hmsy-20200930

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 September 30, 2020


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

For the transition period from to

Commission File Number: 000-50194

HMS HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

Delaware

11-3656261

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

5615 High Point Drive

75038

Irving,

(Address of principal executive offices)

(Zip Code)

(214) 453-3000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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 $0.01 par value	HMSY	The Nasdaq Stock Market LLC
		Nasdaq Global Select Market

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 November 3, 2020, there were approximately 88,551,634 shares of the registrant’s common stock outstanding.

HMS HOLDINGS CORP. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS


		Page

Glossary		1

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	6

	Consolidated Balance Sheets September 30, 2020 (unaudited) and December 31, 2019	6

	Consolidated Statements of Income Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	8

	Consolidated Statement of Shareholders’ Equity Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	9

	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2020 and 2019 (unaudited)	10

	Notes to the Consolidated Financial Statements Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 6.	Exhibits	43

Signatures		45

Glossary

Certain key terms used throughout this Form 10-Q and in our other filings are described below:


ACA			Patient Protections and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010
ACO			Accountable care organization
ADR			Additional documentation request
AI			Artificial intelligence
ASC			Accounting Standards Codification
ASO			Administrative service only
ASU			Accounting Standards Update
CARES Act			Coronavirus Aid, Relief, and Economic Security Act
CHIP			Children's Health Insurance Program
CMS			Centers for Medicare & Medicaid Services
CMS NHE			CMS National Health Expenditures
COB			Coordination of Benefits
COSO			Committee of Sponsoring Organizations of the Treadway Commission
Credit Agreement			Amended and Restated Credit Agreement dated as of May 3, 2013, as amended by Amendment No. 1 to Amended and Restated Credit Agreement dated as of March 8, 2017, and as further amended by Amendment No. 2 to Amended and Restated Credit Agreement, dated as of December 19, 2017, by and among HMS Holdings Corp. the Guarantors party thereto, the Lenders party thereto and Citibank, N.A. as Administrative Agent
DSO			Days sales outstanding
ERISA			Employment Retirement Income Security Act of 1974
Exchange Act			Securities Exchange Act of 1934, as amended
FASB			Financial Accounting Standards Board
Form 10-Q			HMS Holdings Corp. Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020
HIPAA			Health Insurance Portability and Accountability Act of 1996
HITECH			Health Information Technology for Economic and Clinical Health Act
IRC			Internal Revenue Code
IRS			U.S. Internal Revenue Service
LIBOR or LIBO Rate			Intercontinental Exchange London Interbank Offered Rate (or any successor rate determined in accordance with the Credit Agreement)
MCO			Managed care organization
ML			Machine learning
NLP			Natural language processing
PBM			Pharmacy benefit manager
PHI			Protected health information
PHM			Population Health Management
PI			Payment Integrity


PMPM			Per member per month
PMPY			Per member per year
R&D			Research and development
RAC			Recovery Audit Contractor
RFP			Request for proposal
ROU			Right-of-use
RPA			Robotic process automation
SEC			U.S. Securities and Exchange Commission
Securities Act			Securities Act of 1933, as amended
SG&A			Selling, general and administrative
TPL			Third-party liability
U.S. GAAP			United States Generally Accepted Accounting Principles
VA			U.S. Department of Veterans Affairs
2016 Omnibus Plan			HMS Holdings Corp. 2016 Omnibus Incentive Plan
2017 Tax Act			Tax Cuts and Jobs Act of 2017
2019 Form 10-K			HMS Holdings Corp. Annual Report on Form 10-K for the year ended December 31, 2019
2019 Omnibus Plan			HMS Holdings Corp. 2019 Omnibus Incentive Plan
401(k) Plan			HMS Holdings Corp. 401(k) Plan

For purposes of this Form 10-Q, the terms “HMS,” “Company,” “we,” “us,” and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise.

Cautionary Note Regarding Forward-Looking Statements

Included in this Form 10-Q are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements. Such statements relate to our current expectations, projections and assumptions about our business, the economy and future events or conditions. They do not relate strictly to historical or current facts.

We have tried to identify forward-looking statements by using words such as “aim,” “anticipate,” "assume," “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “likely,” “may,” “outlook,” “plan,” “potential,” “project,” “seek,” “strategy,” “target,” “trend,” “will,” “would,” “could,” “should,” and variations of such terms and similar expressions and references to guidance, although some forward-looking statements may be expressed differently. These statements include, among other things, the potential impacts of the novel coronavirus (COVID-19) and related developments, information concerning our future growth, business strategy, strategic or operational initiatives, our future operating or financial performance, our ability to invest in and utilize our data and analytics capabilities to expand our offerings, the benefits and synergies to be obtained from completed and future acquisitions, investments and strategic relationships, and the timing and impact of such significant transactions, our future expenses, interest rates and tax rates, our ability to meet our future liquidity requirements, the impact of changes to existing healthcare laws and regulations, or their enforcement or application, or to healthcare spending affecting Medicare, Medicaid or other publicly funded or subsidized health programs, and other statements regarding our possible future actions, business plans, objectives and prospects.

Forward-looking statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual results may differ materially from past results and from those indicated by such forward-looking statements if known or unknown risks or uncertainties materialize, or if underlying assumptions prove inaccurate. These risks and uncertainties include, among other things:

▪the course of the COVID-19 pandemic and the responses to the pandemic, and their effects on our business and operations, including those of our customers and partners, and general economic, business and market conditions;

▪our ability to execute our business plans or growth strategy;

▪our ability to innovate, develop or implement new or enhanced solutions or services;

▪the nature of acquisition, investment, strategic relationship and divestiture opportunities we are pursuing, and our ability to successfully execute on such opportunities;

▪our ability to successfully integrate acquired businesses and operations and realize synergies;

▪significant and increased competition related to our solutions and services;

▪variations in our results of operations;

▪our ability to accurately forecast the revenue under our contracts and solutions;

▪our ability to protect our systems from damage, interruption or breach, and to maintain effective information and technology systems and networks, including during a catastrophic or extraordinary event, such as COVID-19;

▪our ability to protect our intellectual property rights, proprietary technology, information processes and know-how;

▪our failure to maintain a high level of customer retention or the unexpected reduction in scope or termination of key contracts with major customers;

▪customer dissatisfaction or our non-compliance with contractual provisions or regulatory requirements;

▪our failure to meet performance standards triggering significant costs or liabilities under our contracts;

▪our inability to manage our relationships with data sources and suppliers;

▪our reliance on subcontractors and other third party providers and parties to perform services;

▪our ability to secure future contracts and favorable contract terms through the competitive bidding process;

▪pending or threatened litigation;

▪unfavorable outcomes in legal proceedings;

▪our success in attracting and retaining qualified employees and members of our management team;

▪our ability to generate sufficient cash to cover our interest and principal payments under our credit facility;

▪changes in tax laws, regulations or guidance and unexpected changes in our effective tax rate;

▪unanticipated increases in the number or amount of claims for which we are self-insured;

▪accounting changes or revisions;

▪risks relating to our international operations, including political, regulatory, economic, foreign exchange, tax compliance and other risks;

▪changes in the healthcare environment or healthcare financing system, including regulatory, budgetary or political actions that affect healthcare spending or the practices and operations of healthcare organizations;

▪our failure to comply with applicable laws and regulations governing individual privacy and information security, domestically and internationally, or to protect such information from theft and misuse;

▪our ability to comply with current and future legal and regulatory requirements;

▪negative results of government or customer reviews, audits or investigations;

▪state or federal limitations related to outsourcing of certain government programs or functions;

▪restrictions on bidding or performing certain work due to perceived conflicts of interests;

▪the market price of our common stock and lack of dividend payments; and

▪anti-takeover provisions in our corporate governance documents.

These and other risks are discussed in this Form 10-Q and under the headings “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” of our 2019 Form 10-K, and in other documents we file with the SEC.

Any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. We caution readers not to place undue reliance upon any of these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our reports and other filings with the SEC.

Market and Industry Data

This Form 10-Q may include market, industry and government data and forecasts that have been obtained from publicly available information, various industry publications, other published industry sources and our own internal data and estimates. We have not independently verified information from third-party sources and cannot make any representation as to the accuracy or completeness of such information. None of the reports and other materials of third-party sources referred to in this Form 10-Q were prepared for use in, or in connection with, this Form 10-Q. Additionally, our internal data and estimates are based upon information obtained from our customers, our partners, trade and business organizations, publicly available information and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Estimates are difficult to develop and inherently uncertain, and we cannot assure you that they are accurate. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those detailed above and under “Part II, Item 1A. Risk Factors” of this Form 10-Q.

