Change Healthcare Inc. Reports Second Quarter Fiscal 2020 Financial Results

NASHVILLE, Tenn.--(BUSINESS WIRE)--Change Healthcare Inc. (Nasdaq: CHNG), a leading independent healthcare technology company, today reported financial results for Change Healthcare LLC (“Change Healthcare”) for the second quarter of fiscal year 2020 ended September 30, 2019.

“I am pleased to report another quarter of strong financial and operational performance, supported by continued strength in our underlying business and the execution on our strategic initiatives in our Enterprise Imaging and RCM Services businesses,” said Neil de Crescenzo, president and chief executive officer. “We continue to invest in innovation internally and with leading technology partners to bring to market new solutions that deliver increased value to our more than 30,000 customers by helping them reduce cost, increase quality, and enhance their ability to drive consumer engagement. Our focus on operational excellence and innovation across our platform places Change Healthcare in a strong position to deliver accelerated growth and shareholder value over the coming years.”

Adoption of the New Revenue Recognition Standard - ASC 606

Change Healthcare adopted the new revenue recognition accounting standard Accounting Standards Codification ("ASC") 606 effective April 1, 2019 on a modified retrospective basis. Financial results for reporting periods during fiscal year 2020 are presented in compliance with the new revenue recognition standard. Historical financial results for reporting periods prior to fiscal year 2020 are presented in conformity with the prior revenue recognition standard, ASC 605. This press release includes additional information to reconcile the impacts of the adoption of the new revenue recognition standard on Change Healthcare’s financial results for the quarter and six months ended September 30, 2019. This includes the presentation of financial results during fiscal year 2020 under ASC 605 for comparison to the prior year period.

Fiscal 2020 Second Quarter Highlights for Change Healthcare LLC:

Financial Summary - ASC 606 (standard adopted effective April 1, 2019)

• Total revenue of $795.8 million, including Solutions revenue of $738.7 million
• Net income of $(0.1) million, resulting in net income of $(0.00) per diluted unit⁽¹⁾
• Adjusted net income of $86.6 million, resulting in adjusted net income of $0.27 per diluted unit⁽¹⁾
• Adjusted EBITDA of $217.7 million

Financial Summary - ASC 605 (standard before April 1, 2019)

• Total revenue of $805.8 million, including Solutions revenue of $748.6 million
• Net income of $4.3 million, resulting in net income of $0.01 per diluted unit⁽¹⁾
• Adjusted net income of $91.0 million, resulting in adjusted net income of $0.28 per diluted unit⁽¹⁾
• Adjusted EBITDA of $222.0 million

⁽¹⁾ Common units of Change Healthcare LLC are equivalent to the number of outstanding common shares of Change Healthcare Inc. and membership interests of Change Healthcare LLC held by subsidiaries of McKesson.

Financial Results - ASC 606 (standard adopted effective April 1, 2019)

• Solutions revenue was $738.7 million. Second quarter results were impacted by the adoption of the new accounting standard, ASC 606, which resulted in the recognition of certain revenue in the first quarter of the fiscal year that would have been recognized in the second quarter or subsequent periods under the prior accounting rules. As a result, the second quarter results reflect an unfavorable revenue impact of $9.9 million as compared with ASC 605.
• Net income was $(0.1) million, resulting in net income of $(0.00) per diluted unit. Net income under the new accounting standard was impacted favorably by an extended recognition period for commissions and certain implementation costs, decreasing expenses by $5.6 million, partially offsetting the revenue impact of ASC 606 noted above.
• Adjusted net income was $86.6 million, resulting in adjusted net income of $0.27 per diluted unit.
• Adjusted EBITDA was $217.7 million. Adjusted EBITDA as a percent of Solutions revenue for the second quarter of fiscal 2020 was 29.5%

Financial Results - ASC 605 (standard before April 1, 2019)

