10-Q 1 mdrx-10q_20190331.htm 10-Q mdrx-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-35547

 

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

36-4392754

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

222 Merchandise Mart, Suite 2024

Chicago, IL 60654

(Address of Principal Executive Offices, Zip Code)

(800) 334-8534

(Registrant's Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on which Registered

Common Stock, par value $0.01 per share

MDRX

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes        No   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes        No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes        No   

As of May 1, 2019, there were 166,438,125 shares of the registrant's $0.01 par value common stock outstanding.

 


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

FORM 10-Q

For the Fiscal Quarter Ended March 31, 2019

TABLE OF CONTENTS

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements 

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

137,167

 

 

$

174,243

 

Restricted cash

 

 

10,681

 

 

 

10,552

 

Accounts receivable, net of allowance of $39,214 and $50,406 as of

   March 31, 2019 and December 31, 2018, respectively

 

 

457,960

 

 

 

465,264

 

Contract assets

 

 

95,077

 

 

 

66,451

 

Prepaid expenses and other current assets

 

 

133,448

 

 

 

142,455

 

Total current assets

 

 

834,333

 

 

 

858,965

 

Fixed assets, net

 

 

115,564

 

 

 

121,913

 

Software development costs, net

 

 

219,047

 

 

 

209,660

 

Intangible assets, net

 

 

415,437

 

 

 

431,081

 

Goodwill

 

 

1,373,996

 

 

 

1,373,744

 

Deferred taxes, net

 

 

4,946

 

 

 

5,036

 

Contract assets - long-term

 

 

72,042

 

 

 

71,879

 

Right-of-use assets - operating leases

 

 

97,411

 

 

 

0

 

Other assets

 

 

109,632

 

 

 

109,206

 

Total assets

 

$

3,242,408

 

 

$

3,181,484

 


3


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(Unaudited)

(In thousands, except per share amounts)

 

March 31, 2019

 

 

December 31, 2018

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

80,585

 

 

$

73,166

 

Accrued expenses

 

 

108,773

 

 

 

107,068

 

Accrued compensation and benefits

 

 

61,500

 

 

 

100,076

 

Income tax payable

 

 

0

 

 

 

29,644

 

Deferred revenue

 

 

504,089

 

 

 

466,797

 

Current maturities of long-term debt

 

 

20,518

 

 

 

20,059

 

Current operating lease liabilities

 

 

24,154

 

 

 

0

 

Current liabilities attributable to discontinued operations

 

 

0

 

 

 

920

 

Total current liabilities

 

 

799,619

 

 

 

797,730

 

Long-term debt

 

 

766,240

 

 

 

647,539

 

Deferred revenue

 

 

13,089

 

 

 

15,984

 

Deferred taxes, net

 

 

58,366

 

 

 

58,470

 

Long-term operating lease liabilities

 

 

95,112

 

 

 

0

 

Other liabilities

 

 

53,865

 

 

 

81,334

 

Total liabilities

 

 

1,786,291

 

 

 

1,601,057

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock: $0.01 par value, 1,000 shares authorized,

   no shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

 

0

 

 

 

0

 

Common stock: $0.01 par value, 349,000 shares authorized as of March 31, 2019

   and December 31, 2018; 272,013 and 166,134 shares issued and outstanding as of

   March 31, 2019, respectively; 270,955 and 171,224 shares issued and outstanding

   as of December 31, 2018, respectively

 

 

2,719

 

 

 

2,709

 

Treasury stock: at cost, 105,879 and 99,731 shares as of March 31, 2019 and

   December 31, 2018, respectively

 

 

(525,613

)

 

 

(460,543

)

Additional paid-in capital

 

 

1,858,319

 

 

 

1,881,494

 

Retained earnings (accumulated deficit)

 

 

125,289

 

 

 

132,842

 

Accumulated other comprehensive loss

 

 

(4,597

)

 

 

(5,389

)

Total Allscripts Healthcare Solutions, Inc.'s stockholders' equity

 

 

1,456,117

 

 

 

1,551,113

 

Non-controlling interest

 

 

0

 

 

 

29,314

 

Total stockholders’ equity

 

 

1,456,117

 

 

 

1,580,427

 

Total liabilities and stockholders’ equity

 

