This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section and other sections of this Quarterly Report on Form 10-Q
("Form 10-Q") contain forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties. Forward-looking statements provide current expectations of future
events based on certain assumptions and include any statement that does not
directly relate to any historical fact or pattern, including statements
regarding the potential impacts of the COVID-19 pandemic and steps we have taken
or plan to take in response thereto, statements related to the effect of
macroeconomic trends, statements regarding evolving patient care models,
statements regarding legislative, administrative and regulatory actions on our
business and opportunities related to accumulated patient data, statements
regarding our expected future investment in research and development efforts and
statements regarding our operations following the sale of the Hospitals and
Large Physician Practices Business. Forward-looking statements can also be
identified by the use of words such as "future," "anticipates," "believes,"
"estimates," "expects," "intends," "plans," "predicts," "will," "would,"
"could," "can," "may," and similar terms. Forward-looking statements are not
guarantees of future performance. Actual results could differ significantly from
those set forth in the forward-looking statements, and reported results should
not be considered an indication of future performance or events. Certain factors
that could cause our actual results to differ materially from those described in
the forward-looking statements include, but are not limited to: our ability to
achieve the margin targets associated with our profitability initiatives within
the contemplated time periods, if at all; the continued impact of the COVID-19
pandemic, including the impacts of our responses and the responses by
governments and other businesses to the pandemic, on our business, our
employees, our clients and our suppliers; security breaches resulting in
unauthorized access to our or our clients' computer systems or data, including
denial-of-services ransomware or other Internet-based attacks; the failure by
Practice Fusion to comply with the terms of the settlement agreements with the
U.S. Department of Justice (the "DOJ"); the costs and burdens of compliance by
Practice Fusion with the terms of its settlement agreements with the DOJ;
additional investigations and proceedings from governmental entities or third
parties other than the DOJ related to the same or similar conduct underlying the
DOJ's investigations into Practice Fusion's business practices; our ability to
recover from third parties (including insurers) any amounts paid in connection
with Practice Fusion's settlement agreements with the DOJ and related inquiries;
the expected financial results of businesses acquired by us; the successful
integration of businesses acquired by us; the anticipated and unanticipated
expenses and liabilities related to businesses acquired by us, including the
civil investigation by the U.S. Attorney's Office involving our Enterprise
Information Solutions business; other risks associated with investments and
acquisitions; risks associated with the disposition of the Hospitals and Large
Physician Practices Business; our failure to compete successfully; consolidation
in our industry; current and future laws, regulations and industry initiatives;
increased government involvement in our industry; the failure of markets in
which we operate to develop as quickly as expected; our or our customers'
failure to see the benefits of government programs; changes in interoperability
or other regulatory standards; our ability to maintain and expand our business
with existing clients or effectively transition clients to newer products; the
effects of the realignment of our sales, services and support organizations;
market acceptance of our products and services; the unpredictability of the
sales and implementation cycles for our products and services; our ability to
manage future growth; our ability to introduce new products and services; our
ability to establish and maintain strategic relationships; the performance of
our products; our ability to protect our intellectual property rights; the
outcome of legal proceedings involving us; our ability to hire, retain and
motivate key personnel; performance by our content and service providers;
liability for use of content; price reductions; our ability to license and
integrate third-party technologies; risks related to global operations;
variability of our quarterly operating results; risks related to our outstanding
indebtedness; changes in tax rates or laws; business disruptions; our ability to
maintain proper and effective internal controls; asset and long-term investment
impairment charges; inflationary pressures and macroeconomic volatility; and the
other factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for
the year ended December 31, 2021 , as amended (our "Form 10-K") under the heading
"Risk Factors" and elsewhere. The following discussion should be read in
conjunction with the unaudited consolidated financial statements and notes
thereto included in Part I, Item 1, "Financial Statements" in this Form 10-Q, as
well as our Form 10-K filed with the Securities and Exchange Commission (the
"SEC"). We assume no obligation to revise or update any forward-looking
statements for any reason, except as required by law.
Each of the terms “we,” “us,” “our,” “Company,” or “Allscripts” as used herein
refers collectively to
wholly-owned subsidiaries and controlled affiliates, unless otherwise stated.
Overview
Our Business Overview and Regulatory Environment
We deliver information technology ("IT") solutions and services to help
healthcare organizations achieve optimal clinical, financial and operational
results. We sell our solutions to physicians, hospitals, governments, health
systems, health plans, life sciences companies, retail clinics, retail
pharmacies, pharmacy benefit managers, insurance companies, employer wellness
clinics and post-acute organizations, such as home health and hospice agencies.
