Astrana Health, Inc. (filed as Apollo Medical Holdings, Inc.) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Comparative 2022 figures were restated. The company operates a physician-centric, risk-bearing healthcare platform across Care Partners, Care Delivery and Care Enablement.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $348.2 million | $317.0 million | $1,033.6 million | $850.0 million |
| Income from operations | $39.1 million | $50.1 million | $88.5 million | $91.7 million |
| Net income | $28.0 million | $23.9 million | $57.9 million | $46.6 million |
| Net income attributable to Apollo Medical Holdings | $22.1 million | $23.2 million | $48.4 million | $48.9 million |
| Diluted EPS | $0.47 | $0.50 | $1.03 | $1.06 |
| Adjusted EBITDA and margin | $52.0 million; 15% | $57.1 million; 18% | $117.6 million; 11% | $116.4 million; 14% |
Revenue increased 10% in Q3 and 22% year to date, principally from higher capitation tied to acquisitions, membership and greater participation in value-based Medicare fee-for-service arrangements. This was partly offset by lower risk-pool settlements, including the prior-year recognition of a 2021 NGACO settlement. Cost of services rose 14% in Q3 and 24% year to date; G&A rose 38% and 40%, respectively. As a result, operating income declined despite revenue growth.
Capitation revenue was $305.7 million in Q3, up 34%; risk-pool settlements and incentives were $15.0 million, down 77%. Nine-month figures were $906.4 million for capitation, up 34%, and $48.6 million for risk-pool settlements, down 52%.
Segment performance: Q3 Care Partners revenue rose 11% to $326.5 million, while operating income fell 13% to $40.3 million. Care Delivery revenue rose 18% to $29.3 million but shifted to a $1.0 million operating loss, attributed partly to expansion investment in Nevada and Texas. Care Enablement revenue rose 22% to $36.9 million and operating income rose 27% to $6.4 million. For the first nine months, Care Partners operating income improved 26% to $90.5 million; Care Delivery recorded a $1.4 million operating loss; Care Enablement operating income declined 17% to $19.8 million.
Cash, debt and liquidity
- Cash and cash equivalents were $273.9 million at September 30, 2023; marketable securities were $3.0 million. The filing reports combined cash, cash equivalents and marketable securities of $277.0 million.
- Working capital was $273.3 million, versus $279.5 million at December 31, 2022.
- Nine-month operating cash flow was $48.9 million, compared with cash used of $2.8 million in 2022. Investing cash use was $54.1 million, including a $25.0 million IntraCare convertible note and $21.5 million in property and equipment purchases. Financing cash use was $8.6 million. Cash and restricted cash decreased $13.7 million.
- Total debt was $211.8 million, including a $180.0 million revolver balance; long-term debt, net of current portion and financing costs, was $206.2 million. The average effective interest rate on total debt was 6.07% for the first nine months, versus 2.83% in 2022.
- Management said liquidity was sufficient for operations for at least the next 12 months. The company stated a long-term target leverage ratio of 2.25–2.75; the filing does not provide a comparable actual ratio in this discussion.
Outlook, significant developments and risks
- 2023 guidance, narrowed November 7: revenue $1.34–$1.39 billion; net income $59.5–$71.5 million; EBITDA $114.5–$129.5 million; Adjusted EBITDA $135–$150 million; diluted EPS $1.10–$1.20. Management cautioned actual results could differ materially. Adjusted EBITDA is a non-GAAP measure.
- Post-quarter financing: On November 3, the company added a term-loan facility of up to $300 million, with $180 million funded at closing and $120 million available as delayed draws. By November 9, it had drawn $280 million, using $180 million to repay the revolver. The expanded credit arrangement totals $700 million including the existing $400 million revolver.
- Related-party share repurchase: On November 6, the company agreed to repurchase approximately $100 million of its stock from APC, a consolidated affiliate, intending to finance the purchase with credit-agreement borrowings. APC has ties to company executives and directors.
- Planned acquisitions: Agreements announced November 7 include $52 million for AHMS interests and a CFC asset purchase for $113.8 million, including $93.8 million cash and 631,712 shares, plus assumed liabilities and potential earnouts up to $15 million. Closings were expected in Q1 2024, subject to customary conditions and regulatory approvals. The company also agreed to acquire 25% of I Health with a call option for the remainder.
- Restatement and controls: Prior financial statements were restated following a material weakness in income-tax controls involving tax structure analysis, intercompany transactions and consolidated tax groups. Management said remediation was underway, but disclosure controls were not effective as of September 30, 2023; remediation was not yet complete.
- Other risks: The business bears medical-cost and claims-estimation risk, operates under complex healthcare and managed-care regulation, and may face contract disputes or litigation. Bank deposits exceeded FDIC-insured limits by approximately $301.8 million. A 1% interest-rate change was estimated to affect quarterly interest expense by $2.1 million.
Most important facts for investors to verify
- Review the tax-related restatement and monitor whether management remediates and tests the material weakness; 2022 comparisons in this filing are restated.
- Track medical costs, claims reserves and risk-pool settlements, including the timing and collectability of receivables; receivables from two payers represented 44% and 32% of balances at quarter-end.
- Assess whether capitation growth translates into stronger operating income and margins, particularly given lower Q3 Care Partners profitability and Care Delivery losses.
- Confirm post-quarter term-loan funding, leverage and covenant compliance, and how planned repurchases and acquisitions affect liquidity and debt.
- Evaluate the related-party nature and terms of the approximately $100 million APC stock repurchase, and the closing conditions, financing and integration risks for announced acquisitions.