$

3,242,408

 

 

$

3,181,484

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three Months Ended

March 31,

 

 

(In thousands, except per share amounts)

 

2019

 

 

2018

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Software delivery, support and maintenance

 

$

275,512

 

 

$

280,553

 

 

Client services

 

 

156,537

 

 

 

153,169

 

 

Total revenue

 

 

432,049

 

 

 

433,722

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Software delivery, support and maintenance

 

 

88,133

 

 

 

86,010

 

 

Client services

 

 

141,599

 

 

 

137,088

 

 

Amortization of software development and acquisition-related assets

 

 

28,222

 

 

 

25,959

 

 

Total cost of revenue

 

 

257,954

 

 

 

249,057

 

 

    Gross profit

 

 

174,095

 

 

 

184,665

 

 

Selling, general and administrative expenses

 

 

100,245

 

 

 

119,937

 

 

Research and development

 

 

64,310

 

 

 

64,790

 

 

Asset impairment charges

 

 

98

 

 

 

0

 

 

Amortization of intangible and acquisition-related assets

 

 

6,797

 

 

 

6,639

 

 

Income (loss) from operations

 

 

2,645

 

 

 

(6,701

)

 

Interest expense

 

 

(10,184

)

 

 

(11,694

)

 

Other income (loss), net

 

 

513

 

 

 

(35

)

 

Loss on sale of businesses, net

 

 

0

 

 

 

(871

)

 

Recovery (impairment) of long-term investments

 

 

1,045

 

 

 

(5,500

)

 

Equity in net loss of unconsolidated investments

 

 

(64

)

 

 

(61

)

 

Loss from continuing operations before income taxes

 

 

(6,045

)

 

 

(24,862

)

 

Income tax provision

 

 

(1,932

)

 

 

(299

)

 

Loss from continuing operations, net of tax

 

 

(7,977

)

 

 

(25,161

)

 

Loss from discontinued operations

 

 

0

 

 

 

(5,016

)

 

Income tax effect on discontinued operations

 

 

0

 

 

 

1,662

 

 

Loss from discontinued operations, net of tax

 

 

0

 

 

 

(3,354

)

 

Net loss

 

 

(7,977

)

 

 

(28,515

)

 

Net loss attributable to non-controlling interests

 

 

424

 

 

 

790

 

 

Accretion of redemption preference on redeemable

   convertible non-controlling interest - discontinued operations

 

 

0

 

 

 

(12,149

)

 

Net loss attributable to Allscripts Healthcare

   Solutions, Inc. stockholders

 

$

(7,553

)

 

$

(39,874

)

 

  

 

 

 

 

 

 

 

 

 

Net loss attributable to Allscripts Healthcare

   Solutions, Inc. stockholders per share:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.04

)

 

$

(0.14

)

 

Discontinued operations

 

 

0.00

 

 

 

(0.08

)

 

Net loss attributable to Allscripts Healthcare

   Solutions, Inc. stockholders per share

 

$

(0.04

)

 

$

(0.22

)

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.04

)

 

$

(0.14

)

 

Discontinued operations

 

 

0.00

 

 

 

(0.08

)

 

Net loss attributable to Allscripts Healthcare

   Solutions, Inc. stockholders per share

 

$

(0.04

)

 

$

(0.22

)

 

The accompanying notes are an integral part of these consolidated financial statements.

5


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

Three Months Ended

March 31,

 

 

(In thousands)

 

2019

 

 

2018

 

 

Net loss

 

$

(7,977

)

 

$

(28,515

)

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

695

 

 

 

123

 

 

Change in fair value of derivatives qualifying as cash flow hedges

 

 

132

 

 

 

(633

)

 

Other comprehensive income (loss) before income

    tax (expense) benefit

 

 

827

 

 

 

(510

)

 

Income tax (expense) benefit related to items in

    other comprehensive (loss) income

 

 

(35

)

 

 

314

 

 

Total other comprehensive income (loss)

 

 

792

 

 

 

(196

)

 

Comprehensive loss

 

 

(7,185

)

 

 

(28,711

)

 

Comprehensive loss attributable to non-controlling interests

 

 

424

 

 

 

790

 

 

Comprehensive (loss) income, net

 

$

(6,761

)

 

