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(Mark One)

☑    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

þ

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐     No ☑

As of August 5, 2024, the registrant had 422,108,963 shares of common stock, par value $0.01 per share, outstanding.

 

1. Business Description and Basis of Presentation

R1 RCM Inc. (the “Company”) is a leading provider of technology-driven solutions that transform the financial performance and patient experience for health systems, hospitals, and physician groups. The Company’s scalable operating models complement a healthcare organization’s infrastructure, driving sustainable improvements to net patient revenue and cash flows while driving revenue yield, reducing operating costs, and enhancing the patient experience.

On January 17, 2024, the Company completed the acquisition of the revenue cycle management (“RCM”) business (“Acclara”) of Providence Health & Services – Washington (“Providence”) and certain of its affiliates (the “Acclara Acquisition”). Concurrently with the closing of the acquisition and as part of the consideration thereof, the Company issued a warrant to acquire up to 12,192,000 shares of common stock, par value $0.01 per share, at an initial exercise price of $10.52 per share, of the Company to Providence (the “Providence Warrant”). The Company acquired 100% of the equity interests in Acclara. For further details on the total consideration paid, refer to Note 2, Acquisitions.

The acquisition of Acclara extends our ability to deploy advanced technology solutions and drive execution to improve customer and patient outcomes. In conjunction with the acquisition, the Company began a 10-year partnership with Providence for comprehensive revenue cycle services that leverage the breadth of integrated technology and services capabilities of both the Company and Acclara.

The accompanying unaudited consolidated financial statements reflect the Company’s financial position as of June 30, 2024, the results of operations of the Company for the three and six months ended June 30, 2024 and 2023, and the cash flows of the Company for the six months ended June 30, 2024 and 2023. These financial statements include the accounts of R1 RCM Inc. and its wholly owned subsidiaries, including Acclara and its subsidiaries since the date of acquisition. All material intercompany amounts have been eliminated in consolidation. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial reporting and as required by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information, have been included. Operating results for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2024.

When preparing financial statements in conformity with GAAP, the Company makes a number of significant estimates, assumptions, and judgments in the preparation of the financial statements. Actual results could differ from those estimates. For a discussion of the Company’s significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2023, filed with the SEC on February 27, 2024 (the “2023 Form 10-K”).

In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). ASU 2022-03 clarifies that a contractual sale restriction on an equity security should not be considered in measuring the security’s fair value. The Company prospectively adopted ASU 2022-03 effective January 1, 2024. Adoption of the new standard required changes to the valuation method used in accounting for equity consideration in business combinations occurring after January 1, 2024. There were no current period changes to equity consideration related to prior transactions to be evaluated under this guidance.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. The Company is currently in the process of determining the impact that ASU 2023-07 will have on its consolidated financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 expands the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. The Company is currently in the process of determining the impact that ASU 2023-09 will have on its consolidated financial statement disclosures.

Assets acquired and liabilities assumed in a business combination are recorded at their estimated fair value on the date of the acquisition. The difference between the purchase price amount and the net fair value of assets acquired and liabilities assumed is recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value or as a bargain purchase gain on the income statement if the purchase price is less than the estimated net fair value. The allocation of the purchase price may be modified through the end of the measurement period, which is up to one year after the acquisition date, as more information is obtained about the fair value of assets acquired and liabilities assumed as of the date of acquisition.

On January 17, 2024, the Company completed the acquisition of Acclara for a final purchase price of $786.1 million, inclusive of purchase price adjustments based on the final determination of the closing net working capital. The following table summarizes the fair value of the total consideration paid:

(1) Cash consideration includes the repayment of Acclara’s pre-existing credit facility at closing, which was not assumed by the Company. During the three months ended June 30, 2024, the Company finalized the closing net working capital as defined in the purchase agreement, which resulted in additional consideration due to the seller of $0.1 million that we expect will be paid in the third quarter of 2024.

(2) The provisional, undiscounted fair value of the Providence Warrant was estimated using the Black-Scholes option pricing model. The warrant is subject to a three-year lock-up period and expires five years from the issuance date.

The Company funded the cash portion of the consideration and associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness (see Note 6, Debt).