We help our clients improve the quality and efficiency of health care with
solutions that include electronic health records ("EHRs"), information
connectivity, private cloud hosting, outsourcing, analytics, patient access and
population health management. We derive our revenues primarily from sales of our
proprietary software (either as a perpetual license sale or under a subscription
delivery model), support and maintenance services, and managed services, such as
outsourcing, private cloud hosting and revenue cycle management.
29
--------------------------------------------------------------------------------
Our solutions empower healthcare professionals with the data, insights and
connectivity to other caregivers they need to succeed in an industry that is
rapidly changing from fee-for-service models to fee-for-value advanced payment
models. We believe we offer some of the most comprehensive solutions in our
industry today. Healthcare organizations can effectively manage patients and
patient populations across all care settings using a combination of our
physician, hospital, health system, post-acute care and population health
management products and services. We believe these solutions will help transform
health care as the industry seeks new ways to manage risk, improve quality and
reduce costs.
Globally, healthcare providers continue to face the challenges of caring for an
aging population with an increasing number of patients with chronic diseases, as
well as the ongoing novel coronavirus ("COVID-19") crisis. At the same time,
practitioners worldwide are also under growing pressure to demonstrate the
delivery of high-quality care at lower costs and to fully embrace expectations
of efficient, patient-centered information exchange. Congressional oversight of
EHRs and health information technology has increased in recent years. This
increased oversight has impacted and could continue to impact our clients and
our business. The passage of the 21st Century Cures Act in December 2016
assuaged some concerns about interoperability and possible U.S. Food and Drug
Administration oversight of EHRs, and the ensuing regulations on data blocking
and interoperability were released by the Department of Health and Human
Services ("HHS") in March 2020 and became applicable under Office of the
National Coordinator for Health Information Technology oversight in April 2021 .
Additional regulatory clarity will come with the final rule expected shortly
from the HHS Office of the Inspector General , as well as a rule from HHS that
will outline disincentives for providers who may be engaged in blocking
behaviors. Some aspects of the new regulations are having a significant effect
on our business processes and how our clients must exchange patient information.
In particular, Allscripts must complete development work to satisfy the revised
and new certification criterion, and we and our clients will continue making
adjustments to business practices associated with information exchange and
provision of Electronic Health Information.
Following several high-profile ransomware and other cybersecurity attacks both
in and outside the healthcare industry, as well as increased conversation about
the expanding use of patient health data outside of HIPAA-covered environments,
including through consumer applications, policy makers have taken action
affecting Allscripts and our clients and are currently considering additional
legislative and regulatory vehicles to expand privacy protections. Allscripts
remains committed to working to securely protect the patient data within our
system and complying with requirements associated with the transmission of
patient data to both HIPAA- and non-HIPAA-covered entities.
Please refer to the section entitled “Our Business Overview and Regulatory
Environment” in Part II, Item 7 of our Form 10-K for additional information.
Impacts of COVID-19
The global outbreak of COVID-19 continues to cause volatile economic activity around the world, and the degrees of any economic recovery in various jurisdictions have not been linear. We have been carefully monitoring the COVID-19 pandemic and its impact on our global operations. We are conducting business with certain modifications to employee travel and employee work locations, and have implemented certain cost reduction initiatives, among other modifications. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners and stockholders.Allscripts , along with other health IT vendors, was asked by theWhite House , HHS, theCenters for Disease Control and Prevention , and state and local governments to support public health efforts to contain the pandemic by expanding COVID-19 reporting options available to our clients. Our technology has been instrumental to the provision of high-quality care, aiding not only public health surveillance but also in clinical decision support interventions to aid in triage, diagnosis and treatment; information exchange as patients are moved from site to site and/or discharged; predictive analytics based on local data for surge anticipation and vaccine management; and research based on real-world data informing the world's evolving understanding of post-acute sequelae of COVID-19 (known colloquially as Long COVID).Allscripts and our clients may also be affected by changed requirements at the federal, state or local levels as efforts to modernize public health systems, including technologies (e.g., telehealth), are implemented following the inclusion of associated appropriations within COVID-19-related bills that passed in 2020, 2021 and 2022. The COVID-19 pandemic negatively impacted revenue for the three and nine months endedSeptember 30, 2022 , as projects and buying decisions from the prior year were delayed due in part to the pandemic. However, the negative impacts on our business in the first, second and third quarters of 2022 were minimal compared to the prior year periods. The extent to which the COVID-19 pandemic will continue to impact the Company's results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted. Future developments include resurgences or additional "waves" of outbreaks of COVID-19 in various jurisdictions (including new lineages of the virus), the impact of COVID-19 on economic activity, the actions taken by health authorities and policy makers to contain its impacts on public health and the global economy, and the availability, effectiveness and public acceptance of vaccines.
