Astrana Health, Inc. (formerly Apollo Medical Holdings, Inc.) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial comparisons are to 2022, whose figures were restated. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
The company operates a physician-centric, risk-bearing healthcare platform through Care Enablement, Care Partners, and Care Delivery segments. At June 30, it coordinated care for approximately 1.3 million patients through a network of more than 12,000 contracted physicians, primarily in California. The company added FYB, a California-licensed health plan, in May 2023 and acquired certain healthcare assets from CCHCA.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $348.2 | $269.7 | $685.5 | $533.0 |
| Operating income | $27.0 | $15.4 | $49.4 | $41.6 |
| Operating margin | 7.8% | 5.7% | 7.2% | 7.8% |
| Net income | $17.5 | $11.3 | $30.0 | $22.7 |
| Net income attributable to Apollo Medical Holdings | $13.2 | $12.0 | $26.3 | $25.7 |
| Diluted EPS | $0.28 | $0.26 | $0.56 | $0.56 |
- Revenue rose 29% in both the quarter and first half, mainly from higher capitation associated with organic membership growth and increased participation in a value-based Medicare fee-for-service model. Medicare revenue increased to $222.2 million in Q2 from $142.6 million.
- Cost of services increased 27% in Q2 and 29% in the first half, broadly tracking revenue. General and administrative expense rose 21% in Q2 and 42% year to date, reflecting added headcount and support for growth.
- Q2 operating margin improved year over year, while first-half margin declined. Care Partners drove segment operating income growth; Care Delivery reported a $0.4 million first-half operating loss versus $4.5 million income in 2022. Care Enablement first-half operating income fell 28% to $13.4 million.
- First-half net income attributable to the parent increased only 2%, despite 29% revenue growth. Higher interest expense and tax provision, as well as non-controlling interests, affected the comparison. Diluted EPS was unchanged at $0.56.
Cash flow, debt, and liquidity
- First-half operating cash flow was $33.5 million, versus $33.1 million. Investing used $19.2 million, including $17.4 million for property and equipment; financing used $8.1 million, including $9.5 million of share repurchases. Cash and cash equivalents increased $6.2 million.
- At June 30, cash and cash equivalents were $293.9 million, restricted cash $0.3 million, and marketable securities $3.8 million. Working capital was $279.3 million, compared with $279.5 million at year-end 2022.
- Total debt was $210.6 million, including $180.0 million drawn on the revolving credit facility; the facility provides up to $400.0 million and expires in June 2026. The revolver rate was 6.68% at June 30, versus 2.38% a year earlier. The company reported $205.1 million of long-term debt, net of current portion and financing costs.
- Management said it expects sufficient liquidity to fund operations for at least the next 12 months. A hypothetical 1% interest-rate change on specified borrowings would affect annual interest expense by approximately $2.1 million. Swaps and a collar partly mitigate floating-rate exposure.
Outlook, developments, and risks
- No quantified full-year revenue, earnings, or other financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- After quarter-end, the company agreed to acquire assets related to Texas Independent Providers, serving more than 4,500 Medicare Advantage patients; closing was anticipated in Q3 2023, funded with cash. It also made a $25.0 million convertible promissory note to IntraCare at 8.81% annual interest, compounded annually.
- The company restated previously issued financial information, including 2022 periods, and disclosed a material weakness in income-tax controls. Disclosure controls were deemed ineffective at June 30. Remediation was underway, but management said the weakness would not be considered resolved until controls operated effectively for a sufficient period and were tested.
- Risks include medical-claims estimates and delayed risk-pool settlements, significant payer and receivable concentration, healthcare regulation and contract interpretation, floating interest rates, and deposits exceeding FDIC insurance limits. Bank deposits exceeded the FDIC limit by approximately $326.8 million at June 30. The filing also describes ordinary-course litigation and healthcare compliance contingencies without identifying a pending matter expected to have a material adverse effect.
- The filing reports no material off-balance-sheet arrangements. The company changed to three reportable segments in 2023, and its non-GAAP Adjusted EBITDA methodology differs from the historical method; comparisons should account for that change.
Important facts for investors to verify
- How membership growth and Medicare model participation affect medical costs, claims reserves, and sustainable margins.
- Whether first-half Care Delivery losses and Care Enablement expense growth improve as the business expands.
- The status and testing results of tax-control remediation, and the effects of the restated comparative financial statements.
- Exposure to major payers and related-party receivables: two payors represented 28% and 50% of receivables and related-party receivables at June 30.
- Future interest costs, revolving-facility covenant compliance, and liquidity after the planned acquisition and $25.0 million note investment.
- Valuation and collectability of risk-pool receivables, including the timing of settlements, and the adequacy of medical-liability estimates.