• Solutions revenue was $748.6 million, compared to $737.8 million for the second quarter of fiscal 2019. Total revenue for the current period, which includes Postage revenue, was $805.8 million compared to $800.2 million in the same period of the prior year. Growth in both the Software & Analytics and Network Solutions businesses was partially offset by the impact of planned contract eliminations in our Technology-enabled Services business, and the impact of our optimization initiatives in our Connected Analytics business. As part of our stated strategy, we are repositioning certain of our Revenue Cycle Management (“RCM”) service solutions to better address end-market dynamics, enhance efficiency and to improve the long-term growth potential of these solutions.
• Net income was $4.3 million, resulting in net income of $0.01 per diluted unit, compared with net income of $113.4 million or $0.45 per diluted unit, respectively, for the second quarter of fiscal 2019. Net income in the prior year period included the gain on sale of the Extended Care business of $111.4 million before the provision of income tax. The sale resulted in an after-tax gain of approximately $111.1 million and an impact of approximately $0.44 per diluted unit. During the second quarter of fiscal 2020, the favorable impact of productivity improvements and growth across our Software & Analytics and Network Solutions businesses was partially offset by planned contract eliminations in our Technology-enabled Service business.
• Adjusted net income was $91.0 million, resulting in adjusted net income of $0.28 per diluted unit, compared with adjusted net income of $89.9 million or $0.35 per diluted unit, respectively, for the second quarter of fiscal 2019. Adjusted net income reflects the items noted above.
• Adjusted EBITDA was $222.0 million, compared with $216.0 million for the second quarter of fiscal 2019. Adjusted EBITDA as a percent of Solutions revenue for the second quarter of fiscal 2020 was 29.7%, compared with 29.3% for the second quarter of fiscal 2019. The improved performance was the result of a favorable impact of mix, productivity improvements and growth across our segments.

Cash Flow and Balance Sheet Highlights for Change Healthcare LLC:

Net cash provided by operating activities was $223.9 million for the six months ended September 30, 2019, a decrease of 1.8% from $227.9 million for the six months ended September 30, 2018. Free cash flow was $94.0 million for the six months ended September 30, 2019, a decrease of 8.9% from $103.2 million for the six months ended September 30, 2018. Adjusted free cash flow was $173.9 million, a decrease of $59.2 million year over year.

Net cash provided by operating activities, free cash flow, and adjusted free cash flow each are affected by pass-thru funds we receive from certain pharmaceutical industry participants in advance of our obligation to remit these funds to participating retail pharmacies. The decrease in cash flow from operations, free cash flow and adjusted free cash flow primarily resulted from the inclusion of $12.9 million of such pass-thru funds in the six months ended September 30, 2019 as compared to $156.1 million for the six months ended September 30, 2018.

Change Healthcare LLC ended the quarter with approximately $73.0 million of cash, cash equivalents and restricted cash and approximately $4,971.0 million of total debt. In addition to the previously disclosed repayment of $805.0 million in term loan facility obligations in July 2019, the company repaid an additional $85.0 million in term loan facility obligations in the second quarter of fiscal 2020.

As of September 30, 2019, no amounts had been drawn under the revolving credit facility. On July 3, 2019, the company amended its revolving credit facility to increase the current commitment amount from $500.0 million to $785.0 million and to extend the maturity to July 3, 2024.

Recent Business Highlights

• Introduced new artificial intelligence (AI) technology capabilities to our CareSelect™ Imaging decision support solution. These AI capabilities help healthcare providers enhance workflow efficiency, improve patient safety, provide higher-value care, and meet pending regulatory requirements, leveraging our integration into electronic health record (EHR) systems.
• Awarded a contract through 2026 by Ireland’s Health Service Executive to extend their partnership with Change Healthcare to upgrade Ireland’s National Integrated Medical Imaging system (“NIMIS”). Leveraging the innovation in our Imaging unit, NIMIS is transforming how diagnostic imaging is delivered to the citizens of Ireland to ensure that images and reports are available to clinicians at the right time and location regardless of where the image was acquired.
• Introduced Charge Capture Advisor, a new cloud-based addition to the company’s portfolio of Revenue Integrity Solutions. The solution uses AI to identify potentially missing charges for services that providers actually performed before claims are submitted targeting a more complete capture of services rendered without additional time and effort by hospital revenue integrity teams.

Full Year Fiscal 2020 Outlook and 2021 Guidance - ASC 606

Change Healthcare continues to expect full-year fiscal 2020 Solutions revenue growth of 1% to 2% including the impact of the sale of our extended care business during fiscal year 2019 and planned contract exits in our Technology-enabled Services business; Adjusted EBITDA growth of 6% to 8% and Adjusted net income growth of 9% to11%.

For fiscal year 2021, the company continues to expect Solutions revenue growth of 4% to 6% and Adjusted EBITDA growth of 6% to 8%.

Third Quarter Fiscal 2020 Guidance - ASC 606

Change Healthcare expects third quarter fiscal 2020 Solutions revenue in the range of $745 million to $760 million, Adjusted EBITDA in the range of $225 million to $235 million, and Adjusted net income in the range of $98 million to $103 million.

