Astrana Health, Inc. (then Apollo Medical Holdings, Inc.; Nasdaq: AMEH) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. Financial amounts below are in U.S. dollars; “million” is abbreviated as “m.”
Business context
The company operates a physician-centric, risk-bearing healthcare platform spanning Care Enablement, Care Partners, and Care Delivery. It reported responsibility for coordinating care for approximately 1.3 million patients and a network of more than 12,000 contracted physicians. The company changed from one to three reportable segments in Q1 2023 and recast prior-period segment information.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $337.2m | $263.3m | +28% |
| Operating income | $22.4m | $26.2m | -15% |
| Operating margin | 6.6% | 10.0% | -3.3 percentage points |
| Net income attributable to Apollo Medical Holdings | $14.6m | $14.3m | +3% |
| Diluted EPS | $0.31 | $0.31 | Flat |
| Net cash provided by operating activities | $7.7m | $24.0m | -$16.3m |
| Adjusted EBITDA | $29.8m | $34.4m* | Lower under current method |
Revenue growth was led by capitation, up $78.1m (35%), which management attributed primarily to organic membership growth in core IPAs and increased participation in a value-based Medicare fee-for-service model. Risk pool settlements and incentives declined 26%; management fee income declined 6%. Cost of services rose 31% to $289.4m, while general and administrative expense rose 77% to $21.2m, principally to support growth and increased headcount. These cost increases outpaced revenue growth and reduced operating margin.
Other expense, net, was $3.0m versus $7.9m in the prior-year quarter. The company recorded a $6.4m unrealized investment loss, partly offset by $3.0m of interest income and $2.5m of equity-method income. Interest expense increased to $3.3m from $1.1m, primarily because of higher rates. The effective tax rate was 26.3%, compared with 34.0%.
Cash, cash equivalents, and marketable securities totaled $278.7m at March 31, 2023, down from $293.6m at year-end 2022. Working capital was $292.7m, versus $287.8m. Operating cash flow fell as working-capital changes consumed cash, including higher receivables; investing activities used $14.0m, including an $8.8m property deposit and $6.0m of property and equipment purchases. Financing activities used $7.1m, including $9.5m for treasury-share repurchases.
Gross debt was $208.6m, including $180.0m drawn under a $400.0m revolving facility; the long-term debt carrying amount, net of current maturities and financing costs, was $204.9m. The revolver rate was 6.36% at quarter-end. The credit agreement requires a maximum net leverage ratio of 3.75:1.00 and a minimum interest coverage ratio of 3.25:1.00. Management said liquidity was sufficient for at least the next 12 months.
Material changes, outlook, and risks
- 2023 guidance reiterated: Revenue of $1.3bn–$1.5bn; net income of $49.5m–$71.5m; EBITDA of $89.5m–$129.5m; Adjusted EBITDA of $120m–$160m; and diluted EPS of $0.95–$1.20. Management cautioned that actual results could differ materially.
- Acquisitions and expansion: The company acquired certain Chinese Community Health Care Association assets on March 1, with purchase-price allocation still being finalized and cash payment accrued. It closed its purchase of For Your Benefit Inc., a licensed health plan, on May 1, 2023, after quarter-end.
- Unusual items and comparability: The company repurchased 270,081 shares for $9.5m, including shares purchased from a board member. It also reported a $1.4m fair-value loss on a financing obligation to acquire remaining equity in an investment. Adjusted EBITDA methodology changed in 2022; the filing states Q1 2022 Adjusted EBITDA under the prior method was $38.2m, limiting direct comparison with the $34.4m figure under the current method.
- Concentration and operating risks: One payor contributed 41.5% of Q1 revenue. Two payors represented 31% and 44% of receivables and related-party receivables, respectively. Medical-liability estimates include incurred-but-not-reported claims and are subject to actuarial assumptions and contract interpretation.
- Financial and regulatory exposures: Bank deposits exceeded FDIC-insured limits by approximately $306.5m. Borrowings are exposed to variable interest rates; management estimated a hypothetical 1% rate change would change annual interest expense by $2.1m. Healthcare regulation, claims disputes, and the adequacy and continued availability of liability insurance are additional risks. The company reported no material change to its previously disclosed risk factors and no material off-balance-sheet arrangements.
*The Q1 2022 Adjusted EBITDA figure shown in the reconciliation uses the revised method; the filing separately gives $38.2m under the historical method.
Important facts for investors to verify
- Whether membership growth and Medicare value-based participation continue to support capitation growth while medical costs and administrative expenses remain controlled.
- Receivables collection, risk-pool settlement timing, and the adequacy of medical-liability reserves, particularly given payor concentration.
- Progress against full-year guidance and the assumptions and exclusions underlying Adjusted EBITDA, including its methodology change.
- Revolver utilization, interest-rate exposure, and compliance with credit-facility covenants.
- Purchase accounting and financial contribution from recent and subsequent acquisitions, including the CCHCA assets and For Your Benefit Inc.
- Cash availability and exposure to uninsured bank deposits, as well as the effects of share repurchases and related-party transactions.