Trademarks and Trade Names

We have a number of registered trademarks, including HMS®, as well as the corresponding HMS + logo design mark, Elli®, Eliza®, Essette®, VitreosHealth® and Accent®. These and other trademarks of ours appearing in this Form 10-Q are our property. Solely for convenience, trademarks and trade names of ours referred to in this Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names. Other trademarks and trade names appearing in this Form 10-Q are the property of their respective owners. We do not intend our use or display of other companies' trademarks or trade names to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


	September 30, 2020		December 31, 2019
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	211,034	$	139,268
Accounts receivable, net	234,418		223,443
Prepaid expenses and other current assets	19,430		30,925
Income tax receivable	1,032		3,210
Deferred financing costs, net	564		564
Total current assets	466,478		397,410
Property and equipment, net	82,829		86,947
Goodwill	594,561		599,351
Intangible assets, net	120,755		131,849
Operating lease right-of-use assets	14,725		17,493
Deferred financing costs, net	686		1,109
Other assets	17,065		10,117
Total assets	$	1,297,099	$	1,244,276

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable, accrued expenses and other liabilities	$	93,956	$	97,747
Liability for appeals	5,179		3,570
Total current liabilities	99,135		101,317
Long-term liabilities:
Revolving credit facility	240,000		240,000
Operating lease liabilities	11,976		14,881
Net deferred tax liabilities	25,075		25,587
Other liabilities	8,974		7,626
Total long-term liabilities	286,025		288,094
Total liabilities	385,160		389,411
Commitments and contingencies
Shareholders' equity:
Preferred stock -- $0.01 par value; 5,000,000 shares authorized; none issued	—		—
Common stock -- $0.01 par value; 175,000,000 shares authorized;102,207,020 shares issued and 88,542,342 shares outstanding at September 30, 2020; 101,766,468 shares issued and 88,103,566 shares outstanding at December 31, 2019	1,022		1,018
Capital in excess of par value	499,704		479,964
Retained earnings	546,789		509,459
Treasury stock, at cost: 13,663,194 shares at September 30, 2020 and December 31, 2019	(135,576)		(135,576)
Total shareholders' equity	911,939		854,865
Total liabilities and shareholders' equity	$	1,297,099	$	1,244,276

See accompanying Notes to the unaudited Consolidated Financial Statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue	$	165,236	$	146,815	$	479,302	$	462,950
Cost of services:
Compensation	63,829		56,258		193,678		172,033
Direct project and other operating expenses	23,335		22,751		71,214		63,693
Information technology	15,160		14,207		45,188		39,627
Occupancy	3,965		4,144		12,517		12,275
Amortization of acquisition related software and intangible assets	5,506		4,158		16,575		12,490
Total cost of services	111,795		101,518		339,172		300,118
Selling, general and administrative expenses	26,241		28,232		88,861		85,514
Total operating expenses	138,036		129,750		428,033		385,632
Operating income	27,200		17,065		51,269		77,318
Interest expense	(1,926)		(2,677)		(6,135)		(8,379)
Interest income	8		1,210		266		3,291
Other (expense)/income	(1,127)		7,697		1,744		7,697
Income before income taxes	24,155		23,295		47,144		79,927
Income taxes	6,120		2,159		9,814		10,049
Net income	$	18,035	$	21,136	$	37,330	$	69,878

Basic income per common share:
Net income per common share -- basic	$	0.20	$	0.24	$	0.42	$	0.79
Diluted income per common share:
Net income per common share -- diluted	$	0.20	$	0.24	$	0.42	$	0.77
Weighted average shares:
Basic	88,531		86,324		88,397		88,190
Diluted	90,228		88,324		89,976		90,441

See accompanying Notes to the unaudited Consolidated Financial Statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Common Stock and paid-in capital
Balance, beginning of period	$	497,091	$	462,569	$	480,982	$	426,737
Exercise of stock options	526		12,177		2,145		39,175
Stock-based compensation expense	3,133		2,934		21,083		18,715
Vesting of restricted stock units, net of shares withheld for employee tax	(24)		(23)		(3,484)		(6,970)
Balance, end of period	500,726		477,657		500,726		477,657
Retained earnings
Balance, beginning of period	528,754		470,977		509,459		422,235
Net income	18,035		21,136		37,330		69,878

Balance, end of period	546,789		492,113		546,789		492,113
Treasury stock
Balance, beginning of period	(135,576)		(135,576)		(135,576)		(135,576)
Purchase of treasury stock	—		—		—		—
Balance, end of period	(135,576)		(135,576)		(135,576)		(135,576)
Total shareholders' equity	$	911,939	$	834,194	$	911,939	$	834,194

Shares issued
Balance, beginning of period	102,173,154		101,014,406		101,766,468		98,924,501
Exercise of stock options	28,402		740,748		119,991		2,427,156
Vesting of restricted stock units, net of shares withheld for employee tax	5,464		1,525		320,561		405,022
Balance, end of period	102,207,020		101,756,679		102,207,020		101,756,679

Treasury Stock
Balance, beginning of period	13,663,194		13,663,194		13,663,194		13,663,194
Purchase of treasury stock	—		—		—		—
Balance, end of period	13,663,194		13,663,194		13,663,194		13,663,194

See accompanying Notes to the unaudited Consolidated Financial Statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2020		2019
Operating activities:
Net income	$	37,330	$	69,878
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and software	24,121		24,719
Amortization of intangible assets	11,094		7,009
Amortization of deferred financing costs	423		423
Gain on sale of cost basis investment	—		(7,697)
Stock-based compensation expense	21,083		18,715
Deferred income taxes	(512)		6,327
Noncash lease expense	2,768		2,955

Release of estimated liability for appeals, net	—		(10,478)
Changes in operating assets and liabilities:
Accounts receivable	(8,678)		508
Prepaid expenses and other current assets	11,495		72
Other assets	(6,948)		(1,746)
Income taxes receivable	2,178		9,926
Accounts payable, accrued expenses and other liabilities	(91)		(3,976)
Operating lease liabilities	(2,905)		(3,927)
Liability for appeals	1,609		211
Net cash provided by operating activities	92,967		112,919
Investing activities:
Acquisition of a business, net of cash acquired	1,529		(36,554)
Proceeds from sale of cost basis investment	—		9,776
Purchases of property and equipment	(8,396)		(5,840)
Investment in capitalized software	(12,766)		(10,763)
Net cash used in investing activities	(19,633)		(43,381)
Financing activities:
Proceeds from exercise of stock options	2,145		39,175
Payments of tax withholdings on behalf of employees for net-share settlements	(3,484)		(6,970)
Payments on capital lease obligations	(229)		(93)

Net cash (used in)/provided by financing activities	(1,568)		32,112
Net increase in cash and cash equivalents	71,766		101,650
Cash and Cash Equivalents
Cash and cash equivalents at beginning of year	139,268		178,946
Cash and cash equivalents at end of period	$	211,034	$	280,596

Supplemental disclosure of cash flow information:
Cash paid for income taxes/(refunds received), net of refunds	$	7,035	$	(5,303)
Cash paid for interest	$	3,422	$	8,118

Supplemental disclosure of non-cash activities:
Change in balance of accrued property and equipment purchases	$	1,159	$	2,291

See accompanying Notes to the unaudited Consolidated Financial Statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 and 2019

(unaudited)

1. Business and Summary of Significant Accounting Policies

(a) Business

The terms “HMS,” “Company,” “we,” “us,” and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise. HMS is an industry-leading provider of cost containment and analytical solutions in the healthcare marketplace. Our mission is to make healthcare work better for everyone. We use data, technology and analytics to deliver payment accuracy and population health management solutions that help healthcare organizations reduce costs, improve health outcomes and enhance consumer experiences. We currently operate as one business segment with a single management team that reports to the Chief Executive Officer.

The Consolidated Financial Statements and accompanying Notes in this Form 10-Q are unaudited. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The results reported in these unaudited Consolidated Financial Statements are not necessarily indicative of the results that may be expected for any subsequent interim period or the entire year. These unaudited Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). The consolidated balance sheet as of December 31, 2019 included herein was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

The preparation of the Company’s unaudited Consolidated Financial Statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions were considered and made in context with the information reasonably available to the Company and the unknown future impacts of the novel coronavirus (COVID-19) as of September 30, 2020 and through the date of this Form 10-Q. The statements include all adjustments (which include only normal recurring adjustments, except as disclosed) that management considers necessary to present a fair statement of the Company’s results for such interim periods.