While second quarter revenue decreased as a result of ASC 606 implementation, full year revenue is not expected to differ materially between the two accounting standards. Hence, the acceleration of revenue to the first quarter of the fiscal year will reduce the quarterly reported revenue in subsequent fiscal 2020 reported results versus the prior revenue recognition standard. The impact from extended recognition periods for commission expense as a result of the adoption of ASC 606 is expected to be favorable by about $3 million pre-tax per quarter for the remainder of fiscal 2020.

A reconciliation of the forward-looking third-quarter and full-year fiscal 2020 Adjusted EBITDA outlook to net income cannot be provided without unreasonable effort because of the inherent difficulty of accurately forecasting the occurrence and financial impact of the various adjusting items necessary for such reconciliation that have not yet occurred, are out of our control, or cannot be reasonably predicted. For the same reasons, Change Healthcare LLC is unable to assess the probable significance of the unavailable information, which could have a material impact on its future financial results in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

Conference Call and Webcast Information

Change Healthcare will host a conference call on November 14, 2019 at 8:00 a.m. ET. Investors and other interested parties are invited to listen to the conference call by dialing 1-[phone] in the U.S.; 1-[phone] from abroad, including the conference ID number: 1669249; or via a live, audio webcast on the Company's website at https://ir.changehealthcare.com/.

A webcast replay will be available for on-demand listening shortly after the completion of the call until the second-quarter fiscal 2021 earnings call, at the aforementioned URL. In addition, a digital audio playback will be available until 11:00 a.m. Eastern Time on Thursday, November 21, 2019, by dialing 1-[phone] or 1-[phone] and referencing confirmation 1669249.

About Change Healthcare

Change Healthcare is a leading independent healthcare technology company that provides data and analytics-driven solutions to improve clinical, financial and patient engagement outcomes in the U.S. healthcare system. We are a key catalyst of a value-based healthcare system, accelerating the journey toward improved lives and healthier communities. Learn more at changehealthcare.com.

CHNG-IR

Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of federal securities laws. Any statements made in this release that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plans and strategies. These statements often include words such as “anticipate,” “expect,” “suggest,” “plan,” “believe,” “intend,” “estimate,” “target,” “project,” “should,” “could,” “would,” “may,” “will,” “forecast,” “outlook,” “potential,” “continues,” “seeks,” “predicts,” and the negatives of these words and other similar expressions. Forward-looking statements involve known and unknown risks, uncertainties, including factors disclosed in the Registration Statement on Form S-1 (No. 333-230345) in the section entitled “Risk Factors,” and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on any forward-looking statements in this release. All forward-looking statements are based on information currently available to Change Healthcare and are qualified in their entirety by this cautionary statement. The statements herein speak only as of the date such statements were first made. Except to the extent required by law, Change Healthcare assumes no obligation to update any such forward-looking statements or other statements included in this release.

Non-GAAP Financial Measures

In the Company’s earnings releases, prepared remarks, conference calls, slide presentations and webcasts, there may be use or discussion of non-GAAP financial measures. We believe such measures provide supplemental information to investors with regard to our operating performance and assist investors’ ability to compare our financial results to those of other companies in the same industry. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between the comparable GAAP financial measure and each non-GAAP financial measure are included in this press release after the consolidated financial statements. These non-GAAP financial measures are calculated and presented on the basis of methodologies other than in accordance with GAAP. These non-GAAP financial measures should be considered only as supplemental to, and not as superior to, financial measures prepared in accordance with GAAP and may be defined and calculated differently by others in the same industry.

Change Healthcare Inc.
Statements of Operations (unaudited and amounts in thousands, except share and per share amounts)
		Three Months Ended			Six Months Ended
		September 30,			September 30,
		2019		2018		2019		2018
Revenue	$	—	$	—	$	—	$	—
Operating expenses
General and administrative		1,138		31		1,389		62
Accretion Expense		48,363		—		48,363		—
Total operating expenses		49,501		31		49,752		62
Operating income (loss)		(49,501)		(31)		(49,752)		(62)
Non-operating (income) expense
Loss from Equity Method Investment in the Joint Venture		56,179		25,571		95,732		48,337
(Gain) Loss on Sale of Interests in the Joint Venture		—		(197)		—		(661)
Management fee income		(772)		(31)		(876)		(62)
Interest expense		644		—		644		—
Interest income		(644)		—		(644)		—
Amortization of debt discount and issuance costs		212		—		212		—
Unrealized gain (loss) on forward purchase contract		2,435		—		2,435		—
Total non-operating (income) expense		58,054		25,343		97,503		47,614
Income (loss) before income tax provision (benefit)		(107,555)		(25,374)		(147,255)		(47,676)
Income tax provision (benefit)		(13,620)		(6,783)		(15,804)		(11,584)
Net income (loss)	$	(93,935)	$	(18,591)	$	(131,451)	$	(36,092)
Net income (loss) per share:
Basic	$	(0.66)	$	(0.25)	$	(1.20)	$	(0.48)
Diluted	$	(0.66)	$	(0.25)	$	(1.20)	$	(0.48)
Weighted average shares:
Basic		142,223,836		75,506,552		109,111,853		75,555,700
Diluted		142,223,836		75,506,552		109,111,853		75,555,700