$

(27,921

)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 


6


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

Three Months Ended March 31,

 

(In thousands)

 

2019

 

 

2018

 

Number of Common Shares

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

270,955

 

 

 

269,335

 

Common stock issued under stock compensation plans, net of shares

   withheld for employee taxes

 

 

1,058

 

 

 

1,266

 

Balance at end of period

 

 

272,013

 

 

 

270,601

 

Common Stock

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,709

 

 

$

2,693

 

Common stock issued under stock compensation plans, net of shares

   withheld for employee taxes

 

 

10

 

 

 

13

 

Balance at end of period

 

$

2,719

 

 

$

2,706

 

Number of Treasury Stock Shares

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

(99,731

)

 

 

(88,504

)

Issuance of treasury stock

 

 

0

 

 

 

0

 

Purchase of treasury stock

 

 

(6,148

)

 

 

(4,144

)

Balance at end of period

 

 

(105,879

)

 

 

(92,648

)

Treasury Stock

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(460,543

)

 

$

(322,735

)

Purchase of treasury stock

 

 

(65,070

)

 

 

(57,600

)

Balance at end of period

 

$

(525,613

)

 

$

(380,335

)

Additional Paid-In Capital

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,881,494

 

 

$

1,781,059

 

Stock-based compensation

 

 

11,394

 

 

 

9,935

 

Common stock issued under stock compensation plans, net of shares

   withheld for employee taxes

 

 

(5,338

)

 

 

(8,296

)

Accretion of redemption preference on redeemable convertible

   non-controlling interest - discontinued operations

 

 

0

 

 

 

(12,149

)

Subsidiary issuance of common stock

 

 

0

 

 

 

(430

)

Warrants issued

 

 

682

 

 

 

682

 

Acquisition of non-controlling interest

 

 

(29,913

)

 

 

0

 

Balance at end of period

 

$

1,858,319

 

 

$

1,770,801

 

Retained earnings (accumulated deficit)

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

132,842

 

 

$

(338,150

)

Net loss less net income attributable to non-controlling interests

 

 

(7,553

)

 

 

(27,725

)

ASC 606 implementation adjustments

 

 

0

 

 

 

46,604

 

Balance at end of period

 

$

125,289

 

 

$

(319,271

)

Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(5,389

)

 

$

(1,985

)

Foreign currency translation adjustments, net

 

 

695

 

 

 

123

 

Unrecognized gain on derivatives qualifying as cash flow

   hedges, net of tax

 

 

97

 

 

 

(319

)

Balance at end of period

 

$

(4,597

)

 

$

(2,181

)

Non-controlling interest

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

29,314

 

 

$

39,190

 

Acquisition of non-controlling interest

 

 

(28,890

)

 

 

0

 

Net loss attributable to non-controlling interests

 

 

(424

)

 

 

(790

)

Balance at end of period

 

$

0

 

 

$

38,400

 

Total Stockholders’ Equity at beginning of period

 

$

1,580,427

 

 

$

1,160,072

 

Total Stockholders’ Equity at end of period

 

$

1,456,117

 

 

$

1,110,120

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Three Months Ended March 31,

 

(In thousands)

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,977

)

 

$

(28,515

)

Less: Loss from discontinued operations

 

 

0

 

 

 

(3,354

)

Loss from continuing operations

 

 

(7,977

)

 

 

(25,161

)

Adjustments to reconcile net loss to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

50,126

 

 

 

47,948

 

Operating right-of-use asset amortization

 

 

5,320

 

 

 

0

 

Stock-based compensation expense

 

 

11,658

 

 

 

9,957

 

Deferred taxes

 

 

6

 

 

 

723

 

Asset impairment charges

 

 

98

 

 

 

0

 

(Recovery) impairment of long-term investments

 

 

(1,045

)

 

 

5,500

 

Equity in net loss of unconsolidated investments

 

 

64

 

 

 

61

 

Loss on sale of businesses, net

 

 

0

 

 

 

871

 

Other income (losses), net

 

 

172

 

 

 

(941

)

Changes in operating assets and liabilities (net of businesses acquired):

 

 

 

 

 

 

 

 

Accounts receivable and contract assets, net

 

 

32,307

 

 

 

33,075

 

Prepaid expenses and other assets

 