Changes in Macroeconomic Conditions
A potential economic recession and uncertainty in financial markets have
resulted in changes in market conditions and produced market volatility. The
impact of inflation and rising interest rates may affect the financial
performance of the customers we serve and influence customer demand.
30
——————————————————————————–
Third Quarter 2022 Summary
During the third quarter of 2022, we continued to make progress on our key strategic, financial and operational imperatives, which are aimed at driving higher client satisfaction, increasing operating margins and improving our competitive position by expanding the depth and breadth of our products. Additionally, we believe there are still opportunities to continue to improve our operating leverage and further streamline our operations, and such efforts are ongoing. Total revenue for the third quarter of 2022 was$152 million , an increase of$7 million compared to the third quarter of 2021. For the three months endedSeptember 30, 2022 , provider revenue and payer & life sciences revenue were$123 million and$29 million , respectively, compared with$118 million and$27 million , respectively, during the three months endedSeptember 30, 2021 . Gross profit for the third quarter of 2022 was$83 million , an increase of$14 million compared to the third quarter of 2021. Gross margin increased to 54.9% in the third quarter of 2022 compared to a 48.1% gross margin in the third quarter of 2021.
Overview of Consolidated Results
Three and Nine Months Ended
Months Ended
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except
percentages) 2022 2021 % Change 2022 2021 % Change
Revenue:
Provider $ 122,811 $ 118,179 3.9 % $ 360,415 $ 345,253 4.4 %
Payer & Life Sciences 29,111 26,489 9.9 % 85,077 74,273 14.5 %
Total revenue 151,922 144,668 5.0 % 445,492 419,526 6.2 %
Cost of revenue:
Provider 57,252 61,606 (7.1 %) 172,595 180,566 (4.4 %)
Payer & Life Sciences 11,234 13,422 (16.3 %) 36,498 37,984 (3.9 %)
Total cost of revenue 68,486 75,028 (8.7 %) 209,093 218,550 (4.3 %)
Gross profit 83,436 69,640 19.8 % 236,399 200,976 17.6 %
Gross margin % 54.9 % 48.1 % 53.1 % 47.9 %
Selling, general and
administrative expenses 32,518 27,392 18.7 % 133,683 87,680 52.5 %
Research and development 23,681 21,042 12.5 % 69,851 62,644 11.5 %
Asset impairment charges 0 359 (100.0 %) 0 531 (100.0 %)
Amortization of intangible and
acquisition-related assets 2,236 2,363 (5.4 %) 6,648 7,090 (6.2 %)
Income from operations 25,001 18,484 35.3 % 26,217 43,031 (39.1 %)
Interest expense (1,246 ) (3,617 ) (65.6 %) (5,269 ) (9,709 ) (45.7 %)
Other income, net 1,655 4,493 (63.2 %) 3,800 21,819 (82.6 %)
Gain on sale of businesses,
net 0 8,363 (100.0 %) 0 8,363 (100.0 %)
Equity in net loss of
unconsolidated investments (617 ) (257 ) 140.1 % (1,222 ) (321 ) NM
Income from continuing
operations before income taxes 24,793 27,466 (9.7 %) 23,526 63,183 (62.8 %)
Income tax (provision) benefit (13,868 ) (7,190 ) 92.9 % 9,132 (12,464 ) (173.3 %)
Effective tax rate 55.9 % 26.2 % 38.8 % 19.7 %
Income from continuing
operations, net of tax 10,925 20,276 (46.1 %) 32,658 50,719 (35.6 %)
Loss from discontinued
operations (434 ) (6,187 ) (93.0 %) (9,252 ) (6,545 ) 41.4 %
Gain on sale of discontinued
operations 5,174 0 100.0 % 7,939 647 NM
Income tax effect on
discontinued operations (1,137 ) 2,091 (154.4 %) (57,986 ) 2,342 NM
Income (loss) from
discontinued operations, net
of tax 3,603 (4,096 ) 188.0 % (59,299 ) (3,556 ) NM
Net income (loss) $ 14,528 $ 16,180 (10.2 %) $ (26,641 ) $ 47,163 (156.5 %)
NM - We define "NM" as not meaningful for increases or decreases greater than
200%.
