Astrana Health, Inc. (then Apollo Medical Holdings, Inc.) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The filing was signed November 9, 2020. The company operated a physician-centric, value-based healthcare management business with affiliated physician groups, IPAs and an ACO; it reported approximately 1.1 million patients and more than 7,000 contracted physicians.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $180.1 million | $156.1 million | $510.4 million | $381.9 million |
| Operating income | $37.4 million | $10.1 million | $54.6 million | $21.5 million |
| Net income | $25.4 million | $10.7 million | $109.4 million | $19.0 million |
| Net income attributable to Apollo Medical Holdings | $16.7 million | $3.7 million | $27.8 million | $7.4 million |
| Diluted EPS | $0.45 | $0.10 | $0.75 | $0.20 |
- Revenue increased 15% year over year in Q3 and 34% for the nine-month period. Capitation and risk-pool settlements were the main growth drivers.
- Q3 operating margin was approximately 20.7%, versus 6.4% a year earlier; nine-month operating margin was approximately 10.7%, versus 5.6%.
- Q3 cost of services fell 7% as lower medical claims and elective procedures offset higher payroll. Nine-month cost of services rose 27%, primarily reflecting acquired businesses and higher medical costs.
- Nine-month GAAP net income included a $99.6 million gain on the April sale of the company’s 48.9% interest in Universal Care, Inc. The filing says the asset and gain were for APC and its shareholders, and did not increase net income attributable to Apollo Medical Holdings. The gain therefore makes consolidated net income less representative of recurring performance.
Cash, debt and liquidity
- At September 30, 2020, cash and cash equivalents were $166.1 million and marketable securities were $118.3 million, or $284.4 million combined. Working capital was $235.2 million.
- Nine-month operating cash flow was $48.8 million, versus $10.1 million in 2019; investing cash flow was $66.4 million, largely reflecting UCI sale proceeds and repayment of related-party loans; financing cash flow was negative $52.3 million, mainly due to dividends and term-loan repayments. Cash, cash equivalents and restricted cash ended at $166.8 million.
- Gross credit-facility debt was $240.5 million: $180.5 million term loan and $60.0 million revolver borrowings. Reported debt, net of financing costs, was $235.6 million including current maturities. The company reported covenant compliance, with leverage of 1.79 against a maximum of 3.75 and interest coverage of 10.33 against a minimum of 3.25.
- Management said liquidity was sufficient for at least the next 12 months. Consolidated cash and assets are not necessarily freely available to the parent: certain VIE assets are restricted to settling VIE obligations, and healthcare entities face regulatory capital requirements.
Changes, outlook and risks
- Management raised full-year 2020 net income guidance to $110–$120 million, EBITDA to $182–$194 million and adjusted EBITDA to $97–$112 million, following a Q3 shared-savings settlement. Revenue guidance was maintained at $665–$675 million, reflecting COVID-19 pressure on fee-for-service activity. Net income and EBITDA guidance include the UCI sale gain; adjusted EBITDA excludes equity-method income and other specified items. These are management estimates, not guarantees.
- Q3 risk-pool settlements and incentives rose to $30.9 million from $11.4 million, including $19.8 million of 2019 ACO performance-year savings recognized in 2020. Management cited a $13.3 million net shared-savings settlement after provider bonuses in raising guidance. Risk-pool amounts remain subject to estimation and settlement delays.
- COVID-19 reduced elective procedures and fee-for-service revenue; management also cited lower medical claims costs in Q3. The filing warned that renewed restrictions, ongoing pandemic effects and changes in patient utilization could affect results.
- Other material exposures include medical-liability estimates, healthcare regulation and contract interpretation, customer concentration, variable-rate debt and reliance on ACO/shared-risk arrangements. A 1% interest-rate change was disclosed as affecting quarterly interest expense by $2.4 million.
- A Prospect-related arbitration against MMG seeks damages exceeding $5 million; ApolloMed and AMM were dismissed without prejudice, while MMG disputes the claims. The company said the potential loss beyond any accrual could not be reasonably estimated.
- In September, APC declared an in-kind distribution of 5 million ApolloMed shares to APC shareholders, expected in November. In October, APC made a $4.0 million, two-year promissory note to related party AHMC at 3.75% interest.
Important facts for investors to verify
- How much of reported earnings and guidance reflects recurring healthcare operations versus the UCI disposition and ACO settlements; review the company’s GAAP-to-non-GAAP reconciliation.
- Whether guidance was achieved, particularly revenue amid COVID-related fee-for-service weakness and the timing and amount of risk-pool settlements.
- Collectability and eventual settlement of risk-pool receivables, related-party balances and UCI sale-related contingent proceeds.
- Debt, interest-rate exposure, covenant headroom and cash availability across the parent, VIEs and regulated medical entities.
- Developments in the Prospect arbitration, medical-liability reserves, regulatory compliance and the planned APC share distribution.