These unaudited Consolidated Financial Statements include HMS accounts and transactions and those of the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(b) Summary of Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies that are referenced in the 2019 Form 10-K.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 introduces the current expected credit losses methodology for estimating allowances for credit losses. ASU 2016-13 applies to all financial instruments carried at amortized cost and off-balance-sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credit, and financial guarantees. The new accounting standard does not apply to trading assets, loans held for sale, financial assets for which the fair value option has been elected, or loans and receivables between entities under common control. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020. When developing an estimate of the Company's expected credit losses, the Company considers all relevant information regarding the collectability of cash flows including historical information, customers' credit history and current financial conditions, industry trends and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software. ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements ("ASU 2018-13"). The objective of the ASU is to improve the disclosures related to fair value measurement by removing, modifying, or adding disclosure requirements related to recurring and non-recurring fair value measurements. ASU 2018-13 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted

changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. This guidance is not expected to have a material impact on the Company’s financial position, results of operations or internal control framework.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The objective of ASU 2020-04 is to provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact, but does not expect this guidance to have a material impact on the Company’s consolidated financial statements.

2. Revenue Recognition

The Company’s revenue disaggregated by solution for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Coordination of Benefits	$	113,870	$	94,619	$	338,661	$	305,564
Payment Integrity	37,987		37,016		101,704		113,863
Population Health Management	13,379		15,180		38,937		43,523
Total	$	165,236	$	146,815	$	479,302	$	462,950

Coordination of benefits revenue is derived from contracts with state governments, Medicaid managed care plans, and commercial entities that can span years with the option to renew. Types of service contracts could include: (a) the identification of erroneously paid claims; (b) the delivery of verified commercial insurance coverage information; (c) the identification of paid claims where another third party is liable; and (d) the identification and enrollment of Medicaid members who have access to employer insurance. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance obligations is largely based on variable consideration where, based on the number of claims or amount of findings the Company identified, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation. The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key inputs and assumptions in determining variable consideration include identified pricing and expected recoveries and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when our services are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Generally, coordination of benefit contract payment terms are not standardized

within the respective contract; however, payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.

Payment integrity services revenue is derived from contracts with federal and state governments, commercial health plans and other at-risk entities that can span years with the option to renew. Types of service contracts could include: (a) services designed to ensure that healthcare payments are accurate and appropriate; and (b) the identification of over/under payments or inaccurate charges based on a review of medical records. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance obligations is largely based on variable consideration where, based on the amount of recovery findings the Company identifies, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation. The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key inputs and assumptions in determining variable consideration include identified pricing and expected recoveries and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when our services are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Generally, payment integrity contract payment terms are not standardized within the respective contract; however, invoice payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.

Payment accuracy revenue consists of revenue for our coordination of benefits and payment integrity services.

Population health management revenue is derived from contracts with health plans and other risk-bearing entities that can span years with the option to renew. Types of service contracts could include: (a) programs designed to improve member engagement; and (b) outreach services designed to improve clinical outcomes. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these services is largely based on consideration associated with prices per order/transfer and PMPM/PMPY fees. The Company believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. The Company has elected the right to invoice practical expedient for recognition of revenue related to its performance obligations when the amount we have the right to invoice the customer corresponds directly with the value to the customer. Additionally, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Generally, population health management contract payment terms are stated within the contract and are due within an explicitly stated time period (e.g., 30, 45, 60 days) from the date of invoice. A portion of the payment received may relate to future performance obligations and will result in an increase to deferred revenue until the obligation has been met.

The Company's accounts receivable balance is net of estimated variable consideration of $16.6 million and $17.1 million as of September 30, 2020 and December 31, 2019, respectively, related to revenue recognized based on expected recoveries and/or savings.

The Company’s revenue disaggregated by market for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Commercial	$	87,001	$	69,711	$	250,064	$	225,014
State	62,233		62,830		195,046		189,752
Federal	16,002		14,274		34,192		48,184
Total	$	165,236	$	146,815	$	479,302	$	462,950

A portion of the Company’s services are deferred and revenue is recognized at a later time. Deferred revenue was approximately $6.9 million and $4.2 million as of September 30, 2020 and December 31, 2019, respectively, and is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. Approximately $3.1 million of the December 31, 2019 balance was recognized in revenue during the nine months ended September 30, 2020.

Contract modifications are routine in nature and often done to account for changes in the contract specifications or requirements. In most instances, contract modifications are for services that are not distinct, and, therefore, modifications are accounted for as part of the existing contract. The Company has elected to use the practical expedient to expense the incremental costs of obtaining a contract if the amortization period of the asset that the Company would have otherwise recognized is one year or less.

In connection with coordination of benefits and certain payment integrity services, lockboxes and their associated bank accounts are set up to support recoveries and remittances. Generally, these bank accounts are for the benefit of the Company’s customers. Customer cash held in Company bank accounts for the benefit of the customer was approximately $19.4 million and $21.9 million as of September 30, 2020 and December 31, 2019, respectively. This amount is included in cash and cash equivalents and other current liabilities on the accompanying Consolidated Balance Sheet.

3. Acquisitions

(a)Accent

On December 23, 2019, HMS acquired West Claims Recovery Services, LLC (“Accent”), a payment accuracy and cost containment business, for aggregate consideration of cash in the amount of $157.6 million, net of post-closing adjustments, which was funded through cash on hand. Estimates and assumptions for which the Company is still obtaining or evaluating information are subject to change up to one year from the acquisition date as additional information becomes available and adjustments may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined. As of September 30, 2020, HMS has not finalized the determination of fair values allocated to various assets and liabilities, including, but not limited to: receivables; accounts payable; and goodwill.

The intangible assets are valued using various methods which require several judgments, including growth rates, discount rates, customer attrition rates, and expected levels of revenues, earnings, cash flows and tax rates. The intangible assets are amortized over their estimated useful lives on a straight-line basis. Goodwill was determined based on the difference between the purchase price and the fair values of the tangible and intangible assets acquired. Goodwill recognized from the acquisition was the result of synergies to be realized from future revenue growth. Goodwill is deductible for tax purposes, has an indefinite useful life and will be included in the Company’s annual impairment testing or between annual tests if an indicator of impairment exists.

The preliminary allocation of the purchase price to the fair value of the assets acquired and the liabilities assumed as of December 23, 2019, the effective date of the acquisition, as adjusted during the nine months ended September 30, 2020, is as follows (in thousands):


Cash and cash equivalents	$	9,916
Accounts receivable	11,485
Prepaid expenses	129
Property and equipment	2,878
Intangible assets	68,400
Goodwill	76,755
Other assets	489
Accounts payable and accrued liabilities	(12,431)


Total purchase price	$	157,621

As of the nine months ended September 30, 2020, the Company made refinements to the December 23, 2019 preliminary purchase price allocation as reported at December 31, 2019. These refinements, primarily related to working capital, resulted in an increase in accounts receivable of $2.3 million, an increase in cash and cash equivalents of $0.5 million, a decrease in accounts payable and accrued liabilities of $1.0 million, a decrease in goodwill of approximately $4.8 million and an overall decrease in the total consideration paid due to post-closing adjustments of $1.0 million. Substantially all the receivables acquired are expected to be collectible.

The purchase price allocated to the intangible assets acquired was as follows (in thousands, except for useful life):


	Useful Life (in years)
Customer relationships	12	$	67,000

Trade name	3	1,400

Fair value of intangibles acquired		$	68,400

We incurred $2.1 million of acquisition related costs related to the Accent acquisition for the year ended December 31, 2019. The costs include consulting, legal and transaction costs, and have been recorded in selling, general and administrative expenses.

The financial results of Accent's operations since the date of acquisition have been included in the Company’s consolidated financial statements. For the three and nine months ended September 30, 2020, Accent contributed approximately $10.8 million and $32.4 million in revenue to HMS's results of operations, respectively.

(b) VitreosHealth

On September 16, 2019, HMS acquired VitreosHealth, Inc. ("VitreosHealth"), a company that offers predictive and prescriptive health insights utilized by population risk models, for aggregate consideration of $36.6 million, which was funded with cash on hand. The purchase price was subject to certain post-closing purchase price adjustments and the initial purchase price allocation as of the date of acquisition was based on a preliminary valuation.