Revenue
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 % Change 2022 2021 % Change Revenue: Provider$ 122,811 $ 118,179 3.9 %$ 360,415 $ 345,253 4.4 % Payer & Life Sciences 29,111 26,489 9.9 % 85,077 74,273 14.5 % Total revenue$ 151,922 $ 144,668 5.0 %$ 445,492 $ 419,526 6.2 % 31
——————————————————————————–
Three and Nine Months Ended
Months Ended
Provider revenue consists of revenue derived from software applications for patient engagement and the sale of EHR software to single-specialty and small and mid-sized physician practices, including related clinical, financial, administrative and operational solutions. Payer and life sciences revenue primarily consists of sales of our integrated data systems solutions and related services to key healthcare stakeholders, including health plans and pharmaceutical companies, to help them improve the quality, efficiency and value of healthcare delivery. Provider revenue increased for the three and nine months endedSeptember 30, 2022 compared to the prior year comparable periods, reflecting increases in transaction-related, subscription and upfront software revenues. Payer and life sciences revenue increased for the three and nine months endedSeptember 30, 2022 compared to the prior year comparable periods, primarily due to an increase in subscription revenues and transaction-related revenues.
The percentage of provider and payer and life sciences revenue of our total
revenue was 81% and 19%, respectively, during the three and nine months ended
months ended
Gross Profit
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except percentages) 2022 2021 % Change 2022 2021 % Change
Total cost of revenue $ 68,486 $ 75,028 (8.7 %) $ 209,093 $ 218,550 (4.3 %)
Gross profit $ 83,436 $ 69,640 19.8 % $ 236,399 $ 200,976 17.6 %
Gross margin % 54.9 % 48.1 % 53.1 % 47.9 %
Three and Nine Months Ended
Months Ended
Gross profit and margin increased during the three and nine months endedSeptember 30, 2022 compared with the prior year comparable periods, primarily due to increases in revenues, lower contractor usage and improvements to our hosting infrastructure costs.
Selling, General and Administrative Expenses
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 % Change 2022 2021 % Change
Selling, general and
administrative expenses $ 32,518 $ 27,392 18.7 % $ 133,683 $ 87,680 52.5 %
Three and Nine Months Ended
Months Ended
Selling, general and administrative expenses increased during the three and nine months endedSeptember 30, 2022 , compared with the prior year comparable periods, primarily due to higher legal costs and increases in stock-based compensation expense. In addition, certain corporate expenses that remained after the disposition of the Hospitals and Large Physician Practices business are being fully recognized in 2022, whereas in 2021 those comparable expenses were allocated between Veradigm and the Hospitals and Large Physician Practices businesses. Research and Development Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 % Change 2022 2021 % Change Research and development$ 23,681 $ 21,042 12.5 %$ 69,851 $ 62,644 11.5 %
Three and Nine Months Ended
Months Ended
Research and development expenses increased during the three and nine months endedSeptember 30, 2022 compared with the prior year comparable periods, primarily due to the increased investment in Veradigm products for both provider and payer and life sciences. Asset impairment charges Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 % Change 2022 2021 % Change Asset impairment charges$ 0 $ 359 (100.0 %)$ 0 $ 531 (100.0 %)
Three and Nine Months Ended
Months Ended
Asset impairment charges for the three and nine months endedSeptember 30, 2021 were due to the write-off of deferred costs related to our private cloud hosting operations. 32
——————————————————————————–
Amortization of Intangible and Acquisition-related Assets
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 % Change 2022 2021 % Change
Amortization of intangible and
acquisition-related assets $ 2,236 $ 2,363 (5.4 %) $ 6,648 $ 7,090 (6.2 %)
Three and Nine Months Ended
Months Ended
The decrease in amortization expense for the three and nine months endedSeptember 30, 2022 , compared with the prior year comparable periods, was due to normal amortization expense and certain intangible assets being fully amortized in 2021. Interest Expense Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 % Change 2022 2021 % Change Interest expense$ 1,246 $ 3,617 (65.6 %)$ 5,269 $ 9,709 (45.7 %)
Three and Nine Months Ended
Months Ended
Interest expense decreased during the three and nine months endedSeptember 30, 2022 compared with the prior year comparable periods, primarily due to lower outstanding debt levels in the current year and the absence of accreted interest expense in the current year for the equity component of the 0.875% Convertible Senior Notes. As ofJanuary 1, 2022 , we adopted Accounting Standards Update No. 2020-06, "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity", which required us to remove the equity component from Additional paid-in capital. Refer to Note 10, "Debt" of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for additional information.
Other Income, Net
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 % Change 2022 2021 % Change
Other income, net $ 1,655 $ 4,493 (63.2 %) $ 3,800 $ 21,819 (82.6 %)
Three and Nine Months Ended
Months Ended
Other income, net for the three and nine months endedSeptember 30, 2022 and 2021 consisted of a combination of interest income and miscellaneous receipts and expenses. Income during the three months endedSeptember 30, 2021 was primarily due to a$1.4 million distribution received from a third-party cost method investment and a$1.6 million gain as a result of the sale of a third-party cost method investment. In addition to the items previously mentioned, the income during the nine months endedSeptember 30, 2021 included a$5.0 million distribution received from the Practice Fusion escrow account related to the settlement agreements with the DOJ, a$9.7 million gain as a result of a note conversion, the revaluation of our existing investment with a third-party cost method investment, and a$1.4 million distribution received from a third-party cost method investment.