 

3,658

 

 

 

(6,501

)

Accounts payable

 

 

7,382

 

 

 

4,707

 

Accrued expenses

 

 

(4,847

)

 

 

13,670

 

Accrued compensation and benefits

 

 

(39,525

)

 

 

(18,610

)

Deferred revenue

 

 

(17,107

)

 

 

(13,894

)

Other liabilities

 

 

1,380

 

 

 

2,910

 

Operating leases

 

 

(5,854

)

 

 

0

 

Net cash provided by operating activities - continuing operations

 

 

35,816

 

 

 

54,315

 

Net cash (used in) provided by operating

    activities - discontinued operations

 

 

(30,000

)

 

 

3,993

 

    Net cash provided by operating activities

 

 

5,816

 

 

 

58,308

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(4,847

)

 

 

(7,508

)

Capitalized software

 

 

(28,600

)

 

 

(26,168

)

Cash paid for business acquisitions, net of cash acquired

 

 

0

 

 

 

(107,212

)

Sales (purchases) of equity securities, other investments and related

   intangible assets, net

 

 

32

 

 

 

0

 

Other proceeds from investing activities

 

 

5

 

 

 

37

 

Net cash used in investing activities - continuing operations

 

 

(33,410

)

 

 

(140,851

)

Net cash used in investing activities - discontinued operations

 

 

0

 

 

 

(8,961

)

    Net cash used in investing activities

 

 

(33,410

)

 

 

(149,812

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale or issuance of common stock

 

 

0

 

 

 

212

 

Taxes paid related to net share settlement of equity awards

 

 

(5,327

)

 

 

(8,496

)

Payments of lease obligations

 

 

(55

)

 

 

(255

)

Credit facility payments

 

 

(5,000

)

 

 

0

 

Credit facility borrowings, net of issuance costs

 

 

120,000

 

 

 

145,843

 

Repurchase of common stock

 

 

(65,070

)

 

 

(57,599

)

Payment of acquisition financing obligations

 

 

0

 

 

 

(3,226

)

Purchases of subsidiary shares owned by non-controlling interest

 

 

(54,064

)

 

 

0

 

  Net cash (used in) provided by financing activities - continuing operations

 

 

(9,516

)

 

 

76,479

 

  Net cash used in financing activities - discontinued operations

 

 

0

 

 

 

(3,766

)

      Net cash (used in) provided by financing activities

 

 

(9,516

)

 

 

72,713

 

Effect of exchange rate changes on cash and cash equivalents

 

 

163

 

 

 

65

 

Net decrease in cash and cash equivalents

 

 

(36,947

)

 

 

(18,726

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

184,795

 

 

 

162,498

 

Cash, cash equivalents and restricted cash, end of period

 

 

147,848

 

 

 

143,772

 

Less: Cash and cash equivalents included in current assets

    attributable to discontinued operations

 

 

0

 

 

 

(19,105

)

Cash, cash equivalents and restricted cash, end of period, excluding

    discontinued operations

 

$

147,848

 

 

$

124,667

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.


8


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Basis of Presentation and Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Allscripts Healthcare Solutions, Inc. (“Allscripts”) and its wholly-owned subsidiaries and controlled affiliates. All significant intercompany balances and transactions have been eliminated. Each of the terms “we,” “us,” “our” or the “Company” as used herein refers collectively to Allscripts Healthcare Solutions, Inc. and its wholly-owned subsidiaries and controlled affiliates, unless otherwise stated.

Unaudited Interim Financial Information

The unaudited interim consolidated financial statements as of and for the three months ended March 31, 2019 and 2018 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These interim consolidated financial statements are unaudited and, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the consolidated financial statements for the periods presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The consolidated results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with the SEC's rules and regulations for interim reporting. The Company believes that the disclosures made are adequate to make these unaudited interim consolidated financial statements not misleading. They should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (our “Form 10-K”).

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

Change in Presentation

During the first quarter of 2019, we changed our reportable segments from Clinical and Financial Solutions, Population Health and Unallocated to Provider, Veradigm and Unallocated. The business units reported within the historical segments have been reallocated into the new segments. Refer to Note 15 “Business Segments” for further discussion on the impact of the change.