The Company's allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the acquisition is based on estimated fair values as of September 16, 2019. The Company allocated the purchase price, net of cash acquired, to the following significant assets: intellectual property subject to amortization of $6.0 million, and goodwill of $30.2 million which represents the excess purchase price over the net identifiable tangible and intangible assets. There were no additional material allocations to assets and liabilities. The intangible assets are valued using various methods which require several judgments, including growth rates, discount rates, expected levels of revenues, earnings, cash flows and tax rates. The intangible assets are amortized over their estimated useful lives on a straight-line basis and are not expected to be deductible for tax purposes. The goodwill recognized from the acquisition was a result of expected synergies to be realized from future revenue growth, is not expected to be deductible for tax purposes, has an indefinite useful life and will be included in the Company’s annual impairment testing.

The results of VitreosHealth's operations since the date of acquisition have been included in the Company's consolidated financial statements and are not considered material.

4. Intangible Assets, Goodwill and Other Assets

(a) Intangible Assets

Intangible assets consisted of the following (in thousands, except for weighted average amortization period):


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Amortization Period in Years
September 30, 2020
Customer relationships	$	125,423	$	(18,968)	$	106,455	11.3
Trade names	1,400		(361)		1,039		2.2
Intellectual property	27,700		(14,439)		13,261		3.5
Total	$	154,523	$	(33,768)	$	120,755


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Amortization Period in Years
December 31, 2019
Customer relationships	$	135,290	$	(21,637)	$	113,653	12.1
Trade names	1,536		(147)		1,389		3.0
Intellectual property	27,700		(10,893)		16,807		3.7
Total	$	164,526	$	(32,677)	$	131,849

Amortization expense of intangible assets is expected to approximate the following (in thousands):


Year ending December 31,	Amortization
2020 (excluding the nine months ended September 30, 2020)	$	3,562
2021	14,247
2022	14,235
2023	11,405
2024	10,330
Thereafter	66,976
Total	$	120,755

For the three months ended September 30, 2020 and 2019, amortization expense related to intangible assets was $3.7 million and $2.3 million, respectively.

For the nine months ended September 30, 2020 and 2019, amortization expense related to intangible assets was $11.1 million and $7.0 million, respectively.

(b) Goodwill

As a result of adjustments relating to the Accent acquisition, the changes in the carrying amount of goodwill were as follows (in thousands):



Balance at December 31, 2019	$	599,351
Accent acquisition - Adjustment	(4,790)
Balance at September 30, 2020	$	594,561

Included in Other assets is a Level 1 investment in equity securities with a cost basis of $7.4 million. As of September 30, 2020 and December 31, 2019, the fair value measurement of the equity instrument was $9.6 million and $7.9 million, respectively. There were no sales, settlements issuances or transfers related to this level 1 instrument.

The Company recorded a net unrealized loss of $1.2 million and an unrealized gain of $1.7 million for the three and nine months ended September 30, 2020, respectively. There were no realized or unrealized gains in the three and nine months ended September 30, 2019. These gains and losses are reflected as a component of Other (expense)/income in the accompanying Consolidated Statements of Income.

During the three months ended September 30, 2019, a third party acquired one hundred percent of the outstanding stock of InstaMed Holdings, Inc. ("InstaMed") including the Company's cost based investment in Instamed of $2.1 million. As a result, the Company received proceeds of $9.8 million from the sale of the investment and recognized a $7.7 million gain in other income for the three and nine months ended September 30, 2019.

5. Accounts Payable, Accrued Expenses and Other Liabilities

Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):


	September 30, 2020		December 31, 2019
Accounts payable, trade	$	18,190	$	12,246
Accrued compensation and other	27,261		36,827
Accrued operating expenses	42,035		42,045
Current portion of lease liabilities	6,470		6,629
Total accounts payable, accrued expenses and other liabilities	$	93,956	$	97,747

6. Income Taxes

The Company’s effective tax rate increased to 20.8% for the nine months ended September 30, 2020 from 12.6% for the nine months ended September 30, 2019. The effective tax rate for the nine months ended September 30, 2020 includes discrete tax benefits primarily related to a prior year R&D credit true-up and net equity compensation deductions. For the nine months ended September 30, 2020, the differences between the federal statutory rate and our effective tax rate are tax expense items related to state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences. The Company has current period foreign income tax expense and includes global intangible low-taxed income as current period income tax expense, both of which are not material to the overall financial statements.

Included in Other liabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits (net of the federal benefit for state issues) of approximately $5.3 million and $4.2 million, as of September 30, 2020 and December 31, 2019, respectively, that, if recognized, would favorably affect the Company’s future effective tax rate. Also included in Other liabilities on the Consolidated Balance Sheets, are accrued liabilities for interest expense and penalties related to unrecognized tax benefits of $0.9 million and $0.7 million as of September 30, 2020 and December 31, 2019, respectively. HMS includes interest expense and penalties in the provision for income taxes in the unaudited Consolidated Statements of Income. The amount of interest expense (net of federal and state income tax benefits) and penalties in the unaudited Consolidated Statements of Income for the nine months ended September 30,

2020 and 2019 was $0.2 million and $0.03 million, respectively. The Company believes it is reasonably possible that the amount of unrecognized tax benefits may decrease by $1.6 million over the next twelve months, due to the expiration of the statute of limitations in federal and various state jurisdictions.

HMS files income tax returns with the U.S. Federal government and various state and local jurisdictions and will file income tax returns in certain foreign jurisdictions in future periods as a result of its acquisition of VitreosHealth. HMS is generally no longer subject to U.S. Federal income tax examinations for years before 2016. HMS operates in a number of state, local and foreign jurisdictions. Accordingly, HMS is subject to state, local and foreign income tax examinations based on the various statutes of limitations in each jurisdiction.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act includes numerous provisions relating to, among other things, refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss amounts and carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to analyze the potential impacts of this legislation on its financial position and results of operations.

7. Liability For Appeals

Under the Company’s contracts with certain commercial health plan customers and its Medicare Recovery Audit Contractor (“RAC”) contract with the Centers for Medicare & Medicaid Services (“CMS”) (included within the Company’s payment integrity services revenue), providers have the right to appeal HMS claim findings and to pursue additional appeals if the initial appeal is found in favor of HMS’s customer. To the extent the amount to be returned to providers following a successful appeal exceeds or is less than the amount recorded, revenue in the applicable period would be reduced or increased by such amount. The liability for appeals balance was approximately $5.2 million and $3.6 million as of September 30, 2020 and December 31, 2019, respectively.

8. Credit Agreement

In May 2013, we entered into a credit agreement (as amended and restated, the "Credit Agreement") with certain lenders and Citibank, N.A. as administrative agent. The Credit Agreement originally provided for an initial $500 million five-year revolving credit facility maturing on May 3, 2018.

On December 19, 2017, the Company entered into an amendment to the Credit Agreement, which, among other things, extended the maturity of its then existing $500 million revolving credit facility by five years to December 2022 (the "Amended Revolving Facility").The availability of funds under the Amended Revolving Facility includes sublimits for (a) up to $50 million for the issuance of letters of credit and (b) up to $25 million for swingline loans. In addition, the Company may increase the commitments under the Amended Revolving Facility and/or add one or more incremental term loan facilities, provided that such incremental facilities do not exceed in the aggregate the sum of (i) the greater of $120 million and 100% of Consolidated EBITDA (as defined in the Credit Agreement) and (ii) an additional amount so long as our first lien leverage ratio (as defined in the Credit Agreement) on a pro forma basis is not greater than 3.00:1.00, subject to obtaining commitments from the lenders and meeting certain other conditions.

As of September 30, 2020 and December 31, 2019, the outstanding principal balance due on the Amended Revolving Facility was $240 million. No principal payments were made against the Amended Revolving Facility during the nine months ended September 30, 2020.

Borrowings under the Amended Revolving Facility bear interest at a rate equal to, at the Company’s election (except with respect to swingline borrowings, which will accrue interest based only at the base rate), either:

▪a base rate determined by reference to the greatest of (a) the prime or base commercial lending rate of the administrative agent as in effect on the relevant date, (b) the federal funds effective rate plus 0.50% and (c) the one-month London Interbank Offered Rate (or any successor rate determined in accordance with the Credit Agreement) (“LIBO Rate”) plus 1.00%, plus an interest margin ranging from 0.50% to 1.00% based on the Company’s consolidated leverage ratio for the applicable period; or

▪an adjusted LIBO Rate, equal to the LIBO Rate for the applicable interest period multiplied by the statutory reserve rate (equal to (x) one divided by (y) one minus the aggregate of the maximum reserve percentage (including any marginal, special, emergency or supplemental reserves) established by the Board of Governors of the Federal Reserve System of the United States), plus an interest margin ranging from 1.50% to 2.00% based on the Company’s consolidated leverage ratio for the applicable period.