The purchase price has been provisionally allocated to assets acquired and liabilities assumed based on their estimated fair value as of the acquisition date. The fair value estimates are pending finalization of the valuation of all assets and liabilities acquired. Some of the more significant amounts that are not yet finalized relate to the fair value of intangible assets and income and non-income related taxes. Accordingly, management considers the balances shown in the following table to be preliminary, and there could be adjustments to the consolidated financial statements, including changes in our amortization expense related to the valuation of intangible assets acquired and their respective useful lives.

The preliminary fair value of assets acquired and liabilities assumed is:

The intangible assets preliminarily identified in conjunction with the Acclara Acquisition are as follows:

The goodwill recognized is primarily attributable to synergies that are expected to be achieved by leveraging the R1 operating model to deliver services to Acclara customers upon integration. None of the goodwill is expected to be deductible for income tax purposes. The change in the carrying amount of goodwill from December 31, 2023 to June 30, 2024 is solely attributable to the goodwill recognized in conjunction with the Acclara Acquisition.

As part of the acquisition, the Company recognized an indemnification asset of $4.5 million for indirect tax and income tax related to potential pre-transaction close tax obligations of Acclara. The indemnification asset was valued with the assistance of third-party tax experts and is a best estimate based on information available to the Company at the closing of the transaction. If the pre-transaction close tax obligations exceed the amount of the indemnification asset, the seller is liable for the incremental amount.

Included in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2024 are net services revenue of $70.5 million and $127.6 million and net loss before income taxes of $1.5 million and $4.2 million, respectively, related to the operations of Acclara since the acquisition date of January 17, 2024.

The Company had various measurement period adjustments due to additional information received since the Acclara Acquisition. Significant adjustments during the three months ended June 30, 2024 included a $1.9 million decrease to taxes payable and a $1.8 million decrease in deferred tax liability related to a revised tax provision estimate. The offset of these adjustments was recorded to goodwill.

The following table summarizes, on a pro forma basis, the combined results of the Company as though the Acclara Acquisition had occurred on January 1, 2023. These pro forma results are not necessarily indicative of the actual consolidated results had the acquisition occurred as of that date or of the future consolidated operating results for any period.

Adjustments, net of the income tax effects, that were made to net loss related to (i) depreciation and amortization to reflect the fair value of identified assets acquired, (ii) share-based compensation expense for awards replaced in connection with the acquisition, (iii) paying off Acclara’s debt and incurrence of debt by the Company, and (iv) the timing of acquisition-related costs.

The following table provides the gross carrying value and accumulated amortization for each major class of definite-lived intangible assets at June 30, 2024 and December 31, 2023:

    

The fair value of the identifiable intangible assets was determined in the period of their acquisition utilizing an income approach to derive the present value of future cash flows from developed technology, customer relationships, trade name, and favorable leasehold interests.

Intangible asset amortization expense was $59.1 million and $117.3 million for the three and six months ended June 30, 2024, respectively, and $51.2 million and $101.3 million for the three and six months ended June 30, 2023, respectively. Amortization expense for intangible assets is included in cost of services on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The Company has no indefinite-lived intangible assets.

Estimated annual amortization expense related to intangible assets with definite lives as of June 30, 2024 is as follows:

Revenue is measured based on consideration specified in a contract with a customer, and presented net of any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a service to a customer, which is typically over the contract term. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved.

In the following table, revenue is disaggregated by source of revenue:

(1) Modular and other fees is comprised of service fees related to solutions focused on revenue recovery, clinical integrity, revenue optimization, and regulatory navigation as well as functional outsourcing solutions focused on driving revenue cycle improvements.

The following table provides information about contract assets, net and contract liabilities from contracts with customers:

(1) Current contract liabilities include $3.1 million and $2.4 million classified in the current portion of customer liabilities - related party as of June 30, 2024 and December 31, 2023, respectively.

(2) Non-current contract liabilities include $10.8 million and $11.8 million classified in the non-current portion of customer liabilities - related party as of June 30, 2024 and December 31, 2023, respectively.

Significant changes in the carrying amount of contract assets, net for the six months ended June 30, 2024 were as follows:

(1) During the three months ended March 31, 2024, the Company wrote off the contract asset balance related to a private physician-owned for-profit healthcare network in the United States, who filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code on May 6, 2024.

(1) The Company records advanced billings to contract liabilities and accounts receivable on the first day of the respective service period, which billings are earned during the quarter.

(2) Revenue recognized includes $1.9 million and $5.0 million of revenue recognition for the three and six months ended June 30, 2024, respectively, relating to the contract liabilities balance at the beginning of the period.

