Evolent Health, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed February 28, 2019. This is an annual filing, not a standalone fourth-quarter report. Unless noted, financial comparisons are year over year.
Business context
Evolent provides technology-enabled value-based care, specialty care management, and health-plan administration services to providers and payers. It also operates True Health, a commercial health plan in New Mexico. At year-end, it had more than 35 operating partners. The Services business generally earns fees linked to partner membership, services, premiums, or performance.
2018 results include True Health from January and New Century Health from October; 2017 did not include either business. This limits comparability. New Century Health expanded Evolent’s specialty-care offering, primarily in oncology and cardiology.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $627.1 million | $435.0 million |
| Operating loss | $47.5 million | $72.8 million |
| Net loss attributable to Evolent | $52.7 million | $60.7 million |
| Loss per share, basic and diluted | $0.68 | $0.94 |
| Adjusted EBITDA, non-GAAP | $23.2 million | $(2.2) million |
| Cash used in operating activities | $20.7 million | $28.0 million |
Revenue rose 44.2%. Services platform and operations revenue increased 23.4% to $500.2 million, supported by 32.9% growth in lives on platform, higher average fees, net gain share, and acquired businesses. True Health premiums contributed $94.0 million, or 15.0% of reported revenue. Revenue growth therefore reflects both underlying expansion and acquisitions.
Cost of revenue was $327.8 million, equal to 61.5% of Services revenue, versus 61.9% in 2017. True Health claims expenses were $70.9 million, or 75.4% of its premiums. Selling, general and administrative expense increased 14.5% to $235.4 million but declined to 37.5% of revenue from 47.3%. Depreciation and amortization rose 37.5% to $44.5 million.
At December 31, cash and cash equivalents were $228.3 million; restricted cash and investments totaled $160.8 million. Total assets were $1.72 billion and current liabilities were $269.4 million. Long-term debt, net of discount, was $221.0 million; principal outstanding on the 2021 and 2025 convertible notes totaled $297.5 million. The company used $20.7 million of cash in operations and $160.4 million in investing activities, primarily reflecting acquisitions and technology investment. Financing cash flows included $167.2 million net proceeds from the 2025 notes and $96.2 million of increased partner claims-processing working-capital balances.
Goodwill was $768.1 million, up from $628.2 million, largely reflecting acquisitions; no goodwill impairment was recorded in 2018. The company reported an overall net loss, while adjusted EBITDA is a non-GAAP measure and excludes specified items.
Material changes and unusual items
- Acquired New Century Health on October 1 for total consideration reported at approximately $205.1 million net of cash and closing adjustments; it contributed $48.8 million of revenue and $2.5 million of net loss in the fourth quarter period included in Evolent’s results. The purchase-price allocation included $133.1 million of goodwill.
- Acquired New Mexico commercial-plan assets in January and launched True Health. In the fourth quarter, Evolent replaced a capital-only arrangement with NMHC with a 15-month quota-share reinsurance agreement: NMHC cedes 90% of gross premiums and Evolent assumes 90% of claims, with exposure capped at 105% of ceded premiums.
- Issued $172.5 million principal of 1.50% convertible notes due 2025, receiving $166.6 million net proceeds. The notes’ cash-or-share settlement feature created a substantial debt discount and non-cash interest expense.
- Adopted ASC 606 revenue accounting in 2018. The change increased opening retained earnings, including non-controlling interests, by $17.3 million. The filing also includes a one-time $4.5 million ASC 606 transition adjustment in adjusted segment results; this is not expected to recur.
- Reported consolidated fourth-quarter revenue of $193.1 million and net loss of $17.5 million, compared with revenue of $113.7 million and net loss of $13.8 million in fourth-quarter 2017. The acquisition of New Century Health and issuance of the 2025 notes affected the quarter; the latter increased fourth-quarter interest expense by approximately $2.0 million.
Outlook, risks, and contingencies
Management expected continued operating losses for the foreseeable future while investing in partner success, geographic expansion, and capabilities. It stated that available liquidity was sufficient for the following 12 months as of the financial statements’ issuance date. No specific revenue or earnings guidance is provided in the filing. Management expects scale to support lower operating costs as a percentage of revenue over time, but these expectations are not assured.
- Passport concentration and solvency: Passport generated 17.5% of 2018 revenue. Kentucky Medicaid rate reductions harmed Passport, which filed suit on February 15, 2019 seeking relief. Passport had warned it could be deemed insolvent by the end of March if rates were not changed. Evolent could face reduced fees, lost revenue, collection risk, and partner disruption; the outcome and financial impact were not estimable.
- Partner and healthcare risks: Revenue depends partly on partner membership, government reimbursement, renewals, and performance-based arrangements. Regulatory and political changes affecting Medicaid, Medicare, the ACA, and public exchanges could affect partners and Evolent. The business is exposed to health-cost trends and underwriting risk, particularly through True Health and specialty-care contracts.
- Liquidity, debt, and obligations: The company disclosed up to $11.0 million of potential 2019 funding commitments to equity-method investees. Convertible-note conversion or repurchase provisions could affect liquidity. The TRA may require payment of 85% of realized tax savings; no TRA liability was recorded at year-end, but payments could be substantial or accelerated in specified circumstances.
- Accounting and execution: Goodwill and acquired intangibles are significant, and acquisition integration or weaker performance could lead to impairment. The 2018 goodwill review found no impairment indicators requiring quantitative testing. The company expected adoption of lease accounting in 2019 to materially increase balance-sheet assets and liabilities, without a material impact on operating results.
- Controls and audit: Management and the auditor concluded internal control over financial reporting was effective at December 31, 2018. New Century Health and True Health were excluded from the assessment as recently acquired entities; together, they represented 1.8% of assets and 22.8% of revenue under the auditor’s stated figures. The company had previously remediated a material weakness.
- Legal matters: Evolent stated it was not aware of legal proceedings or claims at year-end expected to have a material adverse financial effect. The Passport lawsuit was filed after year-end and is separately identified as a material business risk.
Important facts for investors to verify
- Passport’s rate dispute, solvency, membership trends, and any resulting changes to Evolent’s contract or fees.
- How much of 2018 revenue growth and adjusted EBITDA reflects acquisitions, accounting changes, or other adjustments versus recurring organic performance.
- New Century Health’s post-acquisition results, contract renewals, earn-out outcomes, and ability to meet operating targets.
- True Health’s claims development, the NMHC quota-share arrangement’s actual risk and results, and the effect of the 75.4% claims-to-premiums ratio.
- Cash available for general corporate use after restricted balances, claims-processing funds, capital commitments, and debt-related obligations.
- Debt conversion and dilution exposure, goodwill and intangible-asset assumptions, lease-accounting effects, and the potential timing and amount of TRA payments.