Business context and reporting period
HealthEquity administers health savings accounts (HSAs) and complementary consumer-directed benefits (CDBs). This Form 10-Q covers the quarter and nine months ended October 31, 2021. Because the company’s fiscal year ends January 31, the quarter is its third quarter of fiscal 2022.
At quarter-end, HealthEquity administered 13.3 million total accounts, including 6.2 million HSAs, and $16.4 billion of HSA assets. The company reported 6% year-over-year growth in total accounts and 32% growth in HSA assets.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2021 | Year-over-year change | Nine months ended Oct. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $180.0 million | Up 0.3% | $553.3 million | Up 1% |
| Gross profit | $103.3 million | Down $1.2 million | $318.4 million | Up $4.0 million |
| Gross margin | 57.4% | Down from 58.3% | 57.6% | Approximately unchanged |
| Operating income (loss) | $(0.4) million | Down from $11.5 million | $3.0 million | Down from $35.6 million |
| Net income (loss) | $(5.0) million | Down from $1.8 million | $(11.5) million | Down from $3.5 million |
| Adjusted EBITDA, non-GAAP | $61.1 million | Essentially flat | $185.6 million | Up 1% |
Quarterly service revenue declined 2% to $102.7 million; custodial revenue rose 1% to $49.0 million; and interchange revenue increased 8% to $28.2 million. For the nine-month period, service revenue fell 2%, while custodial and interchange revenue grew 2% and 13%, respectively. Quarter-end HSA assets were up, but lower custodial yields—1.72% versus 2.08% a year earlier for the quarter—limited custodial revenue growth.
Operating expenses rose 11% in the quarter to $103.7 million, led by 24% growth in technology and development costs and 62% growth in merger integration expense. Nine-month operating expenses increased 13% to $315.4 million. Quarterly interest expense was $11.9 million, including a $4.0 million loss on extinguishment of debt associated with refinancing.
Net cash provided by operating activities was $90.4 million for the nine months, down from $120.7 million. Investing activities used $167.9 million, including $49.5 million for Luum, $64.5 million for HSA portfolio intangibles, and $49.0 million for software development. Financing activities provided $397.8 million. Cash and cash equivalents were $649.1 million at October 31, compared with $328.8 million at January 31.
Debt principal totaled $950 million: $600 million of 4.50% senior notes due 2029 and $350 million under a variable-rate term loan. The company had no revolver borrowings under its $1.0 billion revolving facility and reported covenant compliance. The new credit agreement includes maximum total net leverage and minimum interest coverage tests beginning in the quarter ending January 31, 2022. Management stated that cash, cash equivalents, and revolver availability should be sufficient for at least 12 months.
Material changes, outlook, risks, and unusual items
- Financing and equity: A follow-on offering generated $456.6 million net proceeds. In October, the company refinanced prior debt with the senior notes and new credit facilities, repaying approximately $1.0 billion of prior term debt.
- Acquisitions: HealthEquity acquired Luum in March for $50.2 million cash, with contingent consideration later settled for $6.0 million. It paid $60.8 million for the Fifth Third HSA portfolio, covering approximately 160,000 accounts and $491 million of HSA assets. The Further acquisition, amended to $455 million excluding its VEBA business, closed November 1, after quarter-end; the separate VEBA deal was terminated in December. A HealthSavings portfolio transition was announced December 6 for $60 million, with completion expected in the first quarter of fiscal 2023.
- Management commentary: Management reported approximately $75 million of the targeted $80 million in annualized WageWorks net synergies achieved by October 31. It expects WageWorks integration expenses to conclude by fiscal year-end 2022, except for ongoing closed-office lease costs. Management expects continued technology investment and higher operating expenses; it also expects Further to increase cost of revenue and sales, technology, and development expenses as a share of revenue. No specific revenue or earnings guidance is provided in the supplied filing text.
- COVID-19 and rates: Pandemic-related remote work continued to weigh on commuter accounts and interchange and service revenue, while lower interest rates pressured custodial yields. Management noted that delayed return-to-office plans could extend these effects.
- Controls: Management concluded disclosure controls were not effective due to material weaknesses associated with WageWorks, covering risk assessment and monitoring, accounting close and reporting, contract-to-cash processes, and IT general controls. Remediation and ERP integration work was underway, but controls had not operated long enough to establish that the weaknesses were remediated. Management nevertheless stated the interim financial statements fairly present results in all material respects.
- Contingencies and other items: A dispute over a WageWorks office lease included the landlord drawing a $2.8 million letter of credit; WageWorks filed suit seeking confirmation of termination and return of the funds. The WageWorks securities class action settlement of $30 million was finalized and closed. The company also noted ongoing litigation and tax examinations; it did not consider other described claims probable or estimable, while warning that an adverse outcome could be material.
Important facts for investors to verify
- Whether revenue growth and margins improve as interchange recovery and HSA asset growth offset weaker service revenue and lower custodial yields.
- Integration progress and actual costs, synergies, and operating performance from Further and other acquisitions.
- Progress in remediating the disclosed material weaknesses and the timing of any conclusion that controls are effective.
- Debt service, leverage and covenant headroom after the Further acquisition, alongside the use of cash and revolver capacity.
- Developments in the Mesa lease dispute, pandemic-related operating effects, interest rates, and relevant tax or regulatory changes.