In addition to paying interest on the outstanding principal, the Company is required to pay unused commitment fees on the Amended Revolving Facility during the term of the Credit Agreement ranging from 0.375% to 0.250% per annum based on the Company’s consolidated leverage ratio and letter of credit fees equal to 0.125% per annum on the aggregate face amount of each letter of credit, as well as customary agency fees. As part of a contractual agreement with a customer, the Company has an outstanding irrevocable letter of credit for $6.5 million, which is issued against the Amended Revolving Facility and expires June 30, 2021.

The Amended Revolving Facility is secured, subject to certain customary carve-outs and exceptions, by a first priority lien and security interest in substantially all tangible and intangible assets of the Company and certain subsidiaries of the Company. The Amended Revolving Facility contains certain restrictive covenants, which affect, among other things, the ability of the Company and its subsidiaries to incur indebtedness, create liens, make investments, sell or otherwise dispose of assets, engage in mergers or consolidations with other entities, and pay dividends or repurchase stock. The Company is also required to comply, on a quarterly basis, with two financial covenants: (i) a minimum interest coverage ratio of 3:00:1:00, and (ii) a maximum consolidated leverage ratio of 4.25:1.00 from and after January 2020. The consolidated leverage ratio is subject to a step-up to 5.25:1.00 for four full consecutive fiscal quarters following a permitted acquisition or similar investment. As of September 30, 2020, the Company was in compliance with all terms of the Credit Agreement.

Interest expense and the commitment fees on the unused portion of the Company’s Amended Revolving Facility were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest expense	$	1,594	$	2,342	$	5,111	$	7,392
Commitment fees	162		157		482		473

As of September 30, 2020 and December 31, 2019, the unamortized balance of deferred origination fees and debt issuance costs was $1.3 million and $1.7 million, respectively. For the nine month periods ended September 30, 2020 and 2019, HMS amortized $0.4 million and $0.4 million, respectively, of interest expense related to the Company’s deferred origination fees and debt issue costs.

9. Earnings Per Share

The following table reconciles the basic to diluted weighted average common shares outstanding using the treasury stock method (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	18,035	$	21,136	$	37,330	$	69,878

Weighted average common shares outstanding-basic	88,531		86,324		88,397		88,190
Plus: net effect of dilutive stock options and restricted stock units	1,697		2,000		1,579		2,251
Weighted average common shares outstanding-diluted	90,228		88,324		89,976		90,441
Net income per common share -- basic	$	0.20	$	0.24	$	0.42	$	0.79
Net income per common share -- diluted	$	0.20	$	0.24	$	0.42	$	0.77

For the three months ended September 30, 2020 and 2019, (i) 1,227,140 and 625,573 stock options, respectively, and (ii) restricted stock units representing 807 and 1,693 shares of the Company's common stock, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.

For the nine months ended September 30, 2020 and 2019, (i) 1,126,976 and 472,627 stock options, respectively, and (ii) restricted stock units representing 2,297 and 2,791 shares of common stock, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.

10. Stock-Based Compensation

(a) Long-Term Incentive Award Plans

The Company grants stock options and restricted stock units to HMS employees and non-employee directors of the Company under the HMS Holdings Corp. 2019 Omnibus Incentive Plan (the “2019 Omnibus Plan”), as approved by the Company’s shareholders on May 22, 2019. The 2019 Omnibus Plan replaces and supersedes the HMS Holdings Corp. 2016 Omnibus Incentive Plan.

(b) Stock-Based Compensation Expense

Total stock-based compensation expense in the Company’s unaudited Consolidated Statements of Income related to the Company’s long-term incentive award plans was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cost of services-compensation	$	922	$	982	$	5,897	$	7,825
Selling, general and administrative	2,211		1,952		15,186		10,890
Total	$	3,133	$	2,934	$	21,083	$	18,715

For the three months ended September 30, 2020 and 2019, stock-based compensation expense related to stock options was approximately $1.0 million and $0.9 million, respectively. For the nine months ended September 30, 2020 and 2019, stock-based compensation expense related to stock options was approximately $8.0 million and $7.8 million, respectively.

Presented below is a summary of stock option activity for the nine months ended September 30, 2020 (in thousands, except for weighted average exercise price and weighted average remaining contractual terms):


	Number of Options	Weighted Average Exercise Price		Weighted Average- Remaining Contractual Terms	Aggregate Intrinsic Value
Outstanding balance at December 31, 2019	2,411	$	23.43
Granted	1,073	27.47
Exercised	(120)	17.88
Forfeitures	(47)	28.06
Expired	(6)	29.24
Outstanding balance at September 30, 2020	3,311	$	24.88	7.51	$	9,564
Expected to vest at September 30, 2020	1,303	$	28.85	8.92	$	832
Exercisable at September 30, 2020	1,579	$	20.69	6.04	$	8,376

During the three months ended September 30, 2020 and 2019, the Company received proceeds of $0.5 million and $12.2 million, respectively, for the issuance of 28,402 and 740,748 shares of common stock upon the exercise of outstanding stock options, respectively. The total intrinsic value of stock options exercised during the three months ended September 30, 2020 and 2019 was $0.3 million and $16.0 million, respectively. During the nine months ended September 30, 2020 and 2019, the Company received proceeds of $2.1 million and $39.2 million, respectively, for the issuance of 119,991 and 2,427,156 shares of common stock upon the exercise of outstanding stock options, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2020 and 2019 was $1.2 million and $45.5 million, respectively.

As of September 30, 2020, there was approximately $5.6 million of total unrecognized compensation cost related to stock options outstanding, which is expected to be recognized over a weighted average period of 1.2 years.

The weighted-average grant date fair value per share of the stock options granted during the nine months ended September 30, 2020 and 2019 was $9.06 and $13.87, respectively. HMS estimated the fair value of each stock option grant on the date of grant using a Black-Scholes option pricing model and weighted–average assumptions set forth in the following table:


	Nine Months Ended September 30,
	2020		2019
Expected dividend yield	0	%	0	%
Risk-free interest rate	1.1	%	2.5	%
Expected volatility	41.1	%	40.9	%
Expected life (years)	6.3		6.4

The total tax benefits recognized on stock-based compensation related to stock options for the nine months ended September 30, 2020 and 2019 was $3.2 million and $16.1 million, respectively.

(d) Restricted Stock Units

For the three months ended September 30, 2020 and 2019, stock-based compensation expense related to restricted stock units was approximately $2.1 million and $1.9 million, respectively. For the nine months ended September 30, 2020 and 2019, stock-based compensation expense related to restricted stock units was approximately $13.1 million and $10.9 million, respectively.

Presented below is a summary of restricted stock units activity for the nine months ended September 30, 2020 (in thousands, except for weighted average grant date fair value per unit):


	Number of Units	Weighted Average Grant Date Fair Value per Unit
Outstanding balance at December 31, 2019	1,239	$	21.37
Granted	747	24.22
Vesting of restricted stock units, net of units withheld for taxes	(321)	23.47
Units withheld for taxes	(147)	23.47
Forfeitures	(63)	24.41
Outstanding balance at September 30, 2020	1,455	$	25.41

For the three months ended September 30, 2020 and 2019, HMS granted 7,538 and 12,687 restricted stock units, respectively, with an aggregate fair market value of $0.2 million and $0.5 million, respectively. For the nine months ended September 30, 2020 and 2019, HMS granted 746,502 and 474,520 restricted stock units, respectively, with an aggregate fair market value of $18.1 million and $16.2 million, respectively.

As of September 30, 2020, 1,147,469 restricted stock units remained unvested and there was approximately $13.3 million of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average vesting period of 1.1 years.

11. Commitments and Contingencies

In February 2018, the Company received a Civil Investigative Demand (“CID”) from the Texas Attorney General, purporting to investigate possible unspecified violations of the Texas Medicaid Fraud Prevention Act. In March 2018, the Company provided certain documents and information in response to the CID. HMS has not received any further requests from the government in connection with this CID.