Significant Accounting Policies

We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) on January 1, 2019 using the cumulative-effect adjustment transition method. This method requires us to recognize an adoption impact as a cumulative-effect adjustment to the January 1, 2019 retained earnings balance. Prior period balances were not adjusted upon adoption this standard. The standard requires that leased assets and corresponding lease liabilities be recognized within the consolidated balance sheets as right-to-use assets and operating or financing lease liabilities. Please refer to Note 3 “Leases” for further discussion on the impact of adoption.

Recently Adopted Accounting Pronouncements

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which provides new accounting guidance to simplify and improve the reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in ASU 2017-12 make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. We adopted ASU 2017-12 on January 1, 2019 and the adoption did not have any effect on our consolidated financial statements.

In June 2018, the FASB issued Accounting Standards Update No. 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers. We adopted this standard on January 1, 2019 and the adoption did not have any effect on our consolidated financial statements.

9


Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements ASU 2018-13 will be effective for all entities for interim and annual periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the disclosure impact of this accounting guidance.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The guidance in ASU 2016-13 replaces the incurred loss impairment methodology under current GAAP. The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently in the process of evaluating this new guidance, which we expect to have an impact on our consolidated financial statements and results of operations.

We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, will have a material impact on our consolidated financial statements.

 

2. Revenue from Contracts with Customers

Our two primary revenue streams are (i) software delivery, support and maintenance and (ii) client services. Software delivery, support and maintenance revenue consists of all of our proprietary software sales (either under a perpetual or term license delivery model), subscription-based software sales, transaction-related revenue, the resale of hardware and third-party software and revenue from post-contract client support and maintenance services, which include telephone support services, maintaining and upgrading software and ongoing enhanced maintenance. Client services revenue consists of revenue from managed services solutions, such as private cloud hosting, outsourcing and revenue cycle management, as well as other client services and project-based revenue from implementation, training and consulting services. For some clients, we host the software applications licensed from us using our own or third-party servers. For other clients, we offer an outsourced service in which we assume partial to total responsibility for a healthcare organization’s IT operations using our employees.

At March 31, 2019 and 2018, we had capitalized costs to obtain or fulfill a contract of $22.7 million and $27.4 million, respectively, in Prepaid and other current assets and $32.0 million and $37.3 million, respectively, in Other assets. During the three months ended March 31, 2019 and 2018, we recognized $7.6 million and $8.1 million, respectively, of amortization expense related to such capitalized costs, which is included in selling, general and administrative expenses within the consolidated statements of operations.

The timing of revenue recognition, billings and cash collections results in billed and unbilled accounts receivables, contract assets and customer advances and deposits. Accounts receivable, net includes both billed and unbilled amounts where the right to receive payment is unconditional and only subject to the passage of time. Contract assets include amounts where revenue recognized exceeds the amount billed to the customer and the right to payment is not solely subject to the passage of time. Deferred revenue includes advanced payments and billings in excess of revenue recognized. Our contract assets and deferred revenue are reported in a net position on an individual contract basis at the end of each reporting period. Contract assets are classified as current or long-term based on the timing of when we expect to complete the related performance obligations and bill the customer. Deferred revenue is classified as current or long-term based on the timing of when we expect to recognize revenue.

The breakdown of revenue recognized related based on the origination of performance obligations and elected accounting expedients is presented in the table below:

(In thousands)

 

Three Months

Ended

March 31, 2019

 

Revenue related to deferred revenue balance at beginning of period

 

$

126,184

 

Revenue related to new performance obligations satisfied during the period

 

 

248,221

 

Revenue recognized under "right-to-invoice" expedient

 

 

55,923

 

Reimbursed travel expenses, shipping and other revenue

 

 

1,721

 

Total revenue

 

$

432,049

 

 

10


(In thousands)

 

Three Months

Ended

March 31, 2018

 

Revenue related to deferred revenue balance at beginning of period

 

$

181,398

 

Revenue related to new performance obligations satisfied during the period

 

 

200,232

 

Revenue recognized under "right-to-invoice" expedient

 

 

49,403

 

Reimbursed travel expenses, shipping and other revenue

 

 

2,689

 

Total revenue

 

$

433,722

 

The aggregate amount of contract transaction price related to remaining unsatisfied performance obligations (commonly referred to as “backlog”) represents contracted revenue that has not yet been recognized and includes both deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Total backlog equaled $4.0 billion as of March 31, 2019, of which we expect to recognize approximately 38% over the next 12 months, and the remaining 62% thereafter.