Change Healthcare Inc.
Balance Sheets (unaudited and amounts in thousands, except share and per share amounts)
	September 30,		March 31,
	2019		2019
Assets
Current Assets:
Cash	$	3,409	$	3,409
Prepaid expenses		2,315		—
Due from the Joint Venture		1,345		373
Investment in Joint Venture tangible equity units, current		15,154		—
Income taxes receivable		1,602		1,781
Total current assets		23,825		5,563
Dividend receivable		34,547		81,264
Investment in the Joint Venture		1,826,887		1,211,996
Investment in Joint Venture tangible equity units		259,237		—
Total assets	$	2,144,496	$	1,298,823
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses	$	453	$	176
Due to the Joint Venture		9,513		6,167
Current portion of long-term debt		15,154		—
Total current liabilities		25,120		6,343
Long-term debt		27,384		—
Due to McKesson		48,363		—
Deferred income tax liabilities		156,770		159,993
Other liabilities		752		—
Commitments and contingencies (see Note 4)
Stockholders' Equity:
Common Stock (par value, $.001), 9,000,000,000 and 252,800,000 shares authorized and 124,935,806 and 75,474,654 shares issued and outstanding at September 30, 2019 and March 31, 2019, respectively		124		75
Class X common stock (par value, $.001), 1 and 1 share authorized and no shares issued and outstanding at September 30, 2019 and March 31, 2019, respectively		—		—
Preferred stock (par value, $.001), 900,000,000 and 0 shares authorized and no shares issued and outstanding at September 30, 2019 and March 31, 2019, respectively		—		—
Additional paid-in capital		2,006,494		1,153,509
Accumulated other comprehensive income (loss)		(6,593)		(3,256)
Retained earnings (deficit)		(113,918)		(17,841)
Total stockholders' equity		1,886,107		1,132,487
Total liabilities and stockholders' equity	$	2,144,496	$	1,298,823

		Six Months Ended
		September 30,
		2019		2018
Cash flows from operating activities:
Net income (loss)	$	(131,451)	$	(36,092)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss from Equity Method Investment in the Joint Venture		95,732		48,337
Deferred income tax expense (benefit)		(15,806)		(11,584)
(Gain) Loss on Sale of Interests in the Joint Venture		—		(661)
(Gain) loss on available for sale debt securities		2,435		—
Amortization of debt discount and issuance costs		212		—
Changes in operating assets and liabilities:
Prepaid expenses		(2,315)		—
Due from the Joint Venture		(972)		(62)
Income taxes receivable		179		13,292
Accounts payable and accrued expenses		277		64
Due to McKesson		48,363		—
Due to the Joint Venture		3,346		(9,663)
Net cash provided by (used in) operating activities		—		3,631
Cash flows from investing activities:
Proceeds from sale of interests in Joint Venture		—		4,782
Investment in debt and equity securities of the Joint Venture		(278,875)		—
Proceeds from investment in debt and equity securities of the Joint Venture		3,621		—
Investment in the Joint Venture		(609,818)		—
Net cash provided by (used in) investing activities		(885,072)		4,782
Cash flows from financing activities:
Proceeds from initial public offering, net of issuance costs		608,679		—
Proceeds from issuance of equity component of tangible equity units, net of issuance costs		232,929		—
Proceeds from issuance of debt component of tangible equity units		47,367		—
Payment of loan costs		(1,421)		—
Repayment of senior amortizing notes		(3,621)		—
Proceeds from exercise of equity awards		1,139		—
Payments to acquire common stock		—		(4,782)
Net cash provided by (used in) financing activities		885,072		(4,782)
Net increase (decrease) in cash, cash equivalents and restricted cash		—		3,631
Cash, cash equivalents and restricted cash at beginning of period		3,409		—
Cash, cash equivalents and restricted cash at end of period	$	3,409	$	3,631