In September 2018, a former employee filed an action in the New York County Supreme Court entitled Christopher Frey v. Health Management Systems, Inc. alleging retaliation under New York law. The complaint seeks recovery of an unspecified amount of monetary damages, including back pay and other compensatory and equitable relief. In May 2019, the Court heard oral arguments on the Company's motion to dismiss the complaint, and in July 2020, the Court granted the motion to dismiss the complaint in its entirety. On August 26, 2020, the plaintiff filed a notice of appeal with the New York Supreme Court Appellate Division, First Judicial Department.

From time to time, HMS may be subject to investigations, legal proceedings and other disputes arising in the ordinary course of the Company’s business, including but not limited to regulatory audits, billing and contractual disputes, employment-related matters and post-closing disputes related to acquisitions. Due to the Company’s contractual relationships, including those with federal and state government entities, HMS’s operations, billing and business practices are subject to scrutiny and audit by those entities and other multiple agencies and levels of government, as well as to frequent transitions and changes in the personnel responsible for oversight of the Company’s contractual performance. HMS may have contractual disputes with its customers arising from differing interpretations of contractual provisions that define the Company’s rights, obligations, scope of work or terms of payment, and with associated claims of

liability for inaccurate or improper billing for reimbursement of contract fees, or for sanctions or damages for alleged performance deficiencies. Resolution of such disputes may involve litigation or may require that HMS accept some amount of loss or liability in order to avoid customer abrasion, negative marketplace perceptions and other disadvantageous results that could affect the Company’s business, financial condition, results of operations and cash flows.

HMS records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, HMS does not establish an accrued liability.

12. Subsequent Events

In connection with the preparation of these unaudited Consolidated Financial Statements, an evaluation of subsequent events was performed through the date of filing and there were no events that have occurred that would require adjustments to the financial statements or disclosures.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of HMS. You should read this discussion and analysis in conjunction with the other sections of this Form 10-Q, including the Cautionary Note Regarding Forward-Looking Statements appearing prior to Part I, the information in Part II, Item 1A and the unaudited Consolidated Financial Statements and Notes thereto included in Part I, Item 1. The historical results set forth in Part I of this Form 10-Q should not be taken as necessarily indicative of our future operations or financial results.

Business Overview

At HMS, our mission is to make healthcare work better for everyone. We deliver healthcare technology, analytics and engagement solutions that advance the healthcare system by helping healthcare organizations reduce costs, improve health outcomes and enhance consumer experiences. Our comprehensive solutions include a broad range of payment accuracy and population health management services that offer value throughout the healthcare continuum. Through our solutions, we save billions of dollars annually for our customers while helping consumers lead healthier lives. HMS is managed and operates as one business segment with a single management team that reports to the Chief Executive Officer.

We serve state Medicaid programs, commercial health plans, federal government health agencies, government and private employers, CHIPs and other healthcare payers. We also serve as a subcontractor for certain business outsourcing and technology firms. As of September 30, 2020, our customer base included the following:

▪over 40 state Medicaid programs;

▪approximately 325 health plans, including 22 of the top 25 health plans nationally (based on membership) in support of their multiple lines of business, including Medicaid managed care, Medicare Advantage and group and individual health;

▪over 150 private employers;

▪CMS, VA and the Centers for Disease Control and Prevention; and

▪PBMs, third-party administrators and other risk-bearing entities, including independent practice associations, hospital systems, ACOs and specialty care organizations.

COVID-19 Impact

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which has spread globally and throughout the United States. As COVID-19 has continued to evolve, our top priority has been and continues to be the safety and well-being of

our employees. Since the beginning of the pandemic, we have implemented a number of precautionary and preemptive measures to protect their safety while ensuring continuity of service to our customers. Our efforts include, transitioning essentially all of our employees to working remotely, suspending non-essential employee travel, canceling participation in industry events and in-person group meetings, promoting social distancing and enhanced cleaning and sanitization efforts across office locations, and implementing protocols to quarantine employees who may have been exposed to COVID-19, or show relevant symptoms. We also commenced preparedness plans at our facilities to maintain continuity of operations, which provide for flexible work arrangements, and maintain regular communications with our workforce as well as our customers and vendors. Although we have moved to a remote working environment without any significant disruptions to our business or control processes, and believe we are well-prepared to continue operating this way, we have a multi-phase plan to return to working on-site that gradually allows our workforce to return while practicing social distancing and other safety measures. Our management team continues to monitor the situation and manages our response in collaboration with customers, government officials and stakeholders. Due to the circumstances related to COVID-19, some of our clients have temporarily suspended or reduced certain contract work. As a result of the reduction in services, we experienced lower revenues during the second quarter and continued to see an impact to our financial results in certain parts of our business in the third quarter. Although the Company’s revenues increased for the three and nine months ended September 30, 2020, as compared to the prior year periods, the full long-term effects of COVID-19 on our business cannot be reasonably estimated at this time. The extent of the impact on our future operational and financial results will depend on future developments and their effects on our customers and contracts, which are highly uncertain and cannot be predicted. As the pandemic continues to unfold, we remain committed to helping our employees, clients and partners navigate the ongoing challenges posed by COVID-19 and may take further actions that we determine to be in their best interests. We will continue to monitor the effect of COVID-19 on all aspects of our business and assess any potential impacts to our financial position and operating results, as well as adverse developments in our business. For further information regarding the effect of COVID-19 on the Company, please see Part II, Item 1A. Risk Factors to this Form 10-Q, which is incorporated herein by reference.

Critical Accounting Policies and Estimates

Since the date of our 2019 Form 10-K, there have been no material changes to our critical accounting policies. Information regarding our critical accounting policies can be found in our 2019 Form 10-K under “Critical Accounting Policies and Estimates” in Part II, Item 7 and “Business and Summary of Significant Accounting Policies” in Note 1 to the Consolidated Financial Statements under Part II, Item 8. The future effects of the COVID-19 pandemic on economic and market conditions continue to remain uncertain and increase the subjectivity that will be involved in evaluating our estimates and assumptions underlying our critical accounting policies. Any events and changes in circumstances arising after September 30, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods.

RESULTS

As of and for the three months ended September 30, 2020 and September 30, 2019

▪ Revenue of $165.2 million increased $18.4 million, or 12.5% over the same quarter in 2019; and

▪ Operating income of $27.2 million increased by $10.1 million, or 59.1% over the same quarter in 2019.

Comparison of Three Months Ended September 30, 2020 to September 30, 2019


	Three Months Ended
dollars in millions	September 30,				$ Change		% Change
	2020		2019		2020 vs 2019
Revenue	$	165.2	$	146.8	$	18.4	12.5	%
Cost of services:
Compensation	63.8		56.3		7.5		13.3
Direct project and other operating expenses	23.3		22.7		0.6		2.6
Information technology	15.2		14.2		1.0		7.0
Occupancy	4.0		4.1		(0.1)		(2.4)
Amortization of acquisition related software and intangible assets	5.5		4.2		1.3		31.0
Total cost of services	111.8		101.5		10.3		10.1
Selling, general and administrative expenses	26.2		28.2		(2.0)		(7.1)

Total operating expenses	138.0		129.7		8.3		6.4
Operating income	27.2		17.1		10.1		59.1
Interest expense	(2.0)		(2.7)		0.7		(25.9)
Interest income	—		1.2		(1.2)		(100.0)
Other (expense)/income	(1.1)		7.7		(8.8)		(114.3)
Income before income taxes	24.1		23.3		0.8		(3.4)
Income taxes	6.1		2.2		3.9		177.3
Net income	$	18.0	$	21.1	$	(3.1)	(14.7)	%

Revenue (in millions)

Three Months Ended September 30 – 2020 vs. 2019

During the three months ended September 30, 2020, revenue was $165.2 million, an increase of $18.4 million or 12.5% compared to revenue of $146.8 million for the prior year quarter.

▪By solution:

◦Coordination of benefits revenue increased $19.3 million or 20.3%, largely driven by Accent related revenue of $10.7 million, and incremental services and yield increases provided to non-Accent customers primarily related to cost avoidance and direct bill solutions.

◦Payment integrity revenue increased $1.0 million or 2.6%, primarily due to the timing of federal government related activity compared to the prior year.

◦Population health management revenue decreased $1.8 million or 11.9%, primarily resulting from decreased transactional revenue and lower program volume due to circumstances related to COVID-19.

▪By market:

◦Commercial health plan market revenue increased $17.3 million or 24.8%, largely driven by Accent related revenue of $10.7 million, and incremental services and yield increases provided to non-Accent customers primarily related to cost avoidance and direct bill solutions.

