Evolent Health, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022. Evolent provides value-based care, specialty-care management, health-plan administration and related services. It reorganized its reporting into one segment in 2023; prior-period presentation was recast.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $427.7 million | $297.1 million |
| Cost of revenue | $310.5 million; 72.6% of revenue | $219.7 million; 74.0% of revenue |
| Selling, general and administrative expense | $89.7 million; 21.0% of revenue | $58.9 million; 19.8% of revenue |
| Operating loss | $10.4 million | $2.8 million |
| Net loss attributable to common shareholders | $26.3 million; $0.24 per share | $5.4 million; $0.06 per share |
| Cash used in operating activities | $8.0 million | $57.4 million |
- Revenue rose 44.0%, primarily from $82.5 million associated with acquisitions and product launches, and $48.1 million from new partners and expansion with existing partners. NIA contributed $48.5 million of revenue and $5.5 million of net loss from its January 20 acquisition date through quarter-end.
- Cash and cash equivalents were $157.5 million at March 31; restricted cash and investments were $34.5 million. Management said liquidity should be sufficient for at least the next 12 months.
- Net cash used in investing activities was $395.0 million, including $386.7 million paid for acquisitions. Financing provided $379.7 million, including $256.3 million of net debt proceeds and $168.0 million from preferred stock issuance.
- Long-term debt, net, was $632.3 million. At quarter-end, the company reported $415.0 million of secured term loans, $37.5 million drawn on its revolving facility and $196.8 million principal of convertible notes. Series A preferred stock totaled $175.0 million.
- The term loans bear interest at SOFR plus 6.00% or the base rate plus 5.00%; revolving borrowings bear SOFR plus 4.00% or the base rate plus 3.00%. The company estimated each 1 percentage-point SOFR increase would add $4.5 million in annual interest expense and $1.8 million in annual preferred dividends.
Material changes and unusual items
- The January NIA acquisition was valued at $715.7 million, funded with cash, 8.5 million Evolent shares and contingent consideration. The purchase-price allocation remains preliminary and included $395.2 million of goodwill and $404.0 million of intangible assets.
- Operating expenses increased 46.1%, faster than revenue. Cost of revenue rose with growth, claims costs and IPG surgical-management costs; SG&A growth reflected acquisitions, personnel and stock compensation. Acquisition and severance costs included in SG&A were approximately $12.3 million, versus $0.5 million in Q1 2022.
- Interest expense increased to $12.9 million from $2.2 million, mainly due to acquisition-related borrowings. Depreciation and amortization rose to $29.3 million from $15.1 million, primarily because of acquired intangible assets.
- The company recorded a $66.2 million expense from an increase in its tax receivable agreement (TRA) liability, bringing that liability to $112.1 million. A $68.2 million income tax benefit—primarily reflecting a $56.1 million valuation-allowance release associated with NIA acquisition accounting—partly offset the pre-tax loss. The resulting tax effects make the quarter’s net loss less representative of underlying operating performance.
- Contingent-consideration fair-value expense was $8.6 million. Total Level 3 contingent-consideration liabilities were $122.1 million at quarter-end.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management expects interest expense to increase during 2023, while stating a long-term focus on deleveraging. It expects cost of revenue and SG&A to decline as a percentage of revenue over the longer term, subject to growth mix and integration costs.
- A 2023 repositioning plan includes organizational changes, workforce reductions and other cost initiatives. The company expects to terminate certain leases and may recognize related impairment charges.
- Revenue and receivables are concentrated among a small number of partners. Cook County represented 17.2% of Q1 revenue and 34.6% of short-term trade receivables at March 31. The filing warns that losing, terminating or renegotiating major partner contracts could materially harm results.
- Claims and performance-based reserves were $197.2 million. Their estimates depend on actuarial assumptions, completion factors and medical-cost trends; actual experience could change results.
- Goodwill was $1.12 billion after the NIA acquisition. No Q1 impairment trigger was identified, but the filing notes that unfavorable contract or forecast changes could lead to future impairment.
- The company identifies floating-rate debt and preferred dividends, integration of NIA and IPG, cybersecurity and privacy, bank-deposit concentration, regulatory changes and its ability to manage growth and profitability as risks. It reported no material cybersecurity incident to date.
- The shareholder derivative action concerning Passport was dismissed without prejudice in January 2023 and is resolved. The company reported no amounts funded under its Passport-related guarantee.
Investor verification checklist
- Review NIA integration performance, final purchase-price allocation, earn-out assumptions and the contribution of acquisitions to reported growth.
- Track operating margins, cash conversion, acquisition and repositioning costs, and progress toward management’s stated cost-efficiency goals.
- Verify debt balances, borrowing costs, covenant capacity, preferred dividend obligations and the company’s ability to deleverage.
- Assess the sustainability of the tax benefit, the TRA liability and the timing and cash impact of potential TRA payments.
- Monitor major-partner concentration, receivable collection, claims-reserve development and any changes in goodwill or intangible-asset impairment assumptions.