Change Healthcare LLC
Consolidated Statements of Operations (unaudited and amounts in thousands, except unit and per unit amounts)
	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2019		2018		2019			2018
Revenue:
Solutions revenue	$	738,701	$	737,786	$	1,535,773	$	1,495,491
Postage revenue		57,110		62,404		115,594		127,962
Total revenue		795,811		800,190		1,651,367		1,623,453
Operating expenses:
Cost of operations (exclusive of depreciation and amortization below)		331,234		327,563		658,181		664,993
Research and development		51,783		51,243		101,122		106,567
Sales, marketing, general and administrative		190,039		207,105		383,312		414,019
Customer postage		57,110		62,404		115,594		127,962
Depreciation and amortization		77,448		69,258		148,764		137,785
Accretion and changes in estimate with related parties, net		3,214		5,932		7,094		9,756
Gain on Sale of the Extended Care Business		—		(111,392)		—		(111,392)
Total operating expenses		710,828		612,113		1,414,067		1,349,690
Operating income (loss)		84,983		188,077		237,300		273,763
Non-operating (income) and expense
Interest expense, net		69,901		80,677		153,307		159,226
Loss on extinguishment of debt		16,900		—		16,900		—
Contingent consideration		1,700		(72)		909		200
Other, net		(4,386)		(3,849)		(8,164)		(9,381)
Total non-operating (income) and expense		84,115		76,756		162,952		150,045
Income (loss) before income tax provision (benefit)		868		111,321		74,348		123,718
Income tax provision (benefit)		998		(2,119)		2,563		(2,228)	-
Net income (loss)	$	(130)	$	113,440	$	71,785	$	125,946
Net income (loss) per common unit:
Basic	$	-	$	0.45	$	0.25	$	0.50
Diluted	$	-	$	0.45	$	0.25	$	0.50
Weighted average common units outstanding:
Basic		318,219,028		251,501,744		285,107,046		251,550,892
Diluted		323,970,033		253,333,940		288,809,850		253,390,770
^(1)Common units of Change Healthcare LLC are equivalent to the number of outstanding common shares of Change Healthcare Inc. and membership interests of Change Healthcare LLC held by subsidiaries of McKesson.

Change Healthcare LLC
Consolidated Balance Sheets (unaudited and amounts in thousands)
	September 30,		March 31,
	2019		2019
Assets
Current assets:
Cash and cash equivalents	$	72,992	$	47,718
Restricted cash		—		1,176
Accounts receivable, net of allowance for doubtful accounts		675,306		759,502
Contract assets		139,111		—
Prepaid expenses and other current assets		155,019		172,067
Assets held for sale (see Note 14)		29,562		—
Total current assets		1,071,990		980,463
Property and equipment, net		160,305		197,263
Goodwill		3,295,381		3,284,266
Intangible assets, net		1,261,290		1,320,161
Other noncurrent assets, net		500,627		421,985
Total assets	$	6,289,593	$	6,204,138
Liabilities and members' equity
Current liabilities:
Drafts and accounts payable	$	64,010	$	98,550
Accrued expenses		315,419		316,179
Deferred revenues		337,371		437,636
Due to related parties, net		23,230		34,629
Current portion of long-term debt		26,644		2,789
Total current liabilities		766,674		889,783
Long-term debt, excluding current portion		4,944,395		5,787,150
Deferred income tax liabilities		110,016		106,099
Tax receivable agreement obligations to related parties		199,876		212,698
Other long-term liabilities		112,812		113,194
Commitments and contingencies (see Note 6)
Members' equity (deficit)		155,820		(904,786)
Total liabilities and members' equity	$	6,289,593	$	6,204,138