◦Federal government market revenue increased $1.7 million or 12.1% compared to the prior year quarter due to increased volume.

◦State government market revenue decreased by $0.6 million or 0.9%.

Total Cost of Services (in millions)

Three Months Ended September 30 – 2020 vs. 2019

During the three months ended September 30, 2020, total cost of services was $111.8 million, an increase of $10.3 million or 10.1% compared to $101.5 million for the prior year quarter.

▪Compensation expense increased by $7.5 million primarily due to the payroll related costs incurred as a result of the acquisitions of VitreosHealth and Accent during the third and fourth quarters of 2019, respectively, partially offset by a decrease in variable compensation costs.

▪Direct project and other operating costs increased by $0.6 million primarily attributable to costs incurred as a result of the VitreosHealth and Accent acquisitions during the third and fourth quarters of 2019, respectively.

▪Information technology expense increased by $1.0 million due to an increase in the amortization of capitalized software, and other computer and equipment related costs.

▪Amortization of acquisition related software and intangible assets increased by $1.3 million due to an increase in intangible assets following the acquisition of VitreosHealth and Accent in the third and fourth quarters of 2019, respectively.

Selling, General and Administrative expenses (in millions)

Three Months Ended September 30 – 2020 vs. 2019

During the three months ended September 30, 2020, SG&A expense was $26.2 million, a decrease of $2.0 million or 7.1% compared to $28.2 million for the prior year quarter.

▪Professional and consulting fees decreased $1.6 million compared to the prior year quarter, and other employee and travel related costs decreased $1.5 million primarily due a reduction in travel due to COVID-19.

▪Information technology costs increased $0.7 million compared to the prior year quarter due to increased software related costs.

Other (Expense)/Income

Three Months Ended September 30 – 2020 vs. 2019

During the three months ended September 30, 2020, Other (Expense)/Income was $(1.1) million, a decrease of $8.8 million or 114.3% compared to the prior year quarter. The expense for the three months ended September 30, 2020 was due to a change in the fair value of ordinary shares of MedAdvisor Limited acquired during the fourth quarter of 2019. During the three months ended September 30, 2019, a third party acquired one hundred percent of the outstanding stock of InstaMed Holdings, Inc. ("InstaMed") including the Company's cost based investment in Instamed of $2.1 million. As a result, the Company received proceeds of $9.8 million from the sale of the investment and recognized a $7.7 million gain in Other (Expense)/Income for the three months ended September 30, 2019.

Income Taxes

Three Months Ended September 30 – 2020 vs. 2019

The Company’s effective tax rate increased to 25.3% for the three months ended September 30, 2020 compared to 9.4% for the three months ended September 30, 2019. The effective tax rate for the three months ended September 30, 2020 includes an immaterial amount of discrete tax benefits related to net equity compensation deductions. Excluding the above mentioned discrete tax item, our effective tax rate would approximate 25.3% for the three months ended September 30, 2020. For the three months ended September 30, 2020, the differences between the federal statutory rate and our effective tax rate are tax items related to state taxes, equity

compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, R&D tax credits, and other permanent differences.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic, which provides numerous tax provisions and other stimulus measures. The Company continues to assess the potential impacts the CARES Act may have on its financial position and results of operations.

As of and for the nine months ended September 30, 2020 and September 30, 2019

▪Revenue of $479.3 million increased $16.4 million, or 3.5% over the same period in 2019; and

▪Operating income of $51.3 million decreased by $26.1 million, or 33.7%, as compared to operating income of $77.4 million in the same period in 2019.

Comparison of Nine Months Ended September 30, 2020 to September 30, 2019


	Nine Months Ended
dollars in millions	September 30,				$ Change		% Change
	2020		2019		2020 vs 2019
Revenue	$	479.3	$	463.0	$	16.4	3.5	%
Cost of services:
Compensation	193.7		172.0		21.7		12.6
Direct project and other operating expenses	71.2		63.7		7.5		11.8
Information technology	45.2		39.6		5.6		14.1
Occupancy	12.5		12.3		0.2		1.6
Amortization of acquisition related software and intangible assets	16.6		12.5		4.1		32.8
Total cost of services	339.2		300.1		39.1		13.0
Selling, general and administrative expenses	88.9		85.5		3.4		4.0

Total operating expenses	428.0		385.6		42.4		11.0
Operating income	51.3		77.4		(26.1)		(33.7)
Interest expense	(6.1)		(8.4)		2.3		(27.4)
Interest income	0.2		3.2		(3.0)		(93.8)
Other income	1.7		7.7		(6.0)		(77.9)
Income before income taxes	47.1		79.9		(32.8)		(41.1)
Income taxes	9.8		10.0		(0.2)		(2.0)
Net income	$	37.3	$	69.9	$	(32.6)	(46.6)	%

Revenue (in millions)

Nine Months Ended September 30 – 2020 vs. 2019

During the nine months ended September 30, 2020, revenue was $479.3 million, an increase of $16.4 million or 3.5% compared to revenue of $463.0 million for the prior year period.

▪By solution:

◦Coordination of benefits revenue increased $33.1 million or 10.8% largely driven by Accent related revenue of $32.4 million.

◦Payment integrity revenue decreased $12.2 million or 10.7% primarily related to $10.5 million of revenue in the prior year period resulting from the release of the Company's remaining estimated liability and net receivables in connection with the original Medicare RAC contract during the nine months ended June 30, 2019. In addition, payment integrity experienced lower volume in the current year period, primarily driven by certain customer contract work being temporarily suspended or reduced due to the impacts of COVID-19.

◦Population health management revenue decreased $4.6 million or 10.5% primarily resulting from decreased transactional revenue and lower program volume due to circumstances related to COVID-19.

▪By market:

◦Commercial health plan market revenue increased $25.0 million or 11.1%, which was primarily due to Accent related revenue of $32.4 million, partially offset by a decrease in non-Accent related commercial revenue resulting from lower volume due in part to impacts of COVID-19.

◦Federal government market revenue decreased $14.0 million or 29.0% compared to the prior year due to a reduction in volume as a result of COVID-19 impacts, and $10.5 million of revenue in the prior year period related to the release of the Company's remaining estimated liability and net receivables as described above.

◦State government market revenue increased by $5.3 million or 2.8%, which was attributable to expanded scopes and yield improvements.

Total Cost of Services (in millions)

Nine Months Ended September 30 – 2020 vs. 2019

During the nine months ended September 30, 2020, total cost of services was $339.2 million, an increase of $39.1 million or 13.0% compared to $300.1 million for the prior year period.

▪Compensation expense increased by $21.7 million primarily due to the payroll related costs incurred as a result of the acquisitions of VitreosHealth and Accent in the third and fourth quarters of 2019, respectively.

▪Direct project and other operating costs increased by $7.5 million due to increased labor and professional fees utilized to support acquisition and operational related activities, partially offset by a decrease in travel related costs.

▪Information technology expense increased by $5.6 million due to an increase in the amortization of capitalized software, and other computer and equipment related costs.

▪Amortization of acquisition related software and intangible assets increased by $4.1 million due to an increase in intangible assets following the acquisition of VitreosHealth and Accent in the third and fourth quarters of 2019, respectively.

Selling, General and Administrative expenses (in millions)

Nine Months Ended September 30 – 2020 vs. 2019

During the nine months ended September 30, 2020, SG&A expense was $88.9 million, an increase of $3.4 million or 4.0% compared to $85.5 million for the prior year period.

▪Compensation expense in 2020 increased by $4.9 million primarily as a result of an increase in payroll related costs and stock compensation expense benefits, partially offset by a decrease in variable compensation.

▪Information technology expense increased by $2.1 million primarily due to an increase in software related costs, offset by a decrease in employee related costs and professional expenses of $4.0 million.

Other (Expense)/Income

Nine Months Ended September 30 – 2020 vs. 2019

During the nine months ended September 30, 2020, Other Income was $1.7 million, a decrease of $6.0 million or 77.9% compared to the prior year period. The other income was due to a change in the fair value of ordinary shares of MedAdvisor Limited acquired during the fourth quarter of 2019. During the three months ended September 30, 2019, a third party acquired one hundred percent of the outstanding stock of InstaMed including the Company's cost based investment in Instamed of $2.1 million. As a result, the Company received proceeds of $9.8 million from the sale of the investment and recognized a $7.7 million gain in Other (expense)/income for the nine months ended September 30, 2019.