Gain on Sale of Businesses, Net
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 % Change 2022 2021 % Change
Gain on sale of businesses, net $ 0 $ 8,363
(100.0 %)
Three and Nine Months Ended
Months Ended
Gain on sale of businesses, net during the three and nine months ended
30, 2021
2bPrecise business.
Equity in Net Loss of Unconsolidated Investments
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 % Change 2022 2021 % Change
Equity in net loss of
unconsolidated investments $ (617 ) $ (257 ) 140.1 % $ (1,222 ) $ (321 ) NM
Three and Nine Months Ended
Months Ended
Equity in net loss of unconsolidated investments represents our share of the equity earnings (or losses) of our investments in third parties accounted for under the equity method of accounting based on a one quarter lag.
Income Taxes
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except percentages) 2022 2021 % Change 2022 2021 % Change
Income tax (provision) benefit
92.9 %$ 9,132 $ (12,464 ) (173.3 %) Effective tax rate 55.9 % 26.2 % 38.8 % 19.7 %
NM – We define “NM” as not meaningful for percentages greater than 200%
33
——————————————————————————–
Three and Nine Months Ended
Months Ended
Our provision for income taxes differs from the tax computed at theU.S. federal statutory income tax rate primarily due to permanent differences, income attributable to foreign jurisdictions taxed at different rates, state taxes, tax credits and certain discrete items including a windfall benefit of$12.6 million for the nine months endedSeptember 30, 2022 and a windfall benefit of$4.6 million for the nine months endedSeptember 30, 2021 . Our effective tax rate for the three and nine months endedSeptember 30, 2022 , compared with the prior year comparable periods, differs primarily due to the release of valuation allowance of$11.2 million in the three and nine months endedSeptember 30, 2022 . In addition, the permanent items, credits and the impact of foreign earnings had more impact on the pre-tax income of$24.8 million and$23.5 million in the three and nine months endedSeptember 30, 2022 , respectively, compared to the impact of these items on a pre-tax income of$27.5 million and$63.2 million for the three and nine months endedSeptember 30, 2021 , respectively. In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies, and results of recent operations. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss). During the nine months endedSeptember 30, 2022 , we released valuation allowances of$11.2 million related toU.S. deferred tax assets. Discontinued Operations Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 % Change 2022 2021 % Change Loss from discontinued operations$ (434 ) $ (6,187 ) (93.0 %)$ (9,252 ) $ (6,545 ) 41.4 % Gain on sale of discontinued operations 5,174 0 100.0 % 7,939 647 NM Income tax effect on discontinued operations (1,137 ) 2,091 (154.4 %) (57,986 ) 2,342 NM Income (loss) from discontinued operations, net of tax$ 3,603 $ (4,096 ) 188.0 %$ (59,299 ) $ (3,556 ) NM
Three and Nine Months Ended
Months Ended
OnMay 2, 2022 , we completed the sale of our Hospitals and Large Physician Practices business, including the Sunrise and TouchWorks solutions (the "Hospitals and Large Physician Practices Business") toAltera Digital Health Inc. (formerly known asHarris Dawn Holdings Inc. ), aDelaware corporation ("Altera"), a wholly-owned subsidiary of Constellation Software Inc., anOntario corporation, pursuant to a purchase agreement (the "Altera Purchase Agreement") by which Altera purchased substantially all of the assets of the Hospitals and Large Physician Practices Business. The Hospitals and Large Physician Practices Business sale represented a strategic shift that had a major effect on our operations and financial results. As ofJune 30, 2022 , we reported the Hospitals and Large Physician Practices Business as discontinued operations. OnOctober 15, 2020 andDecember 31, 2020 , we completed the sale of the EPSi and CarePort businesses, respectively. Prior to the sale of EPSi, it was part of the "Unallocated Amounts" category as it did not meet the requirements to be a reportable segment nor the criteria to be aggregated into our two reportable segments at the time. Prior to the sale of CarePort, it was part of the former Data, Analytics and Care Coordination reportable segment. Both businesses were part of the same strategic initiative and were sold within the same period, and given that the combined sale of EPSi and CarePort represented a strategic shift that had a major effect on our operations and financial results, we reported them together as discontinued operations for all periods presented. The loss from discontinued operations for the three and nine months endedSeptember 30, 2022 represents the operating statement activity related to the Hospitals and Large Physician Practices Business. The gain on sale of discontinued operations for the three and nine months endedSeptember 30, 2022 is a result of the sale of the Hospitals and Large Physician Practices Business. The income tax effect on discontinued operations for the three and nine months endedSeptember 30, 2022 represents the income tax expense related to the Hospitals and Large Physician Practices Business. The three months endedSeptember 30, 2022 included certain adjustments made in connection with the sale of the Hospitals and Large Physician Practices Business, primarily relating to net