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. The estimated revenue does not include amounts of variable consideration that are constrained.

    

The amounts presented in the table above include variable fee estimates of the Company’s physician group RCM services contracts, fixed fees, and forecasted incentive fees. Fixed fees are typically recognized ratably as the performance obligation is satisfied and forecasted incentive fees are measured cumulatively over the contractually defined performance period.

The Company does not disclose information about remaining performance obligations with an original expected duration of one year or less. The Company has elected certain of the optional exemptions from the disclosure requirements for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly, the Company applies a practical expedient to its modular RCM solutions and does not disclose information about variable consideration from remaining performance obligations when the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date.

Accounts receivable is comprised of invoiced and unbilled balances due from modular services and end-to-end RCM customers, which are presented net after considering cost reimbursements owed to end-to-end RCM customers.

(1) Includes $42.6 million and $26.1 million for accounts receivable - related party, net as of June 30, 2024, and December 31, 2023, respectively.

The Company evaluates its accounts receivable for expected credit losses monthly. Accounts receivable due from end-to-end RCM customers are evaluated individually as it was determined that the unique nature and scope of our operating partner agreements make the circumstances around credit losses dissimilar. Accounts receivable due from modular service customers are evaluated using the pooling approach due to the homogeneous population of the receivables. The Company maintains an estimated allowance for credit losses to reduce its accounts receivable to the amount that it believes will be collected. This allowance is based on the Company’s historical experience, the length of time a balance has been outstanding, and the Company’s assessment of each customer’s ability to pay, which is based on input from key Company personnel assigned to the customer, the status of ongoing operations with the customer, and business and industry factors, such as significant shifts in the healthcare environment that could impact the customer’s financial health.

Changes in the allowance for credit losses on a consolidated basis related to accounts receivable are as follows:

(1) During the three months ended June 30, 2023, the Company increased the allowance for credit losses related to a physician RCM customer by $11.6 million to fully reserve the outstanding accounts receivable exposure due to the announcement that the customer planned to cease operations.

(2) During the three months ended June 30, 2024, the Company had $22.5 million in write-offs, which primarily related to the balance previously fully reserved in 2023 of the physician RCM customer that ceased operations in the third quarter of 2023 and is in the process of liquidation pursuant to a Chapter 11 plan approved by the bankruptcy court in March 2024.

The carrying amounts of debt consist of the following:

(1) As of June 30, 2024, the Company had $80.0 million in borrowings outstanding, $1.2 million letters of credit outstanding, and $518.8 million of availability under the $600.0 million senior secured revolving credit facility (“Senior Revolver”).

In conjunction with the closing of the Acclara Acquisition, the Company entered into Amendment No. 2 (the “Second Amendment”) to the second amended and restated credit agreement (the “Second A&R Credit Agreement”) executed on June 21, 2022. For further details on the Second A&R Credit Agreement, refer to Note 10 of the audited consolidated financial statements included in the Company’s 2023 Form 10-K. Pursuant to the Second Amendment, among certain other amendments, the lenders named in the Second Amendment agreed, severally and not jointly, to extend additional borrowings in the form of Term B Loans (the “Incremental Term B Loans” and together with the then existing senior secured term B loan, the “Term B Loans”) to the Company in an aggregate principal amount equal to $575.0 million. The Company used the proceeds of the Incremental Term B Loans, together with cash on hand and borrowings of $80.0 million under the Senior Revolver, to finance (i) the cash consideration for the Acclara Acquisition and (ii) fees and costs incurred in connection with the acquisition and related transactions. In conjunction with entering into the Second Amendment, the Company incurred $10.6 million and capitalized $5.7 million of debt issuance costs.

The initial senior secured term A loan (the “Existing Term A Loan”) and Senior Revolver mature on July 1, 2026, the incremental senior secured term A loan (together with the Existing Term A Loan, the “Term A Loans”) matures on June 21, 2027, and the Term B Loans mature on June 21, 2029.

The variable interest rate as of June 30, 2024 was 7.58% for the Term A Loans and Senior Revolver and 8.33% for the Term B Loans.

The Second A&R Credit Agreement contains a number of financial and non-financial covenants. The Company was in compliance with all of the covenants in the Second A&R Credit Agreement as of June 30, 2024. The obligations under the Second A&R Credit Agreement are secured by a pledge of 100% of the capital stock of certain domestic subsidiaries owned by the Company and a security interest in substantially all of the Company’s tangible and intangible assets and the tangible and intangible assets of certain domestic subsidiaries.

