Evolent Health, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Evolent provides administrative, technology and clinical services supporting value-based care through its Evolent Health Services (EHS) and Clinical Solutions segments.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $352.6 million | $222.5 million | $969.6 million | $659.6 million |
| Operating income (loss) | $13.0 million | $(6.6) million | $5.5 million | $(30.2) million |
| Net income (loss) | $2.1 million | $(13.0) million | $(7.8) million | $(32.0) million |
| Adjusted EBITDA | $28.1 million | $13.8 million | $74.0 million | $42.0 million |
| Cash used in operating activities | Not separately reported | Not separately reported | $47.2 million | $27.9 million |
- Q3 revenue grew 58.5%; nine-month revenue grew 47.0%. Management attributed growth primarily to new partners and expansion with existing partners. Q3 revenue was $107.3 million from EHS and $245.3 million from Clinical Solutions.
- Q3 cost of revenue was 75.6% of revenue versus 73.3% a year earlier; nine-month cost of revenue was 75.9% versus 74.8%. Thus, gross margins were approximately 24.4% and 24.1%, respectively, compared with 26.7% and 25.2%. SG&A declined as a share of revenue to 19.4% in Q3 and 19.2% year to date, from 23.1% in both prior-year periods.
- Q3 net income included a $45.5 million income tax benefit, primarily from a valuation-allowance release associated with IPG acquisition accounting. Despite that benefit, the company reported a $43.4 million pretax loss for the quarter. Nine-month results also included a $10.2 million debt-extinguishment loss and a $42.9 million charge related to the tax receivable agreement (TRA) liability.
- Adjusted EBITDA, a non-GAAP measure, increased to $28.1 million in Q3 from $13.8 million; nine-month Adjusted EBITDA rose to $74.0 million from $42.0 million.
Balance sheet, liquidity and debt
- At September 30, 2022, cash and cash equivalents were $156.8 million; restricted cash and investments were $38.1 million. Total cash, cash equivalents and restricted cash for cash-flow reporting was $194.8 million, down from $354.9 million at year-end 2021.
- Current assets were $393.8 million and current liabilities $382.0 million. Accounts receivable, net, increased to $187.6 million from $130.6 million at year-end, partly reflecting collection timing and acquired IPG receivables.
- Long-term debt, net, was $412.4 million. The company had $196.8 million principal amount of convertible notes and $225.0 million outstanding under secured facilities, including a $175.0 million term loan and $50.0 million revolver draw. The new facilities mature in 2027 and bear floating-rate interest; a 1 percentage-point increase in SOFR was estimated to add $2.3 million of annual interest expense.
- Management said available cash should be sufficient for working capital and capital needs over the next 12 months. However, nine-month operating cash use increased to $47.2 million from $27.9 million, and investing activities used $254.7 million, principally reflecting the IPG acquisition.
Material changes, outlook and risks
- IPG acquisition: Closed August 1 for reported consideration of $461.7 million, including $256.5 million cash, 3.7 million shares valued at $130.2 million, and contingent consideration initially valued at $75.0 million. IPG added surgical-management services in musculoskeletal care and approximately $296.6 million of goodwill. Purchase accounting remained preliminary.
- Debt exchange: Holders exchanged $92.8 million principal amount of 2024 Notes for 5.4 million shares, reducing the notes’ principal outstanding to $24.3 million and producing a $10.2 million extinguishment loss.
- Potential goodwill impairment: On October 11, Bright Health Group notified Evolent of its intent to exit its Individual and Family lines of business. Evolent said this could reduce projected EHS cash flows and lead to a potentially material impairment of the segment’s $214.2 million goodwill balance; its analysis was pending.
- Management outlook: No specific numeric revenue or earnings guidance is provided in the supplied filing text. Management expected cost of revenue and SG&A to decline as a percentage of revenue over the longer term, subject to business mix and growth, while depreciation and amortization were expected to increase.
- Other risks and contingencies: Inflation and labor costs may pressure margins; customer concentration is significant, with Cook County representing 21.2% of Q3 revenue and Florida Blue Medicare 13.7%. The new credit agreement includes financial covenants and restrictions; the filing does not state covenant compliance results. A proposed $23.5 million securities-class-action settlement was subject to court approval, with the company expecting insurance to fund it. A separate derivative action remained pending.
- The filing reports effective disclosure controls as of September 30, 2022. It also cautions that medical-cost reserves rely on estimates sensitive to claim completion factors and medical-cost trends.
Key facts for investors to verify
- Outcome and potential amount of the EHS goodwill impairment analysis following Bright Health’s planned exit.
- IPG’s post-acquisition revenue, profitability, earn-out performance and final purchase-price allocation.
- Cash conversion, receivable collections and the drivers of increased operating cash use and lower reserves for claims.
- Compliance with the secured credit agreement’s liquidity and leverage covenants, and sensitivity to floating interest rates.
- Whether the $45.5 million quarterly tax benefit and related $42.9 million TRA liability have ongoing cash or earnings implications.
- Approval and insurance funding of the proposed securities-class-action settlement, and developments in the derivative litigation.