HealthEquity, Inc. — Form 10-Q summary
Reporting period: Three months ended April 30, 2021 (first quarter of fiscal 2022). Comparisons are with the three months ended April 30, 2020, unless noted. Amounts are in U.S. dollars; financial statement amounts are in millions unless specified.
Business context
HealthEquity administers HSAs and complementary consumer-directed benefits, including FSAs, HRAs, COBRA and commuter benefits. At quarter-end it administered 5.8 million HSAs with $15.0 billion in HSA assets, 7.0 million complementary benefit accounts and 12.8 million total accounts. HSA assets grew 31% year over year; total accounts grew 1%.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $184.2 | $190.0 | Down 3% |
| Gross profit / margin | $103.1 / 56.0% | $108.1 / 56.9% | Margin down 0.9 percentage points |
| Operating income / margin | $4.3 / 2.3% | $15.1 / 7.9% | Lower |
| Net income (loss) | $(2.6) | $1.8 | Declined to a loss |
| Diluted EPS | $(0.03) | $0.03 | Declined |
| Adjusted EBITDA (non-GAAP) | $59.0 | $63.0 | Down 6%; margin 32% vs. 33% |
| Operating cash flow | $30.9 | $15.0 | Increased |
Service revenue decreased 8% to $102.5 million, principally due to suspended commuter accounts. Custodial revenue was essentially flat at $47.0 million: higher average HSA cash balances were offset by a lower annualized yield (1.79% versus 2.12%). Interchange revenue rose 9% to $34.7 million, primarily from increased spend per HSA.
Operating expenses increased 6% to $98.9 million, as higher sales and marketing, technology and development, general and administrative, and acquired-intangible amortization costs more than offset lower merger-integration costs. Other expense included $5.9 million of acquisition costs. The quarter’s $3.5 million tax benefit included discrete tax effects; the filing reports a 57.1% effective tax benefit rate.
Financial position and liquidity
Cash and cash equivalents were $736.8 million at April 30, up from $328.8 million at January 31, largely reflecting $456.6 million of net proceeds from a follow-on equity offering. Investing cash outflow was $67.8 million, including $49.5 million for the Luum acquisition; financing cash inflow was $444.9 million. Reported capital expenditures were $18.0 million.
Term-loan principal was $987.5 million; debt carrying value, net of issuance costs, was $972.3 million. The company had $62.5 million of current debt and no borrowings under its $350 million revolving facility. Cash exceeded term-loan principal by approximately $250.7 million. The company reported compliance with credit covenants and stated existing cash and revolving capacity should fund operations and capital needs for at least 12 months. A 1 percentage-point increase in borrowing rates would add an estimated $9.8 million of interest expense over the next 12 months.
Material developments, outlook and risks
- Capital raise and Luum: The company sold 5.75 million shares for $456.6 million net proceeds. It acquired Luum for $50.2 million cash, with up to $20.0 million additional contingent consideration; $8.1 million was recorded as the estimated fair value of that obligation.
- Pending acquisitions: Agreements were signed to acquire Further for $500 million, expected to close by September 2021 subject to conditions, and to transition Fifth Third Bank’s HSA portfolio for a contemplated $60.8 million purchase price, subject to regulatory approval and adjustment for assets transferred. Further’s closing also depends on arranging approved group annuity contracts.
- WageWorks integration: Management reported approximately $65 million of targeted $80 million annualized ongoing net synergies achieved by quarter-end. It expected approximately $100 million of total non-recurring integration costs by the end of FY2022; about $87 million had been incurred.
- Management outlook: The filing provides no formal revenue or earnings guidance. Management expected continued investment-driven increases in technology and development and sales and marketing expenses, and anticipated elevated capital spending for the remainder of FY2022.
- COVID-19 and market exposure: The pandemic reduced commuter activity and affected sales processes; suspended commuter accounts drove service-revenue pressure. Low interest rates weighed on custodial yield, and management said pandemic effects remained uncertain. Changes in healthcare or tax policy, competition, data security and regulation are additional risks.
- Controls: Disclosure controls were deemed ineffective because of material weaknesses at WageWorks involving risk assessment and monitoring, accounting close and reporting, contract-to-cash controls, and IT general controls. Remediation and ERP integration efforts were underway; management nevertheless concluded the reported consolidated financial statements were fairly stated in all material respects.
- Legal and other contingencies: A WageWorks securities class action had a $30 million proposed settlement, with WageWorks responsible for $5 million and insurers for $25 million; final court approval remained outstanding. Related derivative and other litigation and governmental investigations were also described. A disputed lease termination involved $63.1 million of undiscounted future payments; no lease liability had been recognized because the lease had not commenced.
- Cash concentration: Most of the company’s $736.8 million cash balance exceeded federal deposit insurance limits.
Key facts for investors to verify
- Progress on the Further and Fifth Third transactions, including approvals, closing terms, funding needs and assets actually transferred.
- Whether HSA growth, account reactivation and member spending offset suspended commuter accounts and pressure on custodial yields.
- Execution and costs of WageWorks integration, realization of the remaining synergy target, and remediation of material weaknesses.
- Debt repayment plans and exposure to variable interest rates, alongside use of offering proceeds and liquidity after acquisitions.
- Final approval and payment allocation for the WageWorks settlement, and developments in related litigation and the disputed lease termination.