Scheduled maturities of the Company’s long-term debt are summarized as follows:

The Company utilizes cash flow hedges to manage its currency risk arising from its global business services centers. As of June 30, 2024, the Company had recorded $0.1 million of unrealized losses in accumulated other comprehensive loss related to foreign currency hedges. The Company estimates that $0.1 million of losses reported in accumulated other comprehensive loss are expected to be reclassified into cost of services within the next 12 months.

The net gains reclassified into cost of services were as follows:

As of June 30, 2024, the Company’s foreign currency forward contracts designated as cash flow hedges had maturities extending no later than December 31, 2024, and had a total notional value of $74.6 million.

The Company also utilizes cash flow hedges to reduce variability in interest cash flows from its outstanding debt. As of June 30, 2024, the Company had recorded $9.6 million of unrealized gains in accumulated other comprehensive loss related to interest rate swaps. The Company estimates that $9.6 million of gains reported in accumulated other comprehensive loss are expected to be reclassified into earnings within the next 12 months.

The net gains reclassified into interest expense were as follows:

As of June 30, 2024, the Company’s interest rate swaps extended no later than June 30, 2025, and had a total notional value of $500.0 million.

The Company also utilizes fair value hedges to manage its currency risk arising from its global business services centers. These contracts typically have a term of one month in order to manage currency risks between the timing of transaction costs and payment. For the three and six months ended June 30, 2024, respectively, the Company had recognized $0.1 million and $0.0 million of gains in earnings related to foreign currency forward contracts designated as fair value hedges. The fair value of derivative instruments designated as fair value hedges was $0.0 million of unrealized gain as of June 30, 2024 and $0.0 million of unrealized gains as of December 31, 2023. As of June 30, 2024, the Company’s foreign currency forward contracts designated as fair value hedges had maturities extending no later than July 31, 2024 and had a total notional value of $2.0 million.

The location and fair value of derivative instruments designated as hedges in the Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023 were as follows:

As of June 30, 2024 and December 31, 2023, respectively, the accumulated gain, net of tax, recognized in accumulated other comprehensive loss was $7.1 million and $7.5 million.

The Company classifies cash flows from its derivative programs as cash flows from operating activities in the Consolidated Statements of Cash Flows. Fair values for derivative financial instruments are based on prices computed using third-party valuation models and are classified as Level 2 in accordance with the three-level hierarchy of fair value measurements.

8. Share-Based Compensation

The total share-based compensation expense relating to the Company’s stock options, RSUs, and performance-based restricted stock units (“PBRSUs”) that has been included in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) was as follows:

(1) Included in total share-based compensation expense are (i) $1.7 million and $3.5 million, of share-based compensation expense for the three and six months ended June 30, 2024, respectively, of CoyCo 2, L.P., a shareholder of the Company (“CoyCo 2”), and (ii) $1.9 million and $3.7 million, respectively, of shared-based compensation expense of CoyCo 2 for the three and six months ended June 30, 2023. This expense relates to equity awards held by certain Cloudmed employees that were modified as part of the Company’s acquisition of Revint Holdings, LLC (“Cloudmed”) into awards of CoyCo 2 and were granted for services that benefit the Company’s operations.

The Company accounts for forfeitures as they occur. Excess tax benefits and shortfalls for share-based payments are recognized in income tax expense and included in operating activities. The Company recognized the following income tax expense/(benefit) associated with vesting and exercises of equity awards:

The Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of their grant dates. The volatility for the options was calculated based on an analysis of historical volatility. The Company assesses progress and achievement on PBRSUs by reviewing historical performance to date, along with any adjustments which have been approved by the Human Capital Committee of the Company’s Board of Directors to the reported performance, and latest projections to determine the probable outcome of the awards. The current estimates are then compared to the scoring metrics and any necessary adjustments are reflected in the current period to update share-based compensation expense to the current performance expectations. A Monte Carlo simulation was used to estimate the fair value of the Unvested Units (as defined in the 2023 Form 10-K), which are being amortized over a period of 4 years on a straight-line basis. The volatility for the Unvested Units was calculated based on an analysis of historical and implied volatility.

A summary of the activity relating to stock options during the six months ended June 30, 2024 is shown below: