as compared with ASC 605.
• Net income was $(0.1) million, resulting in net income of $(0.00) per diluted unit. Net income under the new accounting standard was impacted favorably by an extended recognition period for commissions and certain implementation costs, decreasing expenses by $5.6 million, partially offsetting the revenue impact of ASC 606 noted above.
• Adjusted net income was $86.6 million, resulting in adjusted net income of $0.27 per diluted unit.
• Adjusted EBITDA was $217.7 million. Adjusted EBITDA as a percent of Solutions revenue for the second quarter of fiscal 2020 was 29.5%

Financial Results – ASC 605 (standard before April 1, 2019)

• Solutions revenue was $748.6 million, compared to $737.8 million for the second quarter of fiscal 2019. Total revenue for the current period, which includes Postage revenue, was $805.8 million compared to $800.2 million in the same period of the prior year. Growth in both the Software & Analytics and Network Solutions businesses was partially offset by the impact of planned contract eliminations in our Technology-enabled Services business, and the impact of our optimization initiatives in our Connected Analytics business. As part of our stated strategy, we are repositioning certain of our Revenue Cycle Management (“RCM”) service solutions to better address end-market dynamics, enhance efficiency and to improve the long-term growth potential of these solutions.
• Net income was $4.3 million, resulting in net income of $0.01 per diluted unit, compared with net income of $113.4 million or $0.45 per diluted unit, respectively, for the second quarter of fiscal 2019. Net income in the prior year period included the gain on sale of the Extended Care business of $111.4 million before the provision of income tax. The sale resulted in an after-tax gain of approximately $111.1 million and an impact of approximately $0.44 per diluted unit. During the second quarter of fiscal 2020, the favorable impact of productivity improvements and growth across our Software & Analytics and Network Solutions businesses was partially offset by planned contract eliminations in our Technology-enabled Service business.
• Adjusted net income was $91.0 million, resulting in adjusted net income of $0.28 per diluted unit, compared with adjusted net income of $89.9 million or $0.35 per diluted unit, respectively, for the second quarter of fiscal 2019. Adjusted net income reflects the items noted above.
• Adjusted EBITDA was $222.0 million, compared with $216.0 million for the second quarter of fiscal 2019. Adjusted EBITDA as a percent of Solutions revenue for the second quarter of fiscal 2020 was 29.7%, compared with 29.3% for the second quarter of fiscal 2019. The improved performance was the result of a favorable impact of mix, productivity improvements and growth across our segments.

Cash Flow and Balance Sheet Highlights for Change Healthcare LLC:

Net cash provided by operating activities was $223.9 million for the six months ended September 30, 2019, a decrease of 1.8% from $227.9 million for the six months ended September 30, 2018. Free cash flow was $94.0 million for the six months ended September 30, 2019, a decrease of 8.9% from $103.2 million for the six months ended September 30, 2018. Adjusted free cash flow was $173.9 million, a decrease of $59.2 million year over year.

Net cash provided by operating activities, free cash flow, and adjusted free cash flow each are affected by pass-thru funds we receive from certain pharmaceutical industry participants in advance of our obligation to remit these funds to participating retail pharmacies. The decrease in cash flow from operations, free cash flow and adjusted free cash flow primarily resulted from the inclusion of $12.9 million of such pass-thru funds in the six months ended September 30, 2019 as compared to $156.1 million for the six months ended September 30, 2018.

Change Healthcare LLC ended the quarter with approximately $73.0 million of cash, cash equivalents and restricted cash and approximately $4,971.0 million of total debt. In addition to the previously disclosed repayment of $805.0 million in term loan facility obligations in July 2019, the company repaid an additional $85.0 million in term loan facility obligations in the second quarter of fiscal 2020.

As of September 30, 2019, no amounts had been drawn under the revolving credit facility. On July 3, 2019, the company amended its revolving credit facility to increase the current commitment amount from $500.0 million to $785.0 million and to extend the maturity to July 3, 2024.

Recent Business Highlights

• Introduced new artificial intelligence (AI) technology capabilities to our CareSelect™ Imaging decision support solution. These AI capabilities help healthcare providers enhance workflow efficiency, improve patient safety, provide higher-value care, and meet pending regulatory requirements, leveraging our integration into electronic health record (EHR) systems.
• Awarded a contract through 2026 by Ireland’s Health Service Executive to extend their partnership with Change Healthcare to upgrade Ireland’s National Integrated Medical Imaging system (“NIMIS”). Leveraging the innovation in our Imaging unit, NIMIS is transforming how diagnostic imaging is delivered to the citizens of Ireland to ensure that images and reports are available to clinicians at the right time and location regardless of where the image was acquired.
• Introduced Charge Capture Advisor, a new cloud-based addition to the company’s portfolio of Revenue Integrity Solutions. The solution uses AI to identify potentially missing charges for services that providers actually performed before claims are submitted targeting a more complete capture of services rendered without additional time and effort by hospital revenue integrity teams.

Full Year Fiscal 2020 Outlook and 2021 Guidance – ASC 606

Change Healthcare continues to expect full-year fiscal 2020 Solutions revenue growth of 1% to 2% including the impact of the sale of our extended care business during fiscal year 2019 and planned contract exits in our Technology-enabled Services business; Adjusted EBITDA growth of 6% to 8% and Adjusted net income growth of 9% to11%.

For fiscal year 2021, the company continues to expect Solutions revenue growth of 4% to 6% and Adjusted EBITDA growth of 6% to 8%.

Third Quarter Fiscal 2020 Guidance – ASC 606

Change Healthcare expects third quarter fiscal 2020 Solutions revenue in the range of $745 million to $760 million, Adjusted EBITDA in the range of $225 million to $235 million, and Adjusted net income in the range of $98 million to $103 million.

While second quarter revenue decreased as a result of ASC 606 implementation, full year revenue is not expected to differ materially between the two accounting standards. Hence, the acceleration of revenue to the first quarter of the fiscal year will reduce the quarterly reported revenue in subsequent fiscal 2020 reported results versus the prior revenue recognition standard. The impact from extended recognition periods for commission expense as a result of the adoption of ASC 606 is expected to be favorable by about $3 million pre-tax per quarter for the remainder of fiscal 2020.

A reconciliation of the forward-looking third-quarter and full-year fiscal 2020 Adjusted EBITDA outlook to net income cannot be provided without unreasonable effort because of the inherent difficulty of accurately forecasting the occurrence and financial impact of the various adjusting items necessary for such reconciliation that have not yet occurred, are out of our control, or cannot be reasonably predicted. For the same reasons, Change Healthcare LLC is unable to assess the probable significance of the unavailable information, which could have a material impact on its future financial results in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

Conference Call and Webcast Information

Change Healthcare will host a conference call on November 14, 2019 at 8:00 a.m. ET. Investors and other interested parties are invited to listen to the conference call by dialing 1-(877) 279-0788 in the U.S.; 1-(270) 215-9894 from abroad, including the conference ID number: 1669249; or via a live, audio webcast on the Company’s website at https://ir.changehealthcare.com/.

A webcast replay will be available for on-demand listening shortly after the completion of the call until the second-quarter fiscal 2021 earnings call, at the aforementioned URL. In addition, a digital audio playback will be available until 11:00 a.m. Eastern Time on Thursday, November 21, 2019, by dialing 1-(855) 859-2056 or 1-(404) 537-3406 and referencing confirmation 1669249.

About Change Healthcare

Change Healthcare is a leading independent healthcare technology company that provides data and analytics-driven solutions to improve clinical, financial and patient engagement outcomes in the U.S. healthcare system. We are a key catalyst of a value-based healthcare system, accelerating the journey toward improved lives and healthier communities. Learn more at changehealthcare.com.

CHNG-IR

Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of federal securities laws. Any statements made in this release that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plans and strategies. These statements often include words such as “anticipate,” “expect,” “suggest,” “plan,” “believe,” “intend,” “estimate,” “target,” “project,” “should,” “could,” “would,” “may,” “will,” “forecast,” “outlook,” “potential,” “continues,” “seeks,” “predicts,” and the negatives of these words and other similar expressions. Forward-looking statements involve known and unknown risks, uncertainties, including factors disclosed in the Registration Statement on Form S-1 (No. 333-230345) in the section entitled “Risk Factors,” and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on any forward-looking statements in this release. All forward-looking statements are based on information currently available to Change Healthcare and are qualified in their entirety by this cautionary statement. The statements herein speak only as of the date such statements were first made. Except to the extent required by law, Change Healthcare assumes no obligation to update any such forward-looking statements or other statements included in this release.

Non-GAAP Financial Measures

In the Company’s earnings releases, prepared remarks, conference calls, slide presentations and webcasts, there may be use or discussion of non-GAAP financial measures. We believe such measures provide supplemental information to investors with regard to our operating performance and assist investors’ ability to compare our financial results to those of other companies in the same industry. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between the comparable GAAP financial measure and each non-GAAP financial measure are included in this press release after the consolidated financial statements. These non-GAAP financial measures are calculated and presented on the basis of methodologies other than in accordance with GAAP. These non-GAAP financial measures should be considered only as supplemental to, and not as superior to, financial measures prepared in accordance with GAAP and may be defined and calculated differently by others in the same industry.

Contacts

Evan Smith, CFA

Investor Relations

404-338-2225

Evan.Smith@changehealthcare.com

Kerry Kelly

External Communications

339-236-2756

Kerry.Kelly@changehealthcare.com

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