Income Taxes

Nine Months Ended September 30 – 2020 vs. 2019

The Company’s effective tax rate increased to 20.8% for the nine months ended September 30, 2020 compared to 12.6% for the nine months ended September 30, 2019. The effective tax rate for the nine months ended September 30, 2020 includes discrete tax benefits primarily related to a prior year R&D tax credit true-up and net equity compensation deductions. Excluding the above mentioned discrete tax items, our effective tax rate would approximate 25.1% for the nine months ended September 30, 2020. For the nine months ended September 30, 2020, the differences between the federal statutory rate and our effective tax rate are tax expense items related to state taxes, equity compensation impacts, unrecognized tax benefits, including

interest, officer compensation deduction limits, R&D tax credits, and other permanent differences.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Liquidity and Capital Resources

The following tables should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Form 10-Q.

Our cash and cash equivalents, working capital and available borrowings under our revolving credit facility (based upon the borrowing base and financial covenants in our Credit Agreement) were as follows (in thousands):


	September 30, 2020		December 31, 2019
Cash and cash equivalents	$	211,034	$	139,268
Working capital	$	367,343	$	296,093
Available borrowings under credit facility	$	253,500	$	253,500

The following is a summary of our cash flows (in thousands):


	Nine Months Ended September 30,
	2020		2019
Net cash provided by operating activities	$	92,967	$	112,919
Net cash used in investing activities	(19,633)		(43,381)
Net cash (used in)/provided by financing activities	(1,568)		32,112
Net increase in cash and cash equivalents	$	71,766	$	101,650

Our principal sources of cash have been our cash flow from operations and our $500 million five-year revolving credit facility. Other sources of cash include proceeds from the exercise of stock options and tax benefits associated with stock option exercises. The primary uses of cash include, but are not limited to, acquisitions, strategic investments, capital investments, compensation expenses, data processing, direct project and other operating costs, SG&A expenses and other expenses.

We believe that expected cash flows from operations, available cash and cash equivalents, and funds available under our revolving credit facility will be sufficient to meet our liquidity requirements for the following year, which include:

▪ the working capital requirements of our operations;

▪ investments in our business; and

▪ business development activities.

Any projections of future earnings and cash flows are subject to substantial uncertainty, particularly in light of the rapidly changing market and economic conditions created by the COVID-19 pandemic. We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to meet working capital requirements, fund acquisitions or investments or repay our indebtedness under the Credit Agreement. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions as well as our financial condition and results of operations at the time we seek additional financing. Although we believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our operations for the foreseeable future, the challenges posed by COVID-19 on our business are expected to continue to shift rapidly. Consequently, we will continue to assess our liquidity needs and anticipated capital requirements in light of future developments, particularly those relating to COVID-19.

Cash Flows from Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2020 was $93.0 million, a $19.9 million decrease compared to net cash provided by operating activities of $112.9 million for the nine months ended September 30, 2019. The decrease was primarily related to a $32.6 million decrease in net income, partially offset by a $12.6 million increase resulting from changes in operating assets and liabilities and in reconciling items.

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2020 was $19.6 million, a $23.8 million decrease compared to net cash used in investing activities of $43.4 million for the nine months ended September 30, 2019. The decrease was primarily attributable to net cash used in the acquisition of a business of $36.6 million, partially offset by the proceeds from the sale of a cost basis investment of $9.8 million, both of which occurred in the third quarter of 2019.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2020 was $1.6 million, a $33.7 million decrease compared to net cash provided by financing activities of $32.1 million for the nine months ended September 30, 2019. The decrease was primarily related to a $33.5 million decrease in proceeds from the exercise of stock options, net of payments of tax withholdings.

Contractual Obligations

There have been no material changes outside the ordinary course of business in our contractual obligations as presented in our 2019 Form 10-K.

Recently Issued Accounting Pronouncements

The information set forth under the caption “Summary of Significant Accounting Policies” in Note 1 to the unaudited Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the market risks discussed in Item 7A to Part II of our 2019 Form 10-K.

Item 4. Controls and Procedures

We are responsible for maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that their objectives were met as of the end of the period covered by this Form 10-Q.

There have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation of our controls performed during the three months ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under the caption “Commitments and Contingencies” in Note 11 to the unaudited Consolidated Financial Statements of this Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

In addition to the information set forth in this Form 10-Q, the risks that are discussed in our 2019 Form 10-K, under the headings “Business” of Part I, Item 1, “Risk Factors” of Part I, Item 1A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II, Item 7 and “Quantitative and Qualitative Disclosures About Market Risk” of Part II, Item 7A, should be carefully considered as such risks could materially affect the Company’s business, financial condition or future results. Other than the risk factor set forth below, there has been no material change in the Company’s risk factors from those described in our 2019 Form 10-K.

The risks that are discussed in our 2019 Form 10-K and the risk factor set forth below are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may have a material adverse effect on the Company’s business, financial condition or future results.

The effects of the COVID-19 pandemic could significantly disrupt our operations and adversely affect our business, financial condition, results of operations and cash flows.

The widespread outbreak of COVID-19 has created significant volatility, uncertainty, and disruption in economic activity and financial markets globally. Although the outbreak of COVID-19 has not had a material adverse effect on our operations to date, it has impacted our financial results for the nine months ended September 30, 2020, and there can be no assurance that COVID-19 will not have a material adverse effect on our future operational and financial performance. The extent to which COVID-19 could impact our operational and financial performance in future periods is currently uncertain and will depend on numerous evolving factors and future developments that we may not be able to accurately predict and to which we may not be able to respond. Such factors and developments include, but are not limited to: the duration, severity and spread of the outbreak; actions taken by government authorities to contain and mitigate COVID-19 and the effectiveness of such actions; the effect on the U.S. and global economies and actions taken in response; the overall impact on the businesses of our customers, partners, vendors and suppliers; changes in the healthcare industry as a result of COVID-19 and actions taken by regulatory authorities and industry participants in response to COVID-19; the health of and effect on our workforce; the future effects to our operational and financial results of the changes we have made to protect the safety and well-being of our employees and future operational disruptions or challenges we may face; increased cybersecurity and information security risk as a result of the transition of our employees to a remote work environment; and how quickly and to what extent normal economic and operating conditions may resume. Further, our management has been intensely focused on mitigating COVID-19, which has required and will continue to require, a large investment of time, attention and resources. A prolonged outbreak could, among other things, strain our business continuity plans, continue to negatively impact our revenue and net income, create delays in our growth and strategic initiatives, reduce our sales and marketing activities, limit our access to financing

on favorable terms, increase the Company’s exposure to potential impairment charges related to goodwill and intangible assets, hinder our ability to support our customers and operate our business effectively, heighten the risk of disruption to our information and reporting systems and internal controls, including those over financial reporting and other risk management systems, or require us to incur substantial costs. We cannot predict the degree to which COVID-19 will ultimately impact our operations and financial results, however, the effects of the COVID-19 pandemic, alone or taken together, could adversely affect our future business, financial condition, results of operations and cash flows, and may also heighten other risks to which the Company is subject, including risks discussed in our 2019 Form 10-K.

Item 6. Exhibits

The exhibits may include agreements to which the Company is a party or has a beneficial interest. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other actual information about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties, and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties, and covenants in the agreements may have been used for the purpose of allocating risk between parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof.

Where an exhibit is filed by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified after the description of the exhibit.


Exhibit Number						Description

3.1						Conformed copy of Certificate of Incorporation of the Company, as amended through May 23, 2018 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q (File No. 000-50194) as filed with the SEC on August 6, 2018)

3.2						Second Amended and Restated Bylaws of HMS Holdings Corp. dated May 23, 2018 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 000-50194) as filed with the SEC on May 25, 2018)

31.1						Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer of HMS Holdings Corp., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2						Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer of HMS Holdings Corp., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1						Section 1350 Certification of the Principal Executive Officer of HMS Holdings Corp., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2						Section 1350 Certification of the Principal Financial Officer of HMS Holdings Corp., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*


101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

__________________________________

† Indicates a management contract or compensatory plan, contract or arrangement

* The certifications attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished with this Form 10-Q and shall not be deemed “filed” by the Company for purposes of Section 18 of the Exchange Act

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:

November 9, 2020

HMS HOLDINGS CORP.

By:

/s/ William C. Lucia

William C. Lucia
President and Chief Executive Officer
(Principal Executive Officer)

By:

/s/ Jeffrey S. Sherman

Jeffrey S. Sherman
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)