Revenue Recognition

We recognize revenue only when we satisfy an identified performance obligation (or bundle of obligations) by transferring control of a promised product or service to a customer. We consider a product or service to be transferred when a customer obtains control because a customer has sole possession of the right to use (or the right to direct the use of) the product or service for the remainder of its economic life or to consume the product or service in its own operations. We evaluate the transfer of control primarily from the customer’s perspective as this reduces the risk that revenue is recognized for activities that do not transfer control to the customer.

The majority of our revenue is recognized over time because a customer continuously and simultaneously receives and consumes the benefits of our performance. The exceptions to this pattern are our sales of perpetual and term software licenses, and hardware, where we determined that a customer obtains control of the asset upon granting of access, delivery or shipment.

 

We disaggregate our revenue from contracts with customers based on the type of revenue and nature of revenue stream, as we believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The below tables summarize revenue by type and nature of revenue stream as well as by our reportable segments:

 

 

Three Months Ended March 31

 

(In thousands)

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

  Recurring revenue

 

$

348,636

 

 

$

352,660

 

  Non-recurring revenue

 

 

83,413

 

 

 

81,062

 

      Total revenue

 

$

432,049

 

 

$

433,722

 

 

 

 

Three Months Ended March 31, 2019

 

(In thousands)

 

Provider

 

 

Veradigm

 

 

Unallocated

 

 

Total

 

Software delivery, support and maintenance

 

$

237,355

 

 

$

34,042

 

 

$

4,115

 

 

$

275,512

 

Client services

 

 

155,252

 

 

 

1,074

 

 

 

211

 

 

 

156,537

 

Total revenue

 

$

392,607

 

 

$

35,116

 

 

$

4,326

 

 

$

432,049

 

 

 

 

Three Months Ended March 31, 2018

 

(In thousands)

 

Provider

 

 

Veradigm

 

 

Unallocated

 

 

Total

 

Software delivery, support and maintenance

 

$

257,754

 

 

$

21,415

 

 

$

1,384

 

 

$

280,553

 

Client services

 

 

152,670

 

 

 

1,392

 

 

 

(893

)

 

 

153,169

 

Total revenue

 

$

410,424

 

 

$

22,807

 

 

$

491

 

 

$

433,722

 

 

 

11


3. Leases

We adopted ASU 2016-02 on January 1, 2019 using the cumulative-effect adjustment transition method. The new guidance required the recognition of leased arrangements on the balance sheet as a right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets.

We determine whether an arrangement is a lease at inception. Assets leased under an operating lease arrangement are recorded in Right-of-use assets – operating leases and the associated lease liability is included in Current operating lease liabilities and Long-term operating lease liabilities within the consolidated balance sheets. Assets leased under finance lease arrangements are recorded within fixed assets and the associated lease liabilities are recorded within Accrued expenses and Other liabilities within the consolidated balance sheets.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since our lease arrangements do not provide an implicit rate, we use our incremental borrowing rate in conjunction with the market swap rate for the expected remaining lease team at commencement date for new leases, or as of January 1, 2019 for existing leases, in determining the present value of future lease payments. Our expected lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.

We have elected the group of practical expedients under ASU 2016-02 to forego assessing upon adoption: (1) whether any expired contracts are or contain leases; (2) the lease classification for any existing or expired leases and (3) any indirect costs that would have qualified for capitalization for any existing leases. We have lease agreements with lease and non-lease components, which are generally accounted for separately except for real estate and vehicle leases, which we have elected to combine through a practical expedient under ASU 2016-02. Non-lease components for our leases typically comprise of executory costs, which under the practical expedient allows for all executory costs to be recorded as lease payments. Additionally, for certain equipment leases, we apply a portfolio approach to effectively record right-of-use assets and liabilities.

