Seven weeks ago, another contributor Jeremy Blum highlighted Performing Financial (NASDAQ:PFMT) “hidden turnaround“, a company that has suffered for many years from the decline of its student loan collection agency business.
On the other hand, the company has made progress in expanding its audit and collection services related to abusive payments in public and commercial healthcare markets.
Performant Financial also provides services to the Centers for Medicare and Medicaid Services (“CMS”) through its Recovery Audit Contractor (“RAC”) program, a business that has struggled over the past two years, primarily due to factors outside the company. control. That said, revenues have started to recover in recent quarters, even with the negative impact of COVID-19:
Source: SEC Filings
Commercial activity showed particularly strong growth despite a COVID-19 related hit in the second quarter, with revenue up nearly 50% year-over-year for the first nine months of 2020 according to more recent 10-Q:
For our healthcare business activity, our business strategy is focused on using our technology services platform to provide auditing, liability recovery and analytics services to private healthcare payers. . Revenue from our commercial customers in the healthcare sector was $16.8 million for the nine months ended September 30, 2020, compared to revenue of $11.3 million from our commercial customers in the healthcare sector. health during the nine months ended September 30, 2019.
Even the legacy business was showing year-over-year growth in the first quarter, but the segment was hit particularly hard by COVID-19, as noted in the company’s report. 10-Q for the second trimester:
The CARES Act included changes to student loans owned by the Department of Education. These changes include suspending payments, stopping accrued interest, and stopping involuntary collections of payments (eg wage garnishments). The changes are in effect until at least September 30, 2020. While these changes will impact the establishment of new loan rehabilitation agreements by defaulting student borrowers, the Department of Education will consider each month during the period of suspension of payments as an eligible month. with a view to carrying out the restoration of the loan, which is an element in determining the future income to which the Company is entitled. In addition, student loan income and related cash flow will continue during this period as the Company derives income for a number of months from outstanding borrower rehabilitation agreements. In addition, although not mandated by the CARES Act, all clients of the Company’s Guarantee Agency (which administers the Federal Family Education Loan Program) largely comply with the provisions of law, except for the consideration of missed payments for eligibility for loan rehabilitation. Considering the impacts of the CARES Act on the company’s recovery activities through at least September 30, 2020, the company has laid off over 500 employees to date, which could result in annual savings of approximately $18 million. dollars.
Following Jeremy’s article, the stock had a two-week rally, eventually peaking at $2.17 on October 13, then returning most of the gains over the following weeks before the third quarter of the company. revenue report November 10.
Given the continued impact of COVID-19, the company actually had a respectable quarter with healthcare revenue hitting a two-year high. With the historical business still suffering, the healthcare segment contributed nearly 50% of total revenue.
That said, Adjusted EBITDA and Operating Cash Flow saw sequential declines.
On the conference callmanagement pointed out that parts of its business were already recovering, but actually warned of a number of near-term headwinds in the healthcare segment (emphasis added by author):
Due to the pandemic, a few of our healthcare audit clients had asked us to suspend our activities on a short-term basis earlier this year, which had a direct impact on our results in the third trimester. I am pleased to report that these temporary pauses have largely ended in the third quarter and that we have aggressively restarted the hiring and recruitment of people as part of our recovery efforts to prepare for service these accounts to the highest possible standards. However, it is important to recognize that we will incur additional spending as part of our recovery efforts, but we do not expect revenue to show until the first quarter of 2021.
(…)
Overall, our healthcare business is doing well, and we are meeting and in some cases exceeding our internal KPIs. We are very excited about these trends and are focused on improving our results in our current and future product offerings. However, as Lisa noted, COVID-19 has impacted our customers. And the cadence of recruiting audit results from our clients has been slow to return to the previous normal. We expect this to have a dampening effect on the pace of revenue from our work efforts, but should be caught up by the first quarter of 2021.
Given these issues, the company will likely see some pressure on adjusted EBITDA and cash flow in the fourth quarter, but those headwinds should start to ease early next year.
In addition, the $61.7 million outstanding under the Company’s credit agreement with Educational Credit Management Company (“ECMC”), a client and significant shareholder of Performant Financial, is now classified as current in the company’s financial statements, apparently making the Current Ratio looks particularly bad.
While the credit facility is currently set to mature in August 2021, Performant Financial actually has the option to extend the maturity of the loans for two additional one-year periods, subject to the satisfaction of customary conditions. The recent improvement in the company’s financial performance led to a decline in the annual interest rate from 11.8% at December 31, 2019 to 8.0% at the end of the third quarter.
At this point, I don’t see any major issues for Performant Financial to extend the credit agreement for at least another year. Should the company’s financial performance return to the levels seen in Q4/2019 and Q1/2020, refinancing on improved terms may in fact become a distinct possibility.
Conclusion
The combination of sequentially weaker financial performance, perceived debt issues, and management’s stated expectations of some near-term headwinds in the important healthcare sector apparently did not resonate well with investors, as the stock sold another 25% after the release of third quarter results.
While the fourth quarter may indeed be pressured by the headwinds discussed above, at this stage I do not share market participants’ concerns and in fact expect the healthcare sector to continue its strong performance next year, likely becoming the company’s biggest revenue contributor.
Given the issues discussed above, speculative investors should take advantage of the current weakness in stock prices to build positions as we approach next year.
I will return to Performant Financial following the company’s fourth quarter earnings release currently scheduled for late February.