working capital adjustments that impacted the gain on the sale of the discontinued operations. The loss from discontinued operations for the three months endedSeptember 30, 2021 and the income from discontinued operations for the nine months endedSeptember 30, 2021 primarily represent the operating statement activity related to the Hospitals and Large Physician Practices Business. The gain on sale of discontinued operations for the nine months endedSeptember 30, 2021 represents the net working capital adjustments to the gain from the sale of CarePort. The income tax effect on discontinued operations for the three and nine months endedSeptember 30, 2021 primarily represents the income tax expense related to the Hospitals and Large Physician Practices Business. Refer to Note 15, "Discontinued Operations" of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for further information regarding discontinued operations. 34
——————————————————————————–
Segment Operations
OnMarch 2, 2022 , we entered into a purchase agreement to sell substantially all of the assets of our Hospitals and Large Physician Practices Business. As ofMarch 31, 2022 , the operating segment was classified in discontinued operations as the disposition represented a strategic shift that had a major effect on our operations and financial results. Therefore, we changed our reportable segments, which previously included Hospitals and Large Physician Practices. As ofMarch 31, 2022 , we had two operating segments: (i) Veradigm and (ii) Certain Products. The Veradigm operating segment was the equivalent to our one reportable segment. OnMay 2, 2022 , we completed the sale of the Hospitals and Large Physician Practices Business. As ofSeptember 30, 2022 , our two operating segments and one reportable segment remained unchanged from the end of the first quarter of 2022. The segment disclosures below for the three and nine months endedSeptember 30, 2021 have been revised to conform to the current period presentation. Refer to Note 16 "Business Segments" of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for further discussion on the impact of the change. Overview of Segment Results Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2022 2021 % Change 2022 2021 % Change Revenue: Veradigm$ 145,391 $ 137,169 6.0 %$ 426,306 $ 396,988 7.4 % Unallocated Amounts 6,531 7,499 (12.9 %) 19,186 22,538 (14.9 %) Total revenue$ 151,922 $ 144,668 5.0 %$ 445,492 $ 419,526 6.2 % Gross Profit: Veradigm$ 78,801 $ 65,696 19.9 %$ 223,405 $ 187,960 18.9 % Unallocated Amounts 4,635 3,944 17.5 % 12,994 13,016 (0.2 %) Total gross profit$ 83,436 $ 69,640 19.8 %$ 236,399 $ 200,976 17.6 % Income (loss) from operations: Veradigm$ 27,707 $ 17,099 62.0 %$ 69,796 $ 46,607 49.8 % Unallocated Amounts (2,706 ) 1,385 NM (43,579 ) (3,576 ) NM
Total income from operations
Veradigm
Our Veradigm segment derives its revenue from payer and life sciences solutions,
which are mainly targeted at payers, life sciences companies and other key
healthcare stakeholders. Additionally, revenue is derived from software
applications for patient engagement and the sale of EHR software to
single-specialty and small and mid-sized physician practices, including related
clinical, financial, administrative and operational solutions. These solutions
enable clients to transition, analyze, coordinate care and improve the quality,
efficiency and value of healthcare delivery across the entire care community.
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 % Change 2022 2021 % Change
Revenue $ 145,391 $ 137,169 6.0 % $ 426,306 $ 396,988 7.4 %
Gross profit $ 78,801 $ 65,696 19.9 % $ 223,405 $ 187,960 18.9 %
Gross margin % 54.2 % 47.9 % 52.4 % 47.3 %
Income from operations $ 27,707 $ 17,099 62.0 % $ 69,796 $ 46,607 49.8 %
Operating margin % 19.1 % 12.5 % 16.4 % 11.7 %
Three and Nine Months Ended
Months Ended
Veradigm revenue increased for the three and nine months endedSeptember 30, 2022 compared with the prior year comparable periods, due to increases in subscription, upfront software and transaction-related revenues. The increase was partially offset by decreases in maintenance and client services revenues. Gross profit and gross margin increased during the three and nine months endedSeptember 30, 2022 compared with the prior year comparable periods, primarily due to increases in revenues, lower contractor usage and improvements to our hosting infrastructure costs. Income from operations and operating margin increased during the three and nine months endedSeptember 30, 2022 compared with the prior year comparable periods, primarily due to the increase in gross profit. The increases were partially offset due to higher research and development costs related to the increased investment in Veradigm products for both provider and payer and life sciences and the decrease in capitalized software costs. 35
——————————————————————————–
Unallocated Amounts
The "Unallocated Amounts" category consists of the 2bPrecise business, certain
products that were shifted from the previous Core Clinical and Financial
Solutions reportable segment due to the organizational changes ("Certain
Products") and certain corporate-related expenses. The amounts included in the
"Unallocated Amounts" category for 2bPrecise and Certain Products do not meet
the requirements to be reportable segments nor the criteria to be aggregated
into our Veradigm reportable segment.
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2022 2021 % Change 2022 2021 % Change
Revenue $ 6,531 $ 7,499 (12.9 %) $ 19,186 $ 22,538 (14.9 %)
Gross profit $ 4,635 $ 3,944 17.5 % $ 12,994 $ 13,016 (0.2 %)
Gross margin % 71.0 % 52.6 % 67.7 % 57.8 %
(Loss) income from operations
$ (43,579 ) $ (3,576 ) NM Operating margin % (41.4 %) 18.5 % NM (15.9 %)
Three and Nine Months Ended
Months Ended
Revenue decreased during the three and nine months endedSeptember 30, 2022 , compared with the prior year comparable periods, primarily due to a decrease in upfront software revenues. Gross profit increased during the three months endedSeptember 30, 2022 , compared with the prior year comparable period, primarily due to a decrease in cost of revenues as certain corporate bonus expense previously recorded to the "Unallocated Amounts" category was recorded to the Veradigm segment in 2022. The increase in gross profit was partially offset by a decrease in revenues. Gross profit was essentially flat during the nine months endedSeptember 30, 2022 , compared with the prior year comparable period. Gross margin increased during the nine months endedSeptember 30, 2022 , compared with the prior year comparable period, primarily due to the decrease in revenues being partially offset by a decrease in cost of revenues as certain corporate bonus expense previously recorded to the "Unallocated Amounts" category was recorded to the Veradigm segment in 2022. Loss from operations increased during the three and nine months endedSeptember 30, 2022 , compared with the prior year comparable periods, primarily due to higher legal costs, increases in stock-based compensation expense and changes attributed to corporate allocations from 2021 to 2022.
Liquidity and Capital Resources
The primary factors that influence our liquidity include, but are not limited to, the amount and timing of our revenues, cash collections from our clients, capital expenditures and investments in research and development efforts, including investments in or acquisitions of third parties, and divestitures. As ofSeptember 30, 2022 , our principal sources of liquidity consisted of cash and cash equivalents of$494 million and available borrowing capacity of$699 million under our Revolving Facility. The change in our cash and cash equivalents balance is reflective of the following:
Operating Cash Flow Activities
Nine Months Ended September 30,
(In thousands) 2022 2021 $ Change
Net (loss) income $ (26,641 ) $ 47,163 $ (73,804 )
Less: Loss from discontinued operations (59,299 ) (3,556
) (55,743 )
Income from continuing operations 32,658 50,719 (18,061 ) Non-cash adjustments to net (loss) income 53,926 41,689
12,237
Cash impact of changes in operating assets and liabilities 32,417 6,137
26,280
Net cash provided by operating activities –
continuing operations 119,001 98,545
20,456
Net cash used in operating activities –
discontinued operations (23,234 ) (239,018
) 215,784
Net cash provided by (used in) operating activities$ 95,767 $ (140,473
)
Nine Months Ended
Net cash provided by operating activities - continuing operations increased during the nine months endedSeptember 30, 2022 compared with the prior year comparable period. Income from continuing operations for the nine months endedSeptember 30, 2022 included a deferred tax benefit. However, during the nine months endedSeptember 30, 2021 we recorded higher income from operations, a$8.4 million gain from the divestiture of our 2bPrecise business and higher other income, which included a distribution received from the Practice Fusion escrow account related to the settlement agreements with the DOJ, the investment gain and distribution received from our third-party cost method investments. Non-cash adjustments to net (loss) income increased primarily due to higher stock-based compensation expense and the absence of the gain from the sale of our 2bPrecise business. The increase was partially offset due to the change in deferred taxes and lower depreciation and amortization expense. The increase in cash impact of changes in operating assets and liabilities for the nine months endedSeptember 30, 2022 was primarily a result of working capital changes. 36 -------------------------------------------------------------------------------- Net cash used in operating activities - discontinued operations decreased for the nine months endedSeptember 30, 2022 primarily due to the absence of the tax payment relating to the gain from the sale of CarePort onDecember 31, 2020 , which was paid in the second quarter of 2021.