Change Healthcare LLC
Consolidated Statements of Cash Flows (unaudited and amounts in thousands)
	Six Months Ended
	September 30,
	2019		2018
Cash flows from operating activities:
Net income (loss)	$	71,785	$	125,946
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		148,764		137,785
Amortization of capitalized software developed for sale		6,698		7,378
Accretion and changes in estimate, net		7,094		9,756
Equity compensation		15,207		8,269
Deferred income tax expense (benefit)		1,473		(3,013)
Amortization of debt discount and issuance costs		9,941		10,964
Contingent consideration		909		200
Gain on Sale of the Extended Care Business		—		(111,392)
Loss on extinguishment of debt		16,900		—
Other		(111)		538
Changes in operating assets and liabilities:
Accounts receivable		54,240		6,730
Contract assets		12,688		—
Prepaid expenses and other		(8,583)		(16,373)
Accounts payable		(15,209)		(32,035)
Accrued expenses and other liabilities		(16,311)		142,707
Deferred revenue		(69,471)		(75,074)
Due to related party, net		(12,150)		15,482
Net cash provided by (used in) operating activities		223,864		227,868
Cash flows from investing activities:
Capitalized expenditures		(129,847)		(124,631)
Proceeds from Sale of the Extended Care Business		—		160,244
Investments in businesses		(18,946)		—
Net cash provided by (used in) investing activities		(148,793)		35,613
Cash flows from financing activities:
Payments of third party IPO and loan costs		(8,554)		—
Payments under tax receivable agreements with related parties		(27,227)		(25,096)
Payments on Term Loan Facility		(902,750)		(76,500)
Receipts (payments) on derivative instruments		3,109		2,090
Payments of deferred financing obligations		—		(3,432)
Capital contribution from Members from exercise of equity awards		1,139		205
Repurchase of equity awards		—		(5,305)
Proceeds from Change Healthcare Inc. initial public offering		608,679		—
Proceeds from debt issued to Change Healthcare Inc.		47,367		—
Proceeds from forward purchase contract with Change Healthcare Inc.		232,929		—
Advances to and refunds from Change Healthcare Inc.		(2,590)		2,636
Payment of debt issued to Change Healthcare Inc.		(3,621)		—
Other		247		598
Net cash provided by (used in) financing activities		(51,272)		(104,804)
Effect of exchange rate changes on cash and cash equivalents		299		(672)
Net increase (decrease) in cash, cash equivalents and restricted cash		24,098		158,005
Cash, cash equivalents and restricted cash at beginning of period		48,894		50,011
Cash, cash equivalents and restricted cash at end of period	$	72,992	$	208,016

Change Healthcare LLC
Reconciliation of Net Income (Loss) to Adjusted EBITDA
		Three Months Ended September 30,								Six Months Ended September 30,
Unaudited and amounts in thousands		2019						2018		2019						2018
		As Reported		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)
Net income (loss)	$	(130)	$	4,386	$	4,256	$	113,440	$	71,785	$	(40,871)	$	30,914	$	125,946
Net interest expense		69,901		—		69,901		80,677		153,307		—		153,307		159,226
Income tax provision (benefit)		998		(32)		966		(2,119)		2,563		(2,283)		280		(2,228)
Depreciation and amortization		77,448		—		77,448		69,258		148,764		—		148,764		137,785
Amortization of capitalized software developed for sale		3,249		—		3,249		3,618		6,698		—		6,698		7,378
EBITDA		151,466		4,354		155,820		264,874		383,117		(43,154)		339,963		428,107
Adjustments to EBITDA:
Equity compensation		9,345		—		9,345		2,959		15,207		—		15,207		8,259
Acquisition accounting adjustments		553		—		553		555		927		—		927		2,540
Acquisition and divestiture-related costs		414		—		414		3,319		1,073		—		1,073		7,507
Integration and related costs		19,781		—		19,781		26,291		45,507		—		45,507		47,242
Strategic initiatives, duplicative and transition costs		6,120		—		6,120		8,348		9,688		—		9,688		19,122
Severance costs		2,929		—		2,929		2,339		10,099		—		10,099		10,015
Costs related to recently issued accounting standards		—		—		—		1,772		—		—		—		5,513
Accretion and changes in estimate with related parties, net		3,214		—		3,214		5,932		7,094		—		7,094		9,756
Management fees and related costs		2,413		—		2,413		2,607		5,060		—		5,060		5,284
Impairment of long-lived assets and other		—		—		—		2,343		(840)		—		(840)		3,360
Gain on sale of extended care business		—		—		—		(111,392)		—		—		—		(111,392)
Contingent consideration		1,700		—		1,700		—		909		—		909		272
Loss on extinguishment of debt		16,900		—		16,900		—		16,900		—		16,900		—
Other non-routine, net		2,858		—		2,858		6,004		4,008		—		4,008		8,156
EBITDA Adjustments		66,227		—		66,227		(48,923)		115,632		—		115,632		15,634
Adjusted EBITDA	$	217,693	$	4,354	$	222,047	$	215,951	$	498,749	$	(43,154)	$	455,595	$	443,741