Our operating leases mainly include office leases and our finance leases include office and computer equipment leases. Our leases have remaining lease terms of approximately 1 year to 10 years, some of which include options to extend the leases for up to 5 years, which may include options to terminate the leases within 1 year. Total costs associated with leased assets are as follows:

(In thousands)

 

Three months ended

March 31, 2019

 

Operating lease cost (1)

 

$

6,717

 

Less: Sublease income

 

 

(802

)

        Total operating lease costs

 

 

5,915

 

Finance lease costs:

 

 

 

 

    Amortization of right-of-use assets (2)

 

 

51

 

    Interest on lease liability (3)

 

 

3

 

        Total finance lease costs

 

$

54

 

(1)

Operating lease costs are recognized on a straight-line basis and are included in Selling, general and administrative expenses within the consolidated statement of operations.

(2)

Amortization of finance right-of-use assets is recognized on a straight-line basis and is included in in Selling, general and administrative expenses within the consolidated statement of operations.

(3)

Interest on finance lease liabilities is recorded as Interest expense within the consolidated statement of operations.

Supplemental information for operating and finance leases is as follows:

(In thousands)

 

Three months ended

March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

    Operating cash flows from operating leases

 

$

7,287

 

        Operating cash flows from finance leases

 

$

3

 

        Financing cash flows from finance leases

 

$

37

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

        Operating leases

 

$

124,811

 

        Finance leases

 

$

263

 

 

12


The balance sheet location and balances for operating and finance leases are as follows:

(In thousands, except lease term and discount rate)

 

March 31, 2019

 

Operating leases:

 

 

 

 

    Right-of-use assets - operating leases

 

$

97,411

 

    Current operating lease liabilities

 

$

24,154

 

    Long-term operating lease liabilities

 

$

95,112

 

 

 

 

 

 

Finance leases:

 

 

 

 

    Fixed assets, gross

 

$

524

 

    Accumulated depreciation

 

 

286

 

        Fixed assets, net

 

$

238

 

 

 

 

 

 

    Current finance lease liabilities (1)

 

$

130

 

    Long-term finance lease liabilities (2)

 

$

97

 

 

 

 

 

 

Weighted average remaining lease term (in years)

 

 

 

 

    Operating leases

 

 

6

 

    Finance leases

 

 

2

 

 

 

 

 

 

Weighted average discount rate

 

 

 

 

    Operating leases

 

 

4.6

%

    Finance leases

 

 

5.0

%

(1)

Current finance lease liabilities are included in Accrued expenses within the consolidated balance sheets.

(2)

Long-term finance lease liabilities are included in Other liabilities within the consolidated balance sheets.

The future maturities of our leasing arrangements including lease and non-lease components are shown in the below table. The maturities are calculated using foreign currency exchange rates in effect as of March 31, 2019.

 

 

March 31, 2019

 

(in thousands)

 

Operating Leases

 

 

Finance Leases

 

Remainder of 2019

 

$

22,128

 

 

$

107

 

2020

 

 

24,839

 

 

 

85

 

2021

 

 

20,773

 

 

 

40

 

2022

 

 

19,205

 

 

 

6

 

2023

 

 

16,817

 

 

 

0

 

Thereafter

 

 

33,171

 

 

 

0

 

    Total lease liabilities

 

 

136,933

 

 

 

238

 

Less: Amount representing interest

 

 

(17,667

)

 

 

(11

)

Less: Short-term lease liabilities

 

 

(24,154

)

 

 

(130

)

    Total long-term lease liabilities

 

$

95,112

 

 

$

97

 

 

 

4. Business Combinations

On March 1, 2019, we acquired all of the outstanding minority interest in Pulse8, Inc., a healthcare analytics and technology company that provides business intelligence software solutions for health plans and at-risk providers to enable them to analyze their risk adjustment and quality management programs, for $53.8 million (subject to adjustments for net working capital and a contingency holdback), plus up to a $10.0 million earnout based upon revenue targets through 2019. We initially acquired a controlling stake in Pulse 8, Inc. on September 8, 2016. This transaction was treated as an equity transaction and the cash payment is reported as part of cash flow from financing activities in the consolidated statement of cash flows for the three months ended March 31, 2019.

 

 

13


5. Fair Value Measurements and Long-term Investments

Fair value measurements are based upon observable and unobservable inputs.

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly.

Level 3: Unobservable inputs are significant to the fair value of the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of the respective balance sheet dates:

 

 

Balance Sheet

 

March 31, 2019