HealthEquity, Inc. — Q3 Fiscal 2021 Form 10-Q
Reporting period: Three and nine months ended October 31, 2020. HealthEquity administers HSAs and complementary consumer-directed benefits (CDBs). At quarter-end, it administered 5.46 million HSAs with $12.44 billion in HSA assets, 7.06 million CDBs, and 12.52 million total accounts.
Financial performance and liquidity
Amounts below are in millions, except per-share data, percentages, and account metrics.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $179.4 | $157.1 | $545.4 | $330.8 |
| Gross profit | $104.6 | $96.0 | $314.4 | $212.2 |
| Income from operations | $11.5 | $9.9 | $35.6 | $62.5 |
| Net income (loss) | $1.8 | $(21.3) | $3.5 | $39.9 |
| Diluted EPS | $0.02 | $(0.30) | $0.05 | $0.59 |
| Adjusted EBITDA (non-GAAP) | $61.1 | $55.5 | $184.1 | $135.1 |
- Quarterly revenue rose 14%; nine-month revenue rose 65%. Gross margin was approximately 58.3% for Q3 2020 versus 61.1% in Q3 2019, and 57.6% versus 64.2% for the nine-month periods.
- Q3 Adjusted EBITDA increased 10%, while its margin was 34% versus 35%; nine-month Adjusted EBITDA increased 36%, with margin of 34% versus 41%. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
- Net cash from operating activities was $120.7 million for the nine months, versus $74.1 million. Investing activities used $76.7 million and financing activities provided $63.6 million. Quarterly cash flow is not separately presented in the supplied filing text.
- Cash and cash equivalents were $299.4 million at October 31, 2020, versus $191.7 million at January 31, 2020. Total assets were $2.66 billion and stockholders’ equity was $1.36 billion.
- Term-loan principal outstanding was $1.019 billion; carrying value net of issuance costs was $1.001 billion. The stated interest rate was 1.65% (effective rate 2.18%). The $350 million revolving facility was undrawn, and the company reported covenant compliance. A 1 percentage-point rate increase on outstanding credit-facility borrowings was estimated to add about $10.1 million of interest expense over 12 months.
Changes versus prior periods
- Comparisons are materially affected by the August 2019 WageWorks acquisition: 2020 includes WageWorks for the full periods, while 2019 includes it for only about two months. Revenue and expenses attributable specifically to WageWorks are generally not separately identifiable after integration.
- Service, custodial, and interchange revenue increased 19%, 3%, and 17%, respectively, in Q3. Management attributed growth primarily to the full-period inclusion of WageWorks and business growth. Custodial revenue growth was restrained by lower yields: Q3 yield on HSA cash with yield fell to 2.08% from 2.43%.
- HSA accounts increased 9% year over year and HSA assets increased 19%; CDB accounts decreased 6%, primarily due to lower commuter-benefit accounts amid the pandemic. Total accounts were approximately flat year over year.
- Operating income increased in Q3 but declined for the nine-month period. The prior-year periods included substantial acquisition costs and a nonrecurring gain on equity securities; current-year results also include higher acquired-intangible amortization and integration expenses.
- In July 2020, the company raised $286.8 million net in a follow-on share offering and used $200 million to repay term debt. Nine-month debt principal payments totaled $223.4 million.
Outlook, risks, contingencies, and unusual matters
- Management expects approximately $80 million of annualized ongoing net WageWorks synergies by fiscal year-end January 2022; approximately $55 million had been achieved by October 31, 2020. It estimated about $100 million in total nonrecurring integration costs over 24–36 months after acquisition close; approximately $63 million had been incurred.
- Management expected elevated capital expenditures to continue through fiscal 2021, particularly for technology infrastructure, and stated that cash, cash equivalents, and the revolving facility should meet operating and capital needs for at least 12 months. The filing gives no specific revenue or earnings guidance.
- COVID-19 risks included lower interest rates and custodial yields, reduced commuter and other card spending, delayed sales opportunities, potential client payment difficulties, unemployment-related account impacts, operational disruption, and increased remote-work cybersecurity risk. Management said the duration and financial impact remained highly uncertain.
- The company expected to complete its transition of HSA cash without yield to yield-generating arrangements in fiscal 2022. It also noted that stock-market declines could reduce investment assets and related fees.
- Disclosure controls were deemed ineffective because of material weaknesses in WageWorks’ financial reporting controls, including accounting close and reporting, contract-to-cash, review of unusual transactions, and IT general controls. Management said the control-environment weakness had been remediated, but other remediation was still being tested; it gave no completion timetable.
- WageWorks matters include claims involving the Office of Personnel Management, securities and derivative litigation, and SEC and U.S. Attorney investigations related to its historical financial reporting. The company said losses were not currently considered probable or estimable, but an unfavorable outcome could materially affect results. A Texas state tax examination was also noted.
Important facts for investors to verify
- Whether WageWorks control weaknesses are fully remediated and independently tested, and whether any further deficiencies or reporting delays emerge.
- Progress toward the $80 million synergy target and $100 million integration-cost estimate, including the effects on GAAP operating results.
- How sustained low interest rates, member yields, HSA asset growth, and the cash-to-yield transition affect custodial revenue and margins.
- Whether COVID-related commuter, healthcare spending, client-payment, sales, and service-level pressures persist or worsen.
- Debt repayment pace, variable-rate exposure, covenant headroom, and the outcome of WageWorks legal and government proceedings.