Investing Cash Flow Activities
Nine Months Ended September 30,
(In thousands) 2022 2021 $ Change
Capital expenditures $ (1,876 ) $ (1,050 ) $ (826 )
Capitalized software (26,207 ) (26,595 ) 388
Cash paid for business acquisitions, net of
cash acquired (24,106 ) 0 (24,106 )
Sale of businesses and other investments, net
of cash divested, and distributions received 672,498 5,380
667,118
Purchases of equity securities, other investments and related intangible assets, net (1,342 ) (219
) (1,123 )
Net cash provided by (used in) investing
activities -
continuing operations 618,967 (22,484
) 641,451
Net cash used in investing activities –
discontinued operations (15,248 ) (32,388
) 17,140
Net cash provided by (used in) investing activities$ 603,719 $ (54,872
)
Nine Months Ended
The change from net cash used in operating activities - continuing operations for the nine months endedSeptember 30, 2021 to net cash provided by operating activities - continuing operations for the nine months endedSeptember 30, 2022 was primarily due to the cash received as a result of the sale of the Hospitals and Large Physician Practices Business, which was partially offset by cash paid for theBabel Health acquisition.
Net cash used in investing activities – discontinued operations during the nine
months ended
capitalized software costs related to the Hospitals and Large Physician
Practices Business.
Financing Cash Flow Activities
Nine Months Ended September 30,
(In thousands) 2022 2021 $ Change
Taxes paid related to net share settlement of
equity awards $ (32,666 ) $ (12,718 ) $ (19,948 )
Credit facility payments (200,000 ) (50,000 ) (150,000 )
Credit facility borrowings, net of issuance
costs 22,335 250,000 (227,665 )
Repurchase of common stock (177,031 ) (308,953 )
131,922
Intercompany to/from parent/subsidiaries 11,685 47,323 (35,638 )
Payment of acquisition and other financing
obligations 0 (2,400 ) 2,400
Net cash used in financing activities -
continuing operations (375,677 ) (76,748 ) (298,929 )
Net cash used in financing activities -
discontinued operations (11,697 ) (48,572 ) 36,875
Net cash used in financing activities $ (387,374 ) $ (125,320 ) $ (262,054 )
Nine Months Ended
Net cash used in financing activities - continuing operations increased for the nine months endedSeptember 30, 2022 primarily due to higher credit facility payments and lower credit facility borrowings in 2022. The increase was partially offset due to lower share repurchases of common stock. Net cash used in financing activities - discontinuing operations during both the nine months endedSeptember 30, 2022 and 2021 primarily reflects the cash for operations for the Hospitals and Large Physician Practices Business.
Future Capital Requirements
We enter into obligations with third parties in the ordinary course of business. These future cash obligations will be funded from future cash flows from the sale of our products and services. The material cash requirements include the following contractual and other obligations.
Debt Obligations
As of
aggregate principal amount of
convertible senior notes’ maturity date. As of
outstanding borrowings under the Revolving Facility.
37
——————————————————————————–
Non-cancelable Operating Leases
We have lease arrangements for certain facilities. As ofSeptember 30, 2022 , we had fixed lease payment obligations of$19.7 million , with$6.7 million payable within the next 12 months. Purchase Obligations
Purchase obligations consist of minimum purchase commitments for Microsoft
services, computer equipment, maintenance, consulting and other commitments. As
of
approximately
Letters of Credit
As of
under the Third Amended Credit Agreement.
Income Taxes
Our liability for uncertain tax positions was$31.7 million as ofSeptember 30, 2022 . It is uncertain the amount that is payable within the next 12 months for liabilities that may result from this exposure, as we cannot predict, with reasonable reliability, the outcome of discussions with the respective taxing jurisdictions, which may or may not result in cash settlements.
Other Matters Affecting Future Capital Requirements
Our total investment in research and development is expected to increase in 2022, as compared to 2021, as the Company plans to make continued investments in expanding the capabilities and functionality of our Veradigm provider, payer and life sciences solutions. Our total spending consists of research and development costs directly recorded to expense, which are offset by the capitalization of eligible development costs. We believe that our cash and cash equivalents of$494 million as ofSeptember 30, 2022 , our future cash flows, our borrowing capacity under our Revolving Facility and access to capital markets, taken together, provide adequate resources to meet future operating needs as well as scheduled payments of short and long-term debt. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of this Form 10-Q. We will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies and the repurchase of our common stock under our stock repurchase program, any of which might impact our liquidity requirements or cause us to borrow additional amounts under our Revolving Facility or issue additional equity or debt securities.
Critical Accounting Estimates
There were no material changes to our critical accounting estimates from those
previously disclosed in our Form 10-K.
© Edgar Online, source
link