Change Healthcare LLC
Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss)
		Three Months Ended September 30,							Six Months Ended September 30,
Unaudited and amounts in thousands		2019						2018	2019						2018
		As Reported		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)	As Reported		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)
Net income (loss)	$	(130)	$	4,386	$	4,256	$	113,440	71,785	$	(40,871)	$	30,914	$	125,946
Amortization expense resulting from acquisition method adjustments		35,054		—		35,054		36,765	69,702		—		69,702		74,708
EBITDA Adjustments		66,227		—		66,227		(48,923)	115,632		—		115,566		—
Tax effect of EBITDA Adjustments and amortization expense		(14,527)		—		(14,527)		(11,359)	(28,991)		—		(28,991)		(28,760)
Adjusted Net Income	$	86,624	$	4,386	$	91,010	$	89,923	228,128	$	(40,871)	$	187,191	$	171,894
Adjusted net income (loss) per diluted unit ^(1)	$	0.27	$	0.01	$	0.28	$	0.35	0.79	$	(0.14)	$	0.65	$	0.68
^(1) Common units of Change Healthcare LLC are equivalent to the number of outstanding common shares of Change Healthcare Inc. and membership interests of Change Healthcare LLC held by subsidiaries of McKesson.

Change Healthcare LLC
Segment Results
		Three Months Ended September 30,								Six Months Ended September 30,
Unaudited and amounts in thousands		2019						2018		2019						2018
		As Reported		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)
Segment revenue
Software and Analytics	$	376,128	$	13,151	$	389,279	$	383,510	$	813,472	$	(28,476)	$	784,996	$	779,912
Network Solutions		144,276		—		144,276		136,322		285,888		—		285,888		272,925
Technology-enabled Services		244,124		(3,206)		240,918		243,343		488,114		(3,110)		485,004		493,338
Corporate and Eliminations ^(1)		31,283		—		31,283		37,015		63,893		—		63,893		77,278
Net revenue	$	795,811	$	9,945	$	805,756	$	800,190	$	1,651,367	$	(31,586)	$	1,619,781	$	1,623,453
Segment Adjusted EBITDA
Software and Analytics	$	140,078	$	8,847	$	148,925	$	139,419	$	342,393	$	(37,137)	$	305,256	$	282,056
Network Solutions		86,500		(414)		86,086		83,612		171,472		(932)		170,540		165,849
Technology-enabled Services		44,841		(3,757)		41,084		39,181		89,992		(4,515)		85,477		89,154
Corporate and Eliminations		(53,726)		(322)		(54,048)		(46,261)		(105,108)		(570)		(105,744)		(93,318)
Total Adjusted EBITDA	$	217,693	$	4,354	$	222,047	$	215,951	$	498,749	$	(43,154)	$	455,529	$	443,741
^(1) – Revenue for the Corporate and Eliminations segment includes postage revenue of $57,110 and $62,404 for the three months ended September 30, 2019 and 2018, respectively, and $115,594 and $127,962 for the six months ended September 30, 2019 and 2018, respectively.

Change Healthcare LLC
Reconciliation of Cash Provided by (Used in) Operating Activities to Free Cash Flow and Adjusted Free Cash Flow
		Six Months Ended
Unaudited and amounts in thousands		September 30,
		2019		2018
Cash provided by (used in) operating activities ^(1)	$	223,864	$	227,868
Capital expenditures		(129,847)		(124,631)
Free Cash Flow		94,017		103,237
Adjustments to Free Cash Flow ^(2):
Integration and related costs		45,507		47,242
Strategic initiatives, duplicative and transition costs		9,688		19,122
Severance costs		10,099		10,015
Costs related to recently issued accounting standards		—		5,513
Integration capital expenditures		14,546		47,983
Adjusted Free Cash Flow	$	173,858	$	233,112
^(1) Includes cash provided by pass-thru funds of $12.9 million and $156.1 million for the six months ended September 30, 2019 and 2018, respectively.
^(2) All operating costs and integration capital expenditures in the table are presented on an as-incurred basis.

Change Healthcare LLC
Consolidated Statements of Operations (unaudited and amounts in thousands, except unit and per unit amounts)
Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard
	Three Months Ended September 30,								Six Months Ended September 30,
	2019							2018	2019							2018
		As Reported		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)		As Reported		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)
Revenue:
Solutions revenue	$	738,701	$	9,945	$	748,646	$	737,786	$	1,535,773	$	(31,586)	$	1,504,187	$	1,495,491
Postage revenue		57,110		—		57,110		62,404		115,594		—		115,594		127,962
Total revenue		795,811		9,945		805,756		800,190		1,651,367		(31,586)		1,619,781		1,623,453
Operating expenses:
Cost of operations (exclusive of depreciation and amortization below)		331,234		996		332,230		327,563		658,181		1,804		659,985		664,993
Research and development		51,783		—		51,783		51,243		101,122		—		101,122		106,567
Sales, marketing, general and administrative		190,039		4,595		194,634		207,105		383,312		9,764		393,076		414,019
Customer postage		57,110		—		57,110		62,404		115,594		—		115,594		127,962
Depreciation and amortization		77,448		—		77,448		69,258		148,764		—		148,764		137,785
Accretion and changes in estimate with related parties, net		3,214		—		3,214		5,932		7,094		—		7,094		9,756
Gain on Sale of the Extended Care Business		—		—		—		(111,392)		—		—		—		(111,392)
Impairment of long-lived assets and related costs		—		—		—		—		—		—		—		—
Total operating expenses		710,828		5,591		716,419		612,113		1,414,067		11,568		1,425,635		1,349,690
Operating income (loss)		84,983		4,354		89,337		188,077		237,300		(43,154)		194,146		273,763
Non-operating (income) and expense
Interest expense, net		69,901		—		69,901		80,677		153,307		—		153,307		159,226
Loss on extinguishment of debt		16,900		—		16,900		—		16,900		—		16,900		—
Contingent consideration		1,700		—		1,700		(72)		909		—		909		200
Other, net		(4,386)		—		(4,386)		(3,849)		(8,164)		—		(8,164)		(9,381)
Total non-operating (income) and expense		84,115		—		84,115		76,756		162,952		—		162,952		150,045
Income (loss) before income tax provision (benefit)		868		4,354		5,222		111,321		74,348		(43,154)		31,194		123,718
Income tax provision (benefit)		998		(32)		966		(2,119)		2,563		(2,283)		280		(2,228)
Net income (loss)	$	(130)	$	4,386	$	4,256	$	113,440	$	71,785	$	(40,871)	$	30,914	$	125,946
Net income (loss) per common unit^(1):
Basic	$	-	$	0.01	$	0.01	$	0.45	$	0.25	$	(0.14)	$	0.11	$	0.50
Diluted	$	-	$	0.01	$	0.01	$	0.45	$	0.25	$	(0.14)	$	0.11	$	0.50
^(1)Common units of Change Healthcare LLC are equivalent to the number of outstanding common shares of Change Healthcare Inc. and membership interests of Change Healthcare LLC held by subsidiaries of McKesson.

Change Healthcare LLC
Consolidated Balance Sheets (unaudited and amounts in thousands)
Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard
		September 30, 2019						March 31, 2019
		As Reported		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)
Assets
Current assets:
Cash and cash equivalents	$	72,992	$	—	$	72,992	$	47,718
Restricted cash		—		—		—		1,176
Accounts receivable, net of allowance for doubtful accounts		675,306		15,814		691,120		759,502
Contract assets		139,111		(139,111)		—		—
Prepaid expenses and other current assets		155,019		20,914		175,933		172,067
Assets held for sale		29,562		—		29,562		—
Total current assets		1,071,990		(102,383)		969,607		980,463
Property and equipment, net		160,305		—		160,305		197,263
Goodwill		3,295,381		—		3,295,381		3,284,266
Intangible assets, net		1,261,290		—		1,261,290		1,320,161
Other noncurrent assets, net		500,627		(40,520)		460,107		421,985
Total assets	$	6,289,593	$	(142,903)	$	6,146,690	$	6,204,138
Liabilities and members' equity
Current liabilities:
Drafts and accounts payable	$	64,010	$	—	$	64,010	$	98,550
Accrued expenses		315,419		—		315,419		316,179
Deferred revenues		337,371		57,881		395,252		437,636
Due to related parties, net		23,230		—		23,230		34,629
Current portion of long-term debt		26,644		—		26,644		2,789
Total current liabilities		766,674		57,881		824,555		889,783
Long-term debt, excluding current portion		4,944,395		—		4,944,395		5,787,150
Deferred income tax liabilities		110,016		—		110,016		106,099
Tax receivable agreement obligations to related parties		199,876		—		199,876		212,698
Other long-term liabilities		112,812		—		112,812		113,194
Commitments and contingencies
Members' equity (deficit)		155,820		(200,784)		(44,964)		(904,786)
Total liabilities and members' equity	$	6,289,593	$	(142,903)	$	6,146,690	$	6,204,138