Evolent Health, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context
Evolent provides technology and operational services supporting value-based care. Its reportable segments are Evolent Health Services (EHS) and Clinical Solutions. The company sold True Health on March 31, 2021; its results are presented as discontinued operations. Passport’s business continued to wind down following the transfer of its Kentucky Medicaid contract to Molina.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $222.1 | $217.3 | $437.1 | $438.5 |
| Operating loss | $(7.7) | $(225.8) | $(23.6) | $(250.9) |
| Net loss | $(9.1) | $(203.5) | $(18.9) | $(282.3) |
| Adjusted EBITDA | $13.3 | $10.5 | $28.3 | $14.4 |
| Operating cash flow | Not separately stated | Not separately stated | $(72.4) | $17.1 |
- Q2 revenue grew 2.2% year over year. Clinical Solutions revenue rose to $147.2 million from $130.8 million, while EHS revenue fell to $75.3 million from $87.2 million, primarily reflecting Passport runoff partly offset by new partners and growth in Clinical Solutions.
- Cost of revenue was 77.5% of revenue in Q2 versus 75.6% a year earlier; SG&A was 19.2% versus 21.8%. For the first half, cost of revenue improved to 75.5% of revenue from 77.5%, while SG&A increased to 23.2% from 22.7%.
- The much smaller comparative operating and net losses primarily reflect the absence of the $215.1 million goodwill impairment recorded in Q2 2020. The 2021 six-month result also includes a $19.2 million debt repayment loss and a $23.0 million gain related to transfer of membership.
- Cash and cash equivalents were $207.3 million at June 30, 2021; restricted cash and investments were an additional $31.1 million. Total assets were $1.293 billion and shareholders’ equity was $614.2 million.
- Convertible-note principal outstanding totaled $316.3 million; the balance sheet reported $233.2 million of short- and long-term debt net of discounts. The $26.7 million principal amount of 2021 Notes was due December 1, 2021. The company repaid and terminated its Ares credit agreement in January, paying $98.6 million, and separately settled related warrants for $13.7 million.
- First-half operating cash use was driven in part by higher receivables and contract assets and lower accrued liabilities and compensation, partly offset by increased claims reserves. Investing cash flow was positive $40.4 million, including Passport-related proceeds; financing cash use was $91.1 million, chiefly from debt and warrant settlements.
Outlook, commentary, risks, and unusual items
- Management said available cash should meet working-capital and capital-expenditure needs for the next 12 months. It expects platform and operations revenue growth in 2021 from new customer additions, partly offset by Passport runoff, but provided no specific numerical revenue or earnings guidance.
- Management expects operating losses to continue for the foreseeable future. It expects cost of revenue and SG&A to decline as a share of revenue over the longer term, subject to business mix and growth. The repositioning plan is expected to continue through Q4 2021; $6.0 million of related costs were recorded in the first half.
- Management reported no material COVID-19 impact on results or outlook to date, but cited uncertainty around future membership, medical utilization, variants, and partner and economic effects.
- Customer concentration is material: Cook County represented 29.6% of Q2 revenue and 42.0% of trade receivables at June 30. Florida Blue Medicare represented 14.2% of Q2 revenue. The filing warns that loss, renegotiation, non-renewal, or payment problems at major partners could materially affect results.
- Claims and performance-based reserves were $238.1 million, up from $188.7 million at year-end. The estimate depends on actuarial assumptions, claims completion patterns, medical-cost trends, and other judgments.
- The company expects a $130 million–$170 million total return of capital from Passport, subject to Kentucky regulatory approval. A further $23.0 million Molina payment is expected in Q1 2022, subject to contingencies. On August 2, 2021, Evolent agreed to acquire Vital Decisions for $85 million plus up to $45 million in earnout, subject to closing conditions.
- Two shareholder matters relating to Passport were pending; the company said it believed they lacked merit but could not estimate a probability of loss or potential range. Management concluded disclosure controls were effective at June 30, 2021.
Important facts for investors to verify
- Whether operating cash use and the large increase in receivables and claims reserves reverse or persist in subsequent quarters.
- Collection timing and credit exposure, especially Cook County’s substantial share of receivables and revenue.
- Actual claims development versus the $238.1 million reserve and the effect of performance-based arrangements on margins.
- Timing and regulatory approval of Passport capital distributions, and satisfaction of conditions for the remaining Molina payment.
- Repayment or refinancing of the $26.7 million 2021 Notes and the cash, dilution, and interest implications of convertible notes.
- Vital Decisions acquisition closing, total consideration, integration costs, and the achievement of any earnout.