HealthEquity, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended January 31, 2022 (not a standalone 2021 fourth-quarter report). Financial figures are compared with the fiscal year ended January 31, 2021 unless noted. Amounts are U.S. dollars.
Business context
HealthEquity administers tax-advantaged health savings accounts (HSAs) and complementary consumer-directed benefits, including FSAs, HRAs, COBRA and commuter benefits. Revenue comes mainly from service fees, custodial income on HSA and client-held funds, and payment-card interchange. At year-end, it administered 7.2 million HSAs with $19.6 billion in HSA assets, 7.2 million complementary benefit accounts, and 14.4 million total accounts.
Financial and operating results
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $756.6 million | $733.6 million | +3% |
| Gross profit / margin | $423.7 million / 56.0% | $415.3 million / 56.6% | Profit +2%; margin down 0.6 percentage points |
| Operating income (loss) | $(24.2) million | $34.0 million | Declined |
| Net income (loss) | $(44.3) million | $8.8 million | Declined |
| Diluted EPS | $(0.53) | $0.12 | Declined |
| Adjusted EBITDA (non-GAAP) | $236.0 million; 31% of revenue | $240.8 million; 33% of revenue | Down 2% |
| Operating cash flow | $141.0 million | $181.6 million | Down $40.6 million |
| Cash and cash equivalents at year-end | $225.4 million | $328.8 million | Down $103.4 million |
Service revenue decreased 1% to $426.9 million, as lower average fees per account offset acquired-account and COBRA-related revenue. Custodial revenue rose 6% to $202.8 million, mainly on higher average HSA cash balances, partly offset by lower yield: 1.75% versus 2.06%. Interchange revenue increased 14% to $126.8 million as account growth and spending recovered from pandemic lows. Interest income from partners represented approximately 27% of consolidated revenue, versus 26% in FY2021.
Year-end HSA assets grew 37% to $19.6 billion; total accounts increased 12%. HSA assets with yield grew, while client-held funds declined 9% to $897 million. The company reported total assets of $3.11 billion and total liabilities of $1.25 billion. Debt principal was $950 million: $600 million of 4.50% senior notes due 2029 and $350 million under a variable-rate term loan. No revolving-credit borrowings were outstanding; the facility provides up to $1.0 billion. The filing states the company was in compliance with debt covenants at year-end.
Material changes, outlook and notable items
- FY2022 included the Further acquisition, completed November 1, 2021 for $455 million, and the Luum acquisition. The Fifth Third HSA portfolio acquisition also closed during the year. HealthSavings, for $60 million, closed after year-end on March 2, 2022.
- FY2022 merger-integration expense was $64.8 million, including an $11.2 million impairment of right-of-use assets. Further-related integration costs of approximately $55 million are expected over about three years. Management reported approximately $80 million of annualized ongoing net synergies from WageWorks integration.
- Net loss reflected increased operating expenses, including technology and development, amortization and integration costs, as well as interest expense. Interest expense was $36.6 million and included a $4.0 million loss on extinguishment of debt from refinancing.
- Management said existing cash, cash equivalents and revolving-credit availability should cover operating and capital expenditure needs for at least 12 months. It expected elevated capital spending in FY2023 on technology infrastructure, and anticipated ongoing expense growth, including technology, sales and marketing, and costs associated with Further.
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects custodial revenue to remain pressured by pandemic-era rate reductions and market conditions, and commuter benefit recovery to be uncertain amid remote and hybrid work.
- COVID-19 effects included lower commuter activity, disruption to healthcare spending and enrollment activity, and operational and staffing pressures. The filing also identifies interest-rate sensitivity, changes to HSA tax advantages, competition, acquisition integration, cybersecurity and privacy, and partner/vendor reliability as material risks.
Controls, contingencies and unusual matters
Management and the independent auditor concluded that internal control over financial reporting was ineffective at January 31, 2022 because of material weaknesses in service-fee contract-to-cash controls and IT general controls over access and change management. The auditor nevertheless gave an unqualified opinion on the financial statements. Management reported remediation work was underway and that certain previously identified weaknesses had been remediated; the current weaknesses remained open.
WageWorks litigation included a $30 million securities class-action settlement, of which the company paid $5 million and insurers paid $25 million; the matter was closed. A separate Arizona lease dispute followed a $2.8 million letter-of-credit draw, recorded as integration expense; the outcome was unresolved in the filing. The company said it could not determine the ultimate outcome of other ordinary-course proceedings and did not consider related losses probable or estimable based on information then available.
Important facts for investors to verify
- Progress and independent testing of remediation for the two remaining material weaknesses, especially billing controls and IT access/change management.
- How Further integration, platform migrations and planned integration spending affect client retention, service costs, and realization of expected synergies.
- HSA cash yields and custodial revenue as interest rates and partner terms change; also the durability of interchange recovery and commuter-benefit usage.
- Debt-service costs and covenant headroom under variable-rate facilities, alongside acquisition and capital-spending requirements.
- Developments in the Arizona lease litigation and any other material legal, regulatory, privacy or cybersecurity matters.