HealthEquity, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended January 31, 2021 (not calendar Q4). Comparisons are with the fiscal year ended January 31, 2020. Dollar amounts are U.S. dollars.
Business context
HealthEquity operates a U.S. technology-enabled platform for health savings accounts (HSAs) and consumer-directed benefits (CDBs), including FSAs, HRAs, COBRA and commuter benefits. It earns service, custodial and interchange revenue. The results include WageWorks for the full year, versus approximately five months in FY2020, limiting comparability.
At year-end, the Company administered 5.8 million HSAs with $14.3 billion in HSA assets, 7.0 million CDBs and 12.8 million total accounts. It served approximately 100,000 clients and was integrated with 174 network partners.
Key financial metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $733.6 million | $532.0 million | +38% |
| Gross profit / gross margin | $415.3 million / 56.6% | $325.9 million / 61.3% | Margin down 4.7 percentage points |
| Operating income / margin | $34.0 million / 4.6% | $77.0 million / 14.5% | Down 56% |
| Net income | $8.8 million | $39.7 million | Down 78% |
| Diluted EPS | $0.12 | $0.58 | Down 79% |
| Adjusted EBITDA (non-GAAP) / margin | $240.8 million / 33% | $196.5 million / 37% | +23%; margin down 4 percentage points |
| Operating cash flow | $181.6 million | $105.0 million | +73% |
| Cash and cash equivalents | $328.8 million | $191.7 million | +$137.1 million |
| Long-term debt principal outstanding | $1.003 billion | Approximately $1.221 billion | Reduced by repayments and prepayment |
Revenue comprised service $431.0 million (+64%), custodial $190.9 million (+5%) and interchange $111.7 million (+28%). Service and interchange growth primarily reflected the full-year inclusion of WageWorks, partly offset by pandemic-related weakness. Custodial revenue rose despite lower yields: average yield on HSA cash with yield declined to 2.06% from 2.44%.
FY2021 investing cash use was $97.0 million, including $51.5 million for software and capitalized development, $32.4 million for acquired HSA portfolio rights and $13.1 million for property and equipment. Financing provided $52.4 million, including $286.8 million net proceeds from a July 2020 stock offering, offset in part by $239.1 million of debt principal payments.
Current assets were $460.2 million and current liabilities $204.7 million. The Company had $1.0 billion principal outstanding on its term loan and no revolver borrowings; its $350 million revolving facility remained available, subject to its terms. The credit agreement is secured by substantially all company assets. Management said existing cash, operating cash generation and revolver capacity were expected to meet operating and capital needs for at least 12 months.
Material changes and drivers
- HSA assets increased 24% to $14.3 billion; HSA accounts rose 8%. CDB accounts fell 5%, primarily because 0.8 million commuter accounts were suspended during the pandemic and excluded from reported account totals.
- Adjusted EBITDA grew, but GAAP operating income, net income and margins declined. Higher acquired-intangible amortization, merger integration costs, interest expense and operating expenses weighed on GAAP earnings.
- Approximately $60 million of the targeted $80 million in annualized ongoing net WageWorks synergies had been achieved by year-end. The Company estimated about $100 million of aggregate non-recurring integration costs by FY2022; approximately $78 million had been incurred through January 31, 2021.
- The July 2020 equity offering generated $286.8 million net; $200 million was used to prepay debt. Shares outstanding increased from 71.1 million to 77.2 million during the year.
Outlook, risks and unusual items
- Management expected custodial revenue to remain pressured by pandemic-related interest-rate cuts. It also expected elevated capital spending in FY2022 to modernize platform architecture and functionality; the filing gives no specific FY2022 revenue or earnings guidance.
- COVID-19 reduced commuter benefit use and healthcare spending, affecting interchange and service revenue; it also disrupted sales and open enrollment and could affect client fee collection, employment and account contributions. The duration and financial impact were described as uncertain.
- Internal control over financial reporting and disclosure controls were assessed as ineffective because of material weaknesses at WageWorks, including accounting close, service-fee contract-to-cash and certain IT general controls. Management had remediation plans underway but gave no completion timetable. The auditor issued an adverse opinion on internal control, while its opinion on the consolidated financial statements was unqualified.
- WageWorks-related securities litigation remained a contingency. A $30 million proposed class-action settlement, subject to court approval, was recorded with $25 million insurance recovery and a $5 million net expense. Other litigation and investigations continued; outcomes were uncertain.
- Net income included a $4.7 million income tax benefit, contributing to an unusually high 113.4% effective tax benefit rate, and a $6.8 million recovery in a WageWorks dispute with the U.S. Office of Personnel Management. FY2020 included a $27.8 million gain on an equity investment and higher acquisition costs, also affecting comparisons.
- Goodwill of $1.33 billion and intangible assets of $767.0 million represented approximately 77% of total assets, creating potential impairment exposure. The Company reported no goodwill impairment for the periods presented.
- Subsequent events: a February–March 2021 stock offering generated $456.7 million net proceeds, and the Company acquired Luum in March 2021 for approximately $50.5 million plus possible contingent payments of up to $20 million. These were after year-end.
Important facts for investors to verify
- Whether WageWorks control weaknesses are fully remediated and whether any reporting adjustments emerge during integration.
- Progress toward the $80 million annualized synergy target, integration costs remaining, platform migrations and potential client attrition.
- HSA cash yields, custodial revenue sensitivity to interest rates, and the timing and economics of moving non-yielding HSA cash into yield-bearing arrangements.
- Underlying organic account and revenue trends, separating acquisition effects from pandemic impacts, including whether suspended commuter accounts return.
- Debt repayment, covenant headroom and liquidity after the subsequent offering; also the impact of variable interest rates and the credit agreement’s 2024 maturity.
- Final court approval and insurance coverage for the WageWorks settlement, plus